Finance Final Theory PDF

Summary

This document appears to be a finance study guide or notes. It covers various topics related to finance, including special purpose vehicles (SPVs), taxes, services, loans, depreciation, internal and external sources of finance, and more.

Full Transcript

Finance SPV (Special Purpose Vehicle) -- a smaller company opened by the mother company in another country for a special purpose (in order to avoid taxes) Taxes will be corporate tax in one country, the withholding tax for moving the money from one country to another and then second corporate tax...

Finance SPV (Special Purpose Vehicle) -- a smaller company opened by the mother company in another country for a special purpose (in order to avoid taxes) Taxes will be corporate tax in one country, the withholding tax for moving the money from one country to another and then second corporate tax in the second country For example, company a will **purchase goods/assets** from company b on a high price Transfer pricing -- prices of goods in different countries The government may ask you why you pay higher prices from a different country **Services** -- other costs Company a paying **salary** to employees in company b for more expenses to lower the profit You have contracts that employees that work in company a actually work in company b and company a will pay "salaries" to company b **Loans** -- "getting a loan" from company b and paying it back, make company a liable to company b for example for a business idea **Depreciation** -- the assets are depreciating at the highest value possible, to reduce the profit and pay less tax 1. **Tools to control Tax Avoidance** Thin capitalization -- to organize you dept as best as possible - pay dept as late as possible, the value of the money is depreciating If you can't justify you will get withholding tax ////////////////////////////////////////////////////////////// All external sources of finance **Internal Sources of Finance** **Use of retained profit** \- Companies usually keep part of the profit every year for the future to reinvest. **Generating increasing sales** \- Increasing revenue to impact overall profit levels, could be by launching a new product **Sale of assets** \- Better obsolete assets because it can be a double-edged sword if it reduces capacity. **Reduction of working capital** \- Cutting stock levels, if your inventory is too big you have goods that aren't generating revenue, minimize the inventory, but this may lead to a shortage of stock and can loss of sales **External Sources of Finance** **Common Shares** (see the previous chapter about growth) **Preference Shares** Are issued by the company **seeking to raise capital,** they combine the characteristics of **debt and equity** investments. The owners of the preferred shares receive fixed **dividends but do not enjoy the voting rights** that common shareholders typically do Companies incur higher **issuing costs** with preferred shares than they do when issuing debt. **Bonds** They are **long-term debt instruments** used by **businesses** and **governments** to raise a large sum of money from a diverse group of lenders with a **fixed rate of return**. o It's an **income-reaping investment** o A **bond** is **an instrument of indebtedness** of the bond issuer to the holders. *When an entity issues a bond, it is issuing debt with the agreement to pay interest for the use of the money* o Abondisaformofaloan.\ o The return on the initial investment is fixed and guaranteed. **Business Angels / Angel investors** **Wealthy individual investors** who make their investment decisions and are **willing to invest in promising start-ups**, in exchange for a portion of the firm's equity. Some investors want them to take action and decisions on the company's board or act as an advisor while others just want to become sleeping partners and just provide the business with capital. Angels tend to finance the **early stages of the business.** **Venture Capitalist Firms** A venture capitalist (VC) is an investor that **provides capital to a firm** exhibiting high growth potential in **exchange for an equity stake.** Is usually formed as a limited partnership. This could be: - \-  Funding startup ventures - \-  Supporting small companies that want to expand Sometimes the period is greater than 1 year. **Leasing** It provides the **opportunity to secure the use of capital without ownership.\ **A lease agreement is a contract between the Lessor and the Lessee, in this case, the lessee is **responsible for servicing and maintenance** Types of Leasing: Operating leasing à is a contractual agreement where the lessee agrees to make periodic payments to the lessor, for 5 or fewer years Financial or Capital leasing à is a longer term than an operating lease. Financial leases are **noncancelable** and obligate the lessee to make payments for the use of an asset over a predefined period **Factoring** When a company **sells its accounts receivable to a factor**.\ A factor buys the company's accounts receivable and pays for them in 2 parts \- 1st payment which the factor makes **immediately, is for 70 to 80%** of the account's agreed value. The factor makes the 2nd payment of **15 to 18%** which makes up the balance Recourse -- the company is responsible if the customers fail to pay Non-recourse -- the company is not responsible if the customers fail to pay, the factor suffers the loss ////////////////////////////////////////////////////////////// Organic vs inorganic In general, growth is considered either organic or inorganic. **Organic** growth comes from expanding your organization's output and engaging in internal activities that increase revenue. **Inorganic** growth comes from mergers, acquisitions, and joint ventures. Examples of Organic growth: - ·  Branding & Promotion: Increasing market share by promoting products and - ·  Innovation & Product Development: Developing products to increase market share or enter new markets. - ·  Sales and Distribution: Improving sales by expanding or improving sales operations and distribution partnerships. For example, a firm might find distribution partners to sell a product in a new territory. - ·  Customer Relationships: Improving customer experience to increase the customer lifetime value - ·  Operations: Bottom-line growth can be improved by reducing costs through operational efficiency. Organic growth is **slower and cheaper** than inorganic growth. It can be achieved by increasing production and technology or using marketing and sales and strategic planning to grow. Examples of Inorganic growth: - ·  Combining with a similar company to grow market share. - ·  Acquiring another company whose products, services, and/or customer base a company wishes to have. - ·  Merging two dissimilar companies (known as a conglomerate merger), thereby creating a combination of two unrelated businesses. - ·  Joint venture ////////////////////////////////////////////////////////////// Franchise vs management contract **Franchise:** Is a type of license that grants the franchisee access to a franchisor's proprietary business knowledge, processes, and trademarks, thus allowing the franchisee to sell a product or service under the franchisor's business name. In exchange for acquiring a franchise, the franchisee usually pays the franchisor an initial start-up fee and annual licensing fees. Phases of added value services that a franchisor must provide to the franchisee: 1 know-how \- product definition -- the franchisor tells the franchasee what they are selling \- standartization -- letting know the franchise how the services shold be provided - in the exact same way as in any other place with the brand name \- training and training tools -- trainging employees how they should behave \- built in monitoring -- monitoring the costs, revenue and profit of the franchise \- benchmarking -- comparing different frnachises in the city or country, to know if this one will work 2 access to market \- procurement efficient systems -- what, how and from where the purchase their input for the inventory \- network and networks clients -- the franchisor decides where and how you advertise the product/ service, as well as contacting and choosing the clients \- brand definition -- similar to product definiton except it is focused on the environment you create 3 access to finance \- viability studies -- checking if all the variables allow the franchise to work \- performance monitoring -- monitoring your performance in temrs of sales, customers and profitability, as well as if you are following all the ruels, if not they can remove the license \- benchmarking -- comparing cost, revenue and profit to other places with the same brand name \- bankability/ credit -- the franchisor helps with creadit, loans and access to the bank **Management Contract:** A management contract is a contract by which a 3rd party (The Hotel Operator) assumes the entire management of the hotel operation, deciding sales, marketing, defining procedures. As such The Hotel Operator has full authority on the management decisions of day to day operation. The management contract establishes The term (duration) The economic conditions ( generally 2% - 5% of sales + 10% GOP) The minimum CAPEX periodic investment Who (the owner or the Operator) appoints GM The revelant non-operational expenses (marketing) A management company may have (but it is not required) an important distribution network to access different origination markets. In such cases, the Management Company establishes further marketing contributions to develop the overall brand. **DIFFERENCE BETWEEN FRANCHISING AND MANAGEMENT CONTRACT:** · **Management contract:** A management contract is a **service contract**. The manager manages the day-to-day operations of a business, in exchange for agreed upon compensation and benefits. The manager does not need to be the owner of the business. · **Franchise:** A franchise contract is a **licensing contract**. A franchisee owns a business, but pays a proportion of profits, and conducts certain business operations in an agreed upon manner, in exchange for the permission to use the franchisor\'s business model and intellectual property.

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