1.
00 NATURE AND SCOPE OF FINANCE
Finance has become a modem professional discipline to a
coherent philosophy and a growing body of statistical research in
support of the conceptual framework. Financial management is
that managerial activity which is concerned with the planning and
controlling of the firm financial resources. It is a branch of
economics till the 1990s and as a separate discipline.
The scheme of financial accounting is of immense interest to both
academic and practicing managers.
What is finance?
Firms financial activities, related to other activities, firms create
manufacturing capacities for production of goods and some
provide services to customers, and sell the goods or services to
earn a living or profit.
They raise funds to acquire manufacturing and other facilities.
There are 3 most important facts: activities of business firm.
These are (QI) production D2= marketing, D3 = finance. A firm
secure whatever capital it needs and employed if finance, activity,
in activities which generate return on invested capital (production
and marketing activities).
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During the 1940s and 1950s one finds a developing awareness of
cash flow and of the methods of cash flow planning and control,
but on the whole the approach was from the point of view of the
external analyst.
Finance is defined as that branch of economics which deals with
the financial activities of government, organization concerning
revenue and expenditure and debt operations and their effect on
the economy. It tries to analyze the impact of these financial
activities of government, organization, individuals and corporate
bodies.
Real and financial Asset
A firm requires real asset to set up its business i.e. Tangible real
asset and physical asset which include plant and machinery,
office, factory, furniture and building.
Another form is intangible real asset which is technical knowhow,
technological collaboration, patents and copy right.
Furthermore, financial asset also known as securities are financial
papers or instrument such as shares and bonds or debentures.
In the primary market, firms issue securities to investors to raise
necessary funds. These securities issued to investors are traded,
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bought and sold in the secondary market, some time referred to as
stock exchange. Financial assets also include lease obligation and
borrowing from the banks, financial instrument, and other
sources. In a lease, they obtain a right to use the leasers asset for
an agreed amount on rentals over the period of lease, fund applies
to assets by the firm are called capital expenditure in investment.
The firm expect to receive a return on investment and might
distribute return from profit as dividend to investors
103. Sources of the modern theory of finance
In the early 1 960s 1 970s new issues emerged which are a source
of great change in the discipline of business finance as today.
These issues were seriously debated by great scholars outside
finance discipline and in some journals of the royal statistical
society and econometrical which concerned the nature of capital
market. Some great writers like Paul (1964) put together various
articles published at that time in his book, ‘The random character
of stock market price’ so called the random work hypothesis.
From these publication and their descendants emerge the concept
of the efficient market which means a market which transaction
prices fully reflect all information known to investor. From the
results of various statistical studies which are shown to major
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capital market as evidence to investors result to an efficient
market.
1.04 FUND
FUNDING PRINCIPLES
Fund accounting in finance is one of the fundamental principles
underlying the finance sector accounting. For accounting and
finance purposes the income of government or organisations are
categorized into series of funds. Each fund caters for specific
welfare activities of the government.
The word fund has been defined a separate fiscal, accounting and
finance activity in which resources are held, by government
special regulation, separated from other funds and established for
specific purposes.
1.05. CLASSIFICATION OF FUNDS
Funds are classified into three categories i.e.
i. Government funds, these are funds used for accounting and
finance for resource derived from the general tax and revenue.
Powers of government or organization e.g. debt service fund,
special revolving fund.
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ii. Proprietary fund: These are fund used to account for resources
derived from business like activities of the government and
organization.
iii. Fiduciary funds: These are funds used to account for resources
held and managed by the government/organization (business in
the capacity of custodians or trustees e.g. trust fund, agency fund).
106. TYPES OF FUNDS
I. GENERAL FUND
This is a fund established for financial resources which are
devoted to financing the general administration or services of
government, business organizations e.g. public enterprise, in other
words it is also called consolidated revenue funds in terms of
government activities.
II. CAPITAL PROJECT FUND: this is a fund created to
accommodate resources meant to financing the acquisition of
capital assets or facilities e.g. development of business venture.
III. SPECIAL FUND
It is a fund created for specific purpose e.g. South Africa relief
fund in
business misfortune.
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IV. CONTINGENCY FUND
This is a fund whose resources are meant for unforeseen
expenditure or for anticipated expenditure of uncertain amount
e.g expenditure on natural disaster like fire outbreak in a market
environment.
V. TRUST FUND
It is a fund whose resources are held by government, business
ventures as trustees. It is used for the purpose stated in the trust
deed e.g. partnership deed, petroleum development fund etc.
VI. INTER GOVERNMENTAL/BUSINESS SERVICE
FUND
This is established to provide services to other fund of both
government and business activities e.g. clearance fund which help
to contain (transitionally) the balance between federal
government or state government for inter governmental service
and balance between business finance. It is noted that this practice
has been cancelled.
VII. REVOLVING FUNDS
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It is a fund created to finance services provided by a designated
department to other department within a single governmental unit
or other government or business unit. It is known as working
capital fund e.g. revolving loans for industries.
VIII. SELF LIQUIDATING FUNDS
This is a fund in to which resources are transferred periodically
and out of which any money or amount left must be transferred to
a current account fund e.g. deposit fund. Deposits are money held
on behalf of third party.
1.07 A) CAPITAL FORMATION OR ACCUMULATION
Capital formation or accumulation refers to increasing a country’s
stock of real capital. It also means increasing net investment in
form of fixed assets. Real capital refers to such physical goods as
factory, building, machinery, tools, tractors etc as opposed to
money capital which is in form of physical cash.
For accumulation of more capital to be made possible there must
be a reduction in the production of consumer goods, increase
saving, reduction in consumption.
The rate of economic development of a country depends greatly
on the rate of capital formation or accumulation.
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There is low rate of capital accumulation in West Africa which
gives raise to low per capital in come and low savings which
economists call the vicious circle of poverty.
1.08 B) CAUSES OF LOW CAPITAL ACCUMULATION
OR FORMATION IN WEST AFRICA COUNTRIES
ESPECIALLY IN NIGERIA.
1. VICIOUS CIRCLE OF POVERTY
In the above chain low income due to so many reasons leads to
low savings and this reduces the available capital for investment
(low investment capital) and the result of this reduction in the
investment brings about low output and the consequence of this is
low income which continues to be rotating along the vicious
circle of poverty. Eventually capital formation will be moving
slowly.
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2. LOW SAVINGS -
Low savings is another factor causing low capital formation and
this may be due to so many reasons such as lack of importance
attached to savings by people or due to their ignorance etc.
3. LACK OF JUDICIOUS SPENDING
In West Africa so many countries embark on none rewarding or
non productive projects. Spending on jamborees e.g. festac 77.
Although their motives are of serious advantage they may not be
of benefit to capital formation. In most west Africa countries the
propensity to consume by people is higher than the propensity to
[Link] there is heavy reliance on the importance of goods instead
of admiring the locally made ones and this consequently affect the
capital accumulation can be solved by finding solution to the
above cause and government should and endeavor to make
favorable economics polices
4. INEQUITABLE DISTRIBUTION OF INCOME
In most West African countries, some people are poor while some
few are rich. And even the few rich ones spend on non rewarding
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like buying of cars, luxurious, jewelleries, burial ceremonies etc.
The effect of this is the negative effect on capital accumulation.
5. HIGH PROPENSITY TO CONSUME
In most West African countries, the propensity of people to spend
is higher than the propensity to save. E.g. there is heavy reliance
on imported goods instead of admiring locally made ones and this
affects the capital formation.
The problem of capital accumulation can be solved by finding
solutions to the above causes,government should endeavor to
make favorable economic policies.
1.09 CAPITAL CONSUMPTION.
Capital consumption refers to the use of an inability to replace
worn-out physical goods likes factory buildings, machineries and
equipment used for production due to wear and tear. Economics
refer to this as consumption or depreciation. In a period of capital
consumption enough savings are not made to maintain and
replace depreciating capital goods. When a nation is unable to
maintain its stock of capital either by making provision for
depreciation or inability to replace worn out capital; it is said to
be living on capital or consuming capital and this consequently
affects the standard of living. Also inability of individuals to save
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or urgument income by withdrawing from the past saving
indicates living on capital.
CHAPTER TWO
2.00 SOURCES OF FIRM FUND RESOURCES
2.01 Sources of long term finance: organization need long-term
finance to finance long term projects, fixed asset etc of which
repayment is not required for at least ten (10) years. Long term
finance takes a variety of forms, there are three types of
investment.
a. variable income and capital investment: the most important
types of investment with variable capital and income
are ordinary shares
b. fixed income investment (loan capital): these will normally
have a nominal value which will be the amount payable on
redemption and their market value will vary with the current
interest rate. Example include debentures, preference share etc.
c. Fixed capital investment: This is a situation where an investor
deposits a sum of money normally for a period on which he
receives interest. Examples commercial bank deposit, local
authority loans, unquoted government bonds.
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The term source of finance and investment may be used
interchangeably to showcase this, it must be noted that a source of
finance to an organization is also an investment to an investor. So
we are looking from the firms point of view therefore it is a
source of finance rather than investment.
2.02 EQUITY - NEW ISSUES
The new issue market is a primary finance market because it is
concerned with the creation of new financial claims. It provides a
method which may be used by deficit units to raise funds from
surplus unit.
In Nigeria it is controlled by the Nigerian stock exchange and
closely related to the secondary trading market run by the
exchange.
In the stock exchange the new issue must carry with them a
listing on the trading market, and a minimum of thirty five
percent (35%) of the company’s market capitalization must be
offered to the market by the first issue of shares. A company
seeking a listing must be represented by a stock broking member
of the stock exchange.
2.03 METHOD OF ISSUING SHARES
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They are six different method of issuing shares in Nigeria
available to the company.
A. public issue by the prospectus
The company through the agency of the issuing house seeks to
persuade the public to buy a large number of shares in the
company by means of an advertisement in two Nigeria
newspapers.
The main difference between the public issue by prospectus
method and the offer for sale is that, in the former case the
issueing house acts as the agent for the issue of shares while in
the latter case it acts as the principal.
In most cases it is illegal to issue to the public any form of
application for shares or debentures in a company unless it is
accompanied by a prospectus complying with companies act 1985
or approved listing particulars or a statement where approved
listing particulars may be inspected.
The prospectus must include an accountants report and a report on
the value of business to be purchased.
B. Offer for sale
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This method is used when a relatively large amount of capital is
required and often when a company wants to change its status to
that of the public company.
The company offers shares to an issuing house which then offers
the shares to the public at a fixed rate.
The procedure for making an offer are as follows
1. Application to publish a prospectus must be made to the
committee on quotations of the Nigeria (Lagos) stock exchange.
2. Once the prospectus has been published at least two days must
elapse before a formal application for a quotation is made to the
stock exchange.
Committee on quotations, the application list for the share will
open on a date stated in the prospectus.
C. Private placing
This method is used by unquoted companies who requires a small
amount of funds and wishes to keep the expenses of the issue as
low as possible either the issuing house or a firm of stock brokers
will agree to buy a small number of the securities of the company
with the intention of placing them in some institutional investors.
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It is usually the intention to have the shares quoted on the Lagos
stock exchange at some times in the future.
D. Stock exchange introduction
This form of issue is different from other methods of issues in
that no extra capital is raised. The real function of an introduction
is to make it possible for a firm to obtain a quotation on the Lagos
stock exchange.
After the introduction has been approved by the quotation
subcommittee of the stock exchange and assurance has been
given that there will be eventually a free market in the share of
the company. The introduction is advertised in the Lagos stock
exchange.
E. Stock exchange placing
This method is a combination of the private placing and the stock
exchange introduction.
The company concerned will need both a quotation for its shares
and a small amount of capital, which is usually raised from
selected institutional investors.
F. ISSUE BY TENDER
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By this method shares are offered to the public and potential
investors are invited to name the price they are willing to pay.
Though the company does not suggest or even know the price at
which the shares will ultimately sell to the bidder. It does put a
reserve for them. The minimum price below which they will not
be sold.
The investor therefore knows the lowest selling price and can, if
he wishes to make an offer above this level.
2.03 UNDERWRITTERS
In the case of offers, an issuing house acts as the principal and
buy the shares from the company before issuing is made, while in
all other method of issuing shares the merchant bank or issuing
house acts as the agent for the issue of shares, irrespective of
whether the issuing house is acting as the principal or merely the
agent for a new issue of shares. It will be facing business risk
because it guarantees that money will be raised, to cover itself, it
arranges with a number of other financial institutions such as
investment trusts or insurance companies that will underwrite the
issue. The institutions are paid a fee which is forthcoming even if
the issue is fully subscribed. In addition, the institution carrying
out the underwriting facility will have the opportunity to
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obtaining some cheap share will under write the issue. The
institutions are paid a fee which is forth coming even if the issue
is fully subscribed. In addition, the institution carrying out the
underwriting facility will have the opportunity of obtaining some
cheap shares.
2.04 COSTS OF FLOTATION
There are two important points that can be made about flotation:-
I. The cost of flotation for ordinary shares is greater than fixed
interest stocks.
II. The cost of offers for sale as a percentage of gross proceeds
is greater than the cost of placing.
One reason for the greater expense involved in marketing
ordinary shares lies in the fact that ‘’fixed interest’’ securities
are generally bought in large blocks by a relatively few
institutional investors. Whereas ordinary shares are bought
by large number of individuals. So also ordinary share are
more volatile than fixed interest rate securities, so
underwriting risks are greater for the fixed interest security.
Secondly costs also tend to be greater as a percentage of total
process for small issues, such as placing than for large issues,
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such as offers for sale. Two explanations are made in respect
of this, i.e
I. Certain fixed expenses are associated with any issue of
securities, since these expense are relatively large and fixed,
their percentage of total cost of flotation runs high on small
issues.
II. Small issues are typically those of less well known firms, so
underwriting expense may be larger than usual because the
danger of omitting vital information is greater.
Flotation cost are lower for large companies for each type of
security, and most companies can cut their flotation cost by
making full use of right issues as a method of issuing new
securities.
II.05 ORDINARY SHARES AS A SOURCE OF FUND
An equity interest in a large company may be said to represent a
share of the companies asset and a share of any profit earned on
those asset after other claims have been met. The equity share
holders are the owners of the business, they purchase shares, the
money is used by the company to buy assets, the assets are used
to earn profit which belong to the ordinary shareholders.
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As a source of long term finance, ordinary shares carry a number
of both advantages, and disadvantages.
ADVANTAGES
a. There are no fixed charges attached to ordinary shares if a
company generate enough earning, it will be able to pay
dividend but there is no legal obligation to pay dividend.
b. Ordinary shares carry no fixed maturity.
c. They provide a cushion against loses for creditors, thus the sale
of ordinary share rather than others securities increase the credit
worthiness of the firm.
d. Ordinary shares can often be sold more easily than debentures.
e. Returns from the sales of ordinary shares in the form of capital
gain are subject to capital tax rather than corporate tax.
DISADVANTAGES
a. The sale of ordinary shares extends voting right or control to
the additional share holders who are brought into the company.
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b. More ordinary shares give more people the right to share with
the existing owners in the company profit.
c. The cost of underwriting and distributing new issue of ordinary
shares are usually higher than those for underwriting and
distribution of preference share or debenture.
d. If the firm has more equity or less debt than is called for in the
optimum capital structure the average cost of capital will be
higher than necessary.
e. Dividends payable to ordinary shares holders are not deductible
as an expense for the purpose of corporation but debenture
interest is deductible.
II.06 SCRIP DIVIDENDS AND SCRIP ISSUES
One way of issuing new equity shares to existing share holders is
by the distribution of a scrip dividend.
As an alternative to paying out cash dividend during the year i.e a
company may choose to pay a scrip dividend, this is essentially a
transfer of a number of additional equity shares without the share
holders having to subscribe additional cash, from the company’s
point of view this offer the advantage of preserving liquidity as no
cash leaves the company. The advantage to the share holders on
the other hand is that he received a dividends which he can
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convert into cash whenever he is in the same way as cash
dividend.
A script issue is similar to a right issue, however share holder do
not have to take up additional equity.
A company uses its capital reserves through capitalization of its
share premium account.
II.07 STOCK SPLITS
A stock split, like a scrip dividend or issue increase the number of
shares in a company without raising any new funds. The
procedure is simple, the company reduces the norminal (par)
value of each share and announce that its investors no longer
hold, say one share with a par value of 0.50, instead they own two
share with a par value of 0.25 each one of the prime objective of a
stock split is to create cheaper shares with increase market ability.
If the market ability of the company’s share improves the value of
the investors holding should increase.
II.08 PREFERENCE SHARES
Preference shares usually have priority over ordinary shares with
respect to earnings and claims on assets in liquidation.
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Preference share are usually cumulative, some are redeemable
and other are irredeemable. They are typically non-participating
and have only contingent voting right. The major advantage to the
issuing company are;
a. The obligation to pay rate of interest on the security is not
binding in the same way as it is with debenture.
b. Preference share enable the company to avoid dilution of equity
capital which occurs when additional ordinary shares are issued
c. They also permit a company to avoid sharing control through
participating in voting
d. Since many preference shares are irredeemable, they are more
flexible than debentures
The major disadvantage is that dividend paid to preference share
holder are not tax deductable, the true cost to a company of
preference share is far greater than the cost of debenture.
As a hybrid security the use of preference share is favored by
circumstance that fall between those favoring the use of ordinary
share and those favoring the use of debentures.
The cost of preference share financing follow interest rate levels
more than ordinary share price, in other words when interest rate
are low the cost preference share is also likely to be low.
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Companies sell preference shares when they seek the awaiting of
financial gearing but fear the dangers of the fixed charges on debt
in the face of potential fluctuations in income.
II.09 DEBENTURES
A debenture is a document issued by a company containing an
acknowledgement of indebtness, usually a debenture is a bond
which is given to the public in exchange for money lent and a
prospectus must have been supplied with the application form.
The company agree to repay the principal to the lender by some
future date and in each year up to repayment, it will pay a stated
rate of interest in return for the use of funds. The debenture holder
is a creditor of the company, and the interest has to be paid each
year before dividends is paid at any class of share holder
debenture and debenture stock can be secured or in secured, when
secured this is by means of a trust deed.
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CHAPTER THREE
3.01 TYPES OF DEBENTURE
a. Mortgage debenture:-
This type of debenture is secured by means of a specific change
upon certain real assets of the company. A mortgage debenture is
therefore secured by real property.
b. Debenture with a floating charge:-
These debentures are secured against all assets of the company
other than those assets which have been changed in the form of
mortgage debenture s,
Although the legal security of these debenture is less than in the
case of mortgage debentures the company does have greater
flexibility in managing its assets if the company defaults in the
payment of interest the debenture holders have the right to
appoint a receiver to administer the asset, until the interest have
been paid or the default made good.
c. Unsecured debenture:-
These debenture have no security, the only security possessed by
the debenture holder is a note of indebtness issued by the
company.
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As with ordinary shares loan capital also carries a number of
advantages and disadvantages
ADVANTAGES
a. The cost of debt is definitely limited, debenture holders do
not participate in superior profit if earned.
b. The expected yield is lower than the cost of equity capital.
c. There is no dilution of equity capital and the share holders do
not have to share their control when debt financing is used.
d. The interest payment on debentures is deductible as a tax
expense.
DISADVANTAGES
a. Debt is a fixed charge
b. Higher risk brings higher capitalization rates on equity earning.
Thus even though gearning is favorable and raises earnings per
share, the higher capitalization rates attributable to gearning
may drive the market price of the ordinary shares.
c. Debentures usually have a fixed maturity date, Because of this
maturity date provision must be made for repayment of the
debt.
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d. Since long-term debt is a commitment for a long period it
involves risks. during that time the debt may have a burden or it
may prove to have been advantageous.
e. There is a limit to the extent to which funds can be raised
through long-term debt.
f. Since many preference share are irredeemable they are more
flexible than debentures.
3.02 MEDIUM –TERM LOANS
Medium term financing is defined as debt originally scheduled
for repayment in more than one year but less than ten (10) years.
Anything shorter is a current liability and falls in the class of
short term credit, while obligation due in ten(10) years or more
are thought of as long term debt.
The major forms of intermediate term financing are
a. Term loans
[Link] financing
TERM LOANS
A term loan is a business loan with a maturity of more than one
year, Repayment arrangements are negotiable, although the usual
practice is for systematic repayment over the life of the loan the
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majority of loans made by the clearing banks are made without
any security being taken. Yet where it is felt that the capital
resources of a borrower are not considered adequate in relation to
the level of borrowing to warrant lending on a totally unsecured
basis then security is taken usually in the form of a fixed or
floating charge over a certain assets.
LEASE FINANCING
Lease provides for the acquisition of asset and their complete
financing simultaneously.
Leasing takes several forms
a. Sale and lease back:-
Under a sale and lease back arrangement, a firm owing land
buildings or equipment sells the property to a financial institution
and simultaneously execute an agreement to lease back for a
specified period under specified terms.
[Link] leases:-
Operating leases include both financing and maintenance
services, these leases ordinarily calls for the leasor to maintain
and service the leased equipment and the cost of the maintenance
are either built into the lease payment or considered for
27
separately. Operating leases are not fully amortised i.e payment
are not sufficient to recover the full cost of the equipment. Also
the operating lease frequently contain a cancellation clause giving
the lease the right to cancel the lease and return the equipment
before the basic lease agreement expires.
c. Financial leases:-
A strick financial lease is one that does not provide for
maintenance services, is not cancellable, And is fully amortised.
financial lease are almost the same as sale and lease back
arrangement. The main difference being that the leased equipment
is new and the leasor buy it from a manufacturer or a distributor
instead of from the user lease.
3.03 INTEREST RATE
The term structure of interest rates and the level of interest rate
are obviously of prime importance, firstly the nature of the
different types of interest rate will be considered.
The most commonly quotted interest rates in the financial
markets are;-
a. The banks base rate
b. The interbank lending rate
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c. The treasuring bill rate
d. The yield on long dated gilt edged securities.
Others interest rate includes those banks over draft, bank
deposit account.
THE TERM STRUCTURE OF INTEREST RATE
The term structure of interest rates describe the relationship
between interest rates and loan in maturities.
When measuring term structure, it is common practice to use
yield on Nigerian government securities.
Three theories have been advanced to explain the term structure
of interest rates
i. Expectation theory
The expectation theory assets that in equilibrium long term
rate is a geometric average of today’s short term rate and
expected short term rate in the future
ii. The liquidity preference theory
The future is inherently uncertain thus pure expectation
must be modified. in a world of uncertaintity investors will
in general prefer to hold short term security because they
are more liquild in the sense that they can be converted to
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cash without danger of loss of principal. investors will
therefore accepts lower yield on short term securities.
Borrowers will react in exactly the opposite way from
investors business borrowers generally prefer long term
debt because short term subjects a firm to greater danger of
having to refund debt under adverse condition,
Accordinly, firms are willing to pay a higher rate, other
things held constant for long term funds that for short term
funds.
iii. Market segmentation theory
This theory accepts the liquidity preference argument as a good
description of the behavior of investors with short term business
ideas. certain investors with long term liabilities might prefer to
buy long term bond because given the nature of their liabilities
they found certainly of income highly desirable. borrowers
typically relate the maturity of their debt to the maturity of their
assets.
Thus the market segmentation or hedging pressure theory
characterizes market participant as having strong market
preference then argues that interest rates are determined by
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supply and demand in each segmented market with each
maturity constituting a segment.
ASSIGNMENT
1. What do you understand by the term long term and short
term loan?
2. what are the three types of investment to an investor?
3. Explain the two major form of intermediate term financing.
CHAPTER FOUR
4.00 GOVERNMENT ACTION AND BUSINESS FINANCE
4.01 THE ECONOMIC BACKGROUND
Business men, politicians, the public, foreign traders etc are all
factors of which influence the economy, the availability and cost
of funds and the possibility of investment within the economy.
The cost incurred In putting supplies on the market take a number
of forms:- wages, profits, rent and interest. These payments act as
income for the recipients and consequently provide a measure of
the money value of potential demand for goods and services
available.
Demand for goods can be reduced by reducing immediate
purchasing power. This can be done by taxation, which
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redistributes purchasing power through the medium of social
services and other government expenditure. it can also be done by
saving, this feeds purchasing power back into the system through
private and corporate investment both these action in effect delay
the emergence of demand.
Where demand exceed supply there is an inflationary gap -
bridged by increasing the selling price. It is against this back
ground that we review government action which can assist or
impede the task of business finance.
4.02 GOVERNMENT FINANCIAL POLICY
In general terms the impact of government action will be in
six main ways:-
a. Credit restriction
b. Taxation
c. Control of wages, dividends and profit
d. Control of imports and exports
e. Encouragement of productive investment
f. Encouragement of personal savings
4.02 CREDIT RESTRICTION:-
Credit may be restricted in a number of ways:-
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i. Legislation for high initial payments
ii. Through the banking system
iii. Through the government national debt operations.
The ability of banks to provide commercial credit can
be reduced by the government funding part of its short
term borrowing from this source which would tie up a
greater proportion of the bank resources. The restriction
of credit and an increase in interest rates will have a
number of effects, it will make borrowing more difficult
and less attractive and cause a drop in the value of
ordinary shares it will also increase the cost of capital for
the purpose of investment evaluation. Finally it will
reduce demand and thus discourage increase in
productive capacity.
4.03 TAXATION
Taxation can reduce the amount of money in circulation to the
extent that it does not re emerge through social services and other
government expenditure, incomes generated by the various
factors of production can be very much affected by corporation
tax, and the relief given to government investment is fixed.
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4.04 CONTROL OF WAGES, DIVIDENDS, AND PROFIT
The object of wages and dividends control is to limit demand for
consumer goods within available supplies and hopefully releases
supplies for export trade. Profit control is in conflict with this in
that it leads to restore home demand and discourage productive
investment.
4.05 CONTROL OF IMPORTS AND EXPORT
Import control may be facilitated by customs duties and other
fiscal devices whilst export can be encouraged either by tax
allowance or by relief from price and profit controls when a
country is heavily dependent on overseas trade the operation of
such control maybe favorable to the exchange rate of its currency,
but may at the same time damage the internal balance of the
economy and discourage productive enterprise.
4.06 ENCOURAGEMENT OF PRODUCTIVE
INVESTMENT
The main forms of encouragement are taxation, adjustments,
grants or loans for investment in selected areas and other
depressed areas incentives such as contributions towards wages.
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4.07 ENCOURAGEMENT OF PERSONAL SAVINGS
Two examples of encouragement of personal savings includes
issue of government bonds and tax concessions.
As well as providing a means of personal savings the issue of
government bond provide finance for government borrowing
requirements such bonds provide 71% of the total money raised
by government in 1977 and 1982. the effect of this on the stock
market is evident. Tax concessions can affect the types of savings
and investment which in term can bring distortion in the capital
market. In recent years it has been evident that the types and
percentages of new capital raised by companies have been greatly
influenced by tax concessions the rules by which company
taxation is calculated afford certain reliefs which effectively
reduce the cost of company distribution to users of fund. tax relief
has been greater for loans finance than for a preference share
finance and hence companies wishing to raise fixed interest
capital have for many years been more than attracted to new
loan/debt finance than to preference share issue.
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CONCLUSION
The financial manager must face a number of pressures and
controls which may appear to be acting contrary to the good of his
organization, the manager must be ready to respond to an ever
changing environment and circumstances. the combination of
national controls and individual enterprise creates a mixed
economy the justification for which is that in the long run it will
yield an economic balance of greatest benefit to the community.
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