Linear Programming

To Maximise f = x1 +2x2 +3x3 (Objective Function) S.T. Constraints: 5x1 + 2x2 + 3x3 100 (Capacity Constraint) 4x1 + x2 + 2x3 60 (Capacity Constraint) x2 + x3 5 (Legal Constraint) 10x1 +x2 + 2x3 80 (Financial Constraint) xi 0 ( i =1,2,3 ) Financial Constraint Quick Ratio = 1 so150+50-40-10-10 -10 x1 - x2 - 2x3 --------------------------------1 60

Integer Programming
A linear Programming problem in which all or some of the decision variables are constrained to assume non-negative integer values. Beneficial where fractional solutions are unrealistic. Rounding off the optimum values to obtain an inter solution do not give guarantee that the deviation from the exact integer solution will not be too large to retain feasibility. Mathematical Form is: Minimize or Maximise z=c1x1+c2x2+c3x3+.+cnxn
Subject To the constraints ai1x1+ai2x2+..ainxn =bi xj 0, i=1,2,3.m j=1,2,..n where xj is an integer valued for j=1,2,..,p (p n) In case p =n then its a pure integer problem otherwise a mixed inter programming problem. If all the variables in the IP are either 1 or 0 the problem is zero-one programming problem.

Simplex Method
5x1 + 2x2 + 3x3 + S1 100 4x1 + x2 + 2x3 + S2 60 x2 + x3 + S3 5 10x1 +x2 + 2x3 + S4 80 x1, x2,, x1 0 To Maximise f = x1 +2x2 +3x3 +S1+ S2 + S3 + S4 Optimal Solution x1 =7.1, x2 =1, x3 =4, S1= 50.5, S2 =22.6, S3 = 0, S4= 0 Yielding Profit = 21.10

Incremental Analysis
Slack variable S1 is 50 and S2 is 22and S3 which a legal constraint is zero and S4 is zero, so financials are acting as a constraint. In case we put instead of 80, 81 the optimal solution shall be x1 =7.1, x2= 0 x3 = 5,x4= 49.5,x6=49.5,x5=21.6, x6= 0,x7=0 Profitability in this case shall be 22.10 Therefore only 10 paisa can be used of an additional unit of long term credit in period 1 and this information is available in fourth table. This is to say that each long term credit can be afforded till it costs 10 paisa. If we assume the firm can take unlimited credit so can the firm produce unlimited levels of calculators

Incremental Analysis
It is best for the firm to increase the production of calculator by .1 and hence use machine hour and 2/5 additional assembly hour. We have 50 additional machine hour and 22 assembly hours in hand. So even with unlimited financial resources we have limited production capacities.As we see the case the assembly time shall become a hinderance. Hence 10 paisa is the incremental price for additional long term funds till Rs.55. Lastly the optimal solution is as per the legal restriction. If this is removed the solution shall change

Gomorys IPPMethod
R.E. Gormory first suggested the solution Step 1: Determine the optimum solution as in LPP Step 2: In case some of the basic variables are not integer valued then add a linear constraint called Gomorys constraint (fractional cut is generated) The linear constraint created shall then be added at the last row of the optimum simplex table indicating te solution no longer to be feasible. Modified problem is then solved through the dual simplex method An optimum solution is obtained once all basic variable obtain inter values else repeat the process.

 Maximise Z=200x1+300x2 Subject to 1. 2x1+4x2 17 2. 3x1+ 3x2 15, x1,x2 >0 Since the optimal solution provide for fractions instead of integer we o apply gomory method. So we select the first constraint which is 0x1+1x2+1/2 s1-1/3 s2 = 7/2 0x1+1x2+(0+1/2) s1+(-1+2/3) s2 = 3+1/2 Put all integers on RHS 1/2 s1+2/3 s2 = +(3 -1x1+ 1 s2) 1/2 s1+2/3 s2 1/2 s1+2/3 s2 = + S3 -1/2 s1-2/3 s2 + S3 =-

Goal Programming
A mathematical programming technique which overcomes the disadvantage of the linear programming and integer programming techniques by handling multiple objectives. Step 1: Determine the goals which has to have a target value. Step 2: A penalty is assigned for each unit of deviation from the target value in each direction. Step 3: A revised linear programming model with deviational variables is formulated whose optimal solutions come as close as achieving the stated goal that is to minimise and the sum of penalties incurred for under and over achievement of the goals.

Goal Programming Formulation

1. Z= 40 x1+35x2 Subject to constraints 2x1 +3x2 60 , 4x1 + 3x2 96 , x1,x2 0 Suppose the manager wants to achieve a profit of Rs.1400 He identifies his goal and the target to be achieved He can have positive and negative deviations ie 1500 or 800 can both be achieved. Let 40 x1+35x2 1400 d+ and d- be the over and under achievements. The managers goal can be represented as 40 x1+35x2 1400 this can be over or under achieved so can take the form 40 x1+35x2 + d+ + d- =1400

Goal Programming Formulation

Now the objective of this problem is to minimise the underachievement of the profit goal The goal programming problem shall be ( with single goal) To Minimise Z = dSubject to 2x1 +3x2 60 , 4x1 + 3x2 96 , 40 x1+35x2 + d+ + d- =1400 x1,x2 ,d+ , d- 0 ( use simplex method) Goal Programming Problems can be divided into Non-preemptive and preemptive goal programming. Non- Preemptive goal programming model involves situations where all goals are of roughly comparable importance. Preemptive goal programming model deals with cases where there is a hierarchy of priority levels for various goals so that there are goals of primary importance which receive attention before others which are of secondary importance.

Non-preemptive Goal Programming Model

Let x1 and x2 represent P1 and P2 respectively, to be produced every week, we can formulate the model as: Goal 1: 20 x1 +32 x2 =5400 Goal 2: 0.3x1 +0.75x2 =108 Constraints are: 2x1 + 4x2 600 ( Labour) 4x1 + 5x2 1000 ( Material M1) 5x1 + 4x2 1200 ( Material M2) d1- Under achievement of the profit goal d1+ Over achievement of the profit goal d2- Under achievement of the workforce goal d2+ Over achievement of the workforce goal

Non preemptive goal programming problem

To Minimise z = d1- + d2Subject to 20 x1 +32 x2+ d1- + d1+ =5400 0.3x1 +0.75x2 + d2- + d2+ =108 2x1 + 4x2 + S1 = 600 ( Labour) 4x1 + 5x2 +S2 = 1000 ( Material M1) 5x1 + 4x2 + S3 = 1200 ( Material M2) x1 x2 d1- d1+ d2- d2+ S1 S2 S3 0 ( Non Negativity Constraint) Solve by simplex method

Preemptive goal programming

Deals with hierarchy of priority levels for various goals Focus on achieving the top priority goal and then the lower priority ones. Goals are given priority that Most important goal(Goal 1), least important goal (Goal n) Objective function carrying coefficients assigned for deviational variables representing goal i is Pi . It is assumed P1>>>P2>>>P3>>>P4>>>>Pn which means that weight of goal one is higher than goal n.

Preemptive Goal Programming formulation

Objective Function Z = P1d1- +P2(4d2-+3d3-)+P3d1+

Subject to x1 + x2 300 2x1 + x2 + d1- + d1+ =400 x1 + d2=150 x2 + d3=350

x1,x2, d1- ,d1+ , d2- , d3- 0

Options
A contract that gives the option holder the right to buy or sell an asset at some predetermined price within a specified period of time. Suppose a100 shares of a company X are selling at Rs. 80 and there is an expectation that the price of the share within three months shall touch Rs. 115 then I purchase an option to buy the shares at Rs. 85 from someone after 2months. In case the price goes to 115 I exercise the option else I may not purchase the shares. To take this option (buy) the option I shall have to pay a certain amount called the option premium. The giver (seller) of the option is the option writer. The buyer of the option has a choice to buy or not to buy however the seller does not have any option and has to sell. Strike price the price that must be paid (buying or selling ) for a share of common stock when an option is exercised. Call Option is an option to buy or Call a share of stock at a certain price within a specified period Put option is an option to sell a share of stock at a certain price, within a specified period

Pricing of an option
Formula value of an Option = current price of the stock striking price Formula value= Rs . 80-85= -5 If the price of the stock in the future is 60 Not to exercise the option (loss of Rs.5*100=Rs.500) 88 Not to exercise the option (loss of Rs.5*100=Rs.500) 85 Indifferent to the option (loss of Rs. 500) 110 Exercise the option (100*25 (110-85) 500) to gain Rs. 2000 135 Exercise the option (100*45 (130-85) 500) to gain Rs 4000 Option shall always sell at a value greater than their formula value Price of the stock Strike price Formula Value Market Price Premium 80 85 -5 5 -10 85 85 0 9 9 90 85 5 9.25 14.25 95 85 10 10 20 100 85 15 10.5 25.50 (huge gain potential versus the limited loss entails the option a value higher than the formula value)

Option Value
The option value depends on; Stock Price Strike Price Option time to maturity/ type of option The variability of the underlying Variable

Warrants: A long term option to buy a stated number of shares of common stock at a specified price. Detachable warrants: A warrant that can be separated from the bond and can be traded independently Stepped- exercise price: An exercise price that is specified to be higher if a warrant is exercised after a designated date. Convertible security: A security usually a bond or preferred stock that is exchangeable at the option of the holder for the common stock of issuing firm

 Mumbai , April 4 WELSPUN India Ltd on Monday said it has allotted 90.79 lakh equity shares to Dunearn Investments (Mauritius) Pte Ltd, a wholly owned subsidiary of Temasek Holdings of Singapore at a price of Rs 130.25 per share, aggregating Rs 118.26 crore. The company has also issued 16.81 lakh warrants to the Singapore firm, which will hold a 14 per cent stake in the company. According to a notice issued to stock exchanges, the company has also allotted warrants to Welspun Wintex (7.73 lakh); Welspun Mercantile (8.40 lakh) and Welspun Trading (4.03 lakh) all three being group companies. The warrants would carry the option to convert into equity shares at Rs 130.25 per share any time within 18 months from the date of allotment . The funds would be utilised to part finance the company's growth and expand its weaving capacity and enhance its spindle facility. The funds would also go towards brand development and retail initiatives in India and global distribution alliances. The above expansions will be financed partly through the issuance and the balance through debt at 2-3 per cent interest through TUF loans. In this regard, Welspun Wintex was allotted 13.03 lakh equity shares and Welspun Mercantile 12.76 lakh equity shares on conversion of existing warrants allowed on May 14, 2004, at a face value of Rs 10 and at a premium of Rs 85.

 According to a company official, post allotment, the conversion of all outstanding warrants as also the merger with Glofame Cotspin Industries Ltd, the paid-up capital of Welspun India would stand at Rs 76.79 crore. The promoters and associate companies would have a stake of 35.01 per cent and foreign institutional investors will hold 31.62 per cent. The company has also inducted Mr Padmanabh Sinha as a nominee director representing Dunearn Investments (Mauritius) Pte Ltd, while Mr G. Diwan resigned as director from the board. The board has also approved the purchase of 7.5 lakh shares of Welspun Zucchi Textiles Ltd (WZTL, a joint venture of the company) from the co-promoters of WZTL. It also announced that the company's Rs 575 crore expansion project at Anjar, Gujarat, for terry towels, bed sheets and cotton spinning is as per schedule. In the terry towel unit, all 96 looms have started commercial production and the company claimed to have already shipped more than 1,000 tonnes to clients in the US. The sheeting and spinning units are expected to be operational during this month.

Analysis
The

Commercial Paper
Definition: It is an unsecured money market instrument issued in the form of a Promissory Note. Introduced in the Indian Market in January 1990 as per recommendation of the Working Group of Money Market (Chairman Mr. N. Vaghul ) formed in 1980. CP were introduced as a privately placed instrument with a view to enabling highly rated corporate borrowers to diversify their sources of short term borrowings and to provide an additional instrument to investors to invest. Later Primary dealer and Satellite dealers were allowed to issue CPs to meet their short term funding requirements of operations. Who Can Issue a CP?
Corporates, Primary Dealers,Satellite Dealers, All India Financial Institutions to raise short term funds under the umbrella limit of RBI

Corporate Eligibility
1. The Tangible net worth ie Paid Up Capital Add ( General Reserve + Share premium Account+ Capital Debenture redemption Reserve+ other free reserves not being created to meet any future liability or depreciation in assets or Bad Debts or Reserves created revaluation of assets. Other reserves include Dividend Equalization Reserve, Development Rebate Reserve, Development Allowance Reserve, Investment Allowance Reserve and Capital Reserve created through Profit on sale of assets realized in cash or otherwise) Deduct (Accumulated losses + Deferred Revenue Expenditure + Other tangible Assets) } of the company as per the latest audited balance sheet is not less than Rs. 4 crore ( This limit in Jan 1990 was 10 crore which was slashed to Rs. 5 crore in June 1990 and further to Rs.4 crore in 1993) 2. Company has been sanctioned working capital limit by bank/s or all India Financial Institutions 3. The borrowal account of the company is classified as a standard Asset by financing bank/s/ institution.

1.

2.

All eligible participant shall obtain credit rating by any one of the following agencies that CRISIL,ICRA,CARE,FITCH or any other approved credit rating agency. The minimum credit rating for Crisil is P-2, A-2 for ICRA and PR-2 for Care and equivalent ranks for others.( In 1990 the minimum rating required by corporate was P-1) CP can be issued for a period of 7 days to 1year
1. 2. 3. In 1990 they were allowed for 91 days -6months In June 1994 were allowed for 3mths to 1 year In Oct 2000 were allowed for 15 days to 1 year

3.

4.

5.

Maturity Date of CP should not go beyond the date upto which credit rating of the issuer is valid. CP can issued in denominations of Rs. 5 lakhs or multiples thereof ie an amount invested by a single investor not be less than Rs. 5 lakhs ( In Jan1990 this denomination was Rs. 25 lakh and in July 1990 it was 10 lakh and then in July 1991 it is cut to 5 lakh) The minimum size of CP issue should be Rs. 25 lakh ( in Jan 1990 it was 1 crore and was cut to 5O lakhs in July 1990 and then in July 1991 it was brought to this level)

The commercial Paper can be issued through an Issuing and Paying agent (IPA) AN IPA can be only a scheduled commercial Bank The cost of the CP involves Stamp duty, rating fees and issuing and paying agent fee. The stamp duty in case the CP is issued by Bank is 0.2% and 1% in case the CP is issued by merchant banker or non banks The rating fee varies but for care it its .1% of the issue or minimum 100,000 The IPA shall take .1% of the issue size. As per 2004-05 CP market positions The manufacturing and other companies have 24% share in the market The Financial institutions have 15% share The Finance and leasing companies have 61% share. Norms of the issue are stringent with respect to date of the issue and maturity of the issue.

Limits and Amounts of Issue of Commercial Paper An FI can issue Cp within an overall Umbreall limit fixed by RBI ie the isse of CP together with other instruments viz term money borrowing , term deposits, certificate of deposits should not exceed 200% of the net owned funds, as per the latest audited balance sheet The total amount of CP proposed to be issued need to be raised within a period of 2 weeks from the date on which issuer opens the issue of subscription. CP may be issued on a single date or may be issued on different dates in different parts. CP can be issued as a stand alone product. The aggregate amount form an issuer shall be within the limit approved by
Its board of directors Or quantum specified by the rating agency whichever is lower Banks and Financial Insitutions shall have the flexibility to fix working capital limits duly taking into account the resource pattern of companies including Every CP issue should be reported to the Chief General Manager, Industrial and export Credit department and RBi at its central office. Every issue shall be treated as a fresh issue ( including renewal)

Investments in CPs can be made by Individuals, banking companies, other corporate bodies registered or incorporate in India and unincorporated bodies, NRI and FII. However the investment of FII shall be as per the limit prescribed by SEBI. Mode of Issuance CP can issued as a promissory note CP can be isued through any of the depositories approved and registered with SEBi CP can be issued at discount as per the desire of the issuer. No issuer shall have a CP under written or co accepted From 30 june 2001 all CP issues of Banks, FIs,,PD and SD shall be in dematerialised form. CPs may obtain a stand by facility as per the commercial viability decided by the banks however it is not obligatory Procedure of Issuance: IPA to potential investor then deal-then physical certificates or crediting investors demat account with a depository. Investor shall be given a copy that the issuer has a valid agreement with the IPA.

Venture Capital Financing

Introduction Features Equity investment in unquoted securities in growth oriented small/medium business. Equity Financing Long term Investment Hands on Approach High risk-return Spectrum Technology oriented Companies a mere subset Selection of Investment Stages of Financing
Seed Capital Preparation of Feasibility report, Applied research Start Up- Product development, Initial Marketing Second Round Financing- Follow up, may consider debt financing, before exit financing Later Stage Financing- Mezannin/Development Financing, bridge/ expansion, buyouts and Turnarounds

Valuation by Venture Capitalist

There are 3 approaches Conventional Venture Capital Valuation Method
To compute annual Revenue at the time of liquidation of the investment, determine its present Value and compound it with the expected growth rate for the holding period Expected earnings after tax and their Present Value Future market Value by multiplying Expected EPS with the P/E multiple which can be expected or on the date of liquidation Present value of all the investment on the book value of the overall assets

First Chicago Method

Create alternate ScenariosSuccess, Sideways Survival, Failure Associate Probabilities Determine the Cash Flows and Find the Net Present Value and then determine the Expected monetary Value

Revenue Multiplier Approach Mt = V/ R= (1+r)n (A) (P)/ (1+K)n V= Present Value of VCU, R= Annual Revenue Level R= Expected annual rate of return from the investment N= holding period A= expected after- tax Profit Margin % at the time of exit P= Expected P/e Ratio at the exit Time

Structuring the Deal Investment Monitoring Hand on, Hands Off and Hands holding approach Structural Aspects Limited Partnership- General Partner, Limited Partners Investment Company/ Trust Offshore Investment Company Offshore unit Trust Exit On Debt:
Conversion Liquidation Securitization

On Equity
Going Public Sales of Shares to Entrepreneur/ employees Selling to New investors Trade Sales/ Sale to another Company Liquidation

Factoring
A fund based financial service, provides resources to finance receivables as well as facilities the collection of receivables. Definition: An arrangement between a factor and his client which includes at least two of the following services which Finance, maintenance of accounts, collection of debts and protection against credit risk. Mechanism Involves Client A firm A factor/s- A financial service firm/ Bank/ Financial institution Debtors of the Firm Creating Receivables

On the Basis of Type

Boundaries
Cash Disburseme nt by the factor to the client

Domestic

International

Advance

Maturity Nonrecourse

Credit Risk

Recourse

Disclosure to the Buyer Disclosed

Undisclosed

Buyer -Purchase of Goods -Receiving Goods and Instructions to pay factor in Time

Seller -MOU with the buyer -Sells goods to the buyer -Delivers Copies of Invoices and challan and instruction to pay to the factor -Sellers receives 80% or more advance from the factor on selling the receivables -Seller receives balance amount from the factor after deduction of factor service charges

Factor -Agreement with the seller -Advance payment on receipt of sales ledger -Factor receives payment from the buyer -Credit analysis of the receivables ( that title is free) -A letter of confirmation by the seller wrt sale of goods agreement -In case the bank has a charge on assets then a letter of waiver shall be obtained by the seller and to be given to the factor and the sale proceeds are to be deposited in the account of the bank

Functions of a Factor
Maintenance/administration of sales ledger
Factor maintains the sales ledger The seller sends the sales invoice to the factor and keeps open invoices Factors give periodic reports about the clients receivables position Factors also maintains customer wise records

Collection Facility
Collects Payments from the buyers. Relieves the seller/client of the collection hassles

Financing Trade Debts

Advances given as against the purchased receivables In recourse the advance is refundable in case there is default in collection In without recourse factoring the advance is not refundable

Credit Control and Provisioning

In case of without recourse factoring, factors define credit limits for the buyers of the client or for the customers of the client and hence takes all the credit risk of the client onto himself.

Advisory Services
Market Survey Auditing of the sales record Introducing the client to financial intermediaries