Suggest various funding patterns that may be adopted by the company in the light of its capital structure.
The Telestar Company Ltd (TCL) was formed in 1985 as a public sector undertaking. Till 1986, it was only telecom service provider in India. Lucknow unit had been recording profits for the year 2001, it did not have a systematic costing system. For e.g., the investment decisions of the company were made by comparing the estimated revenue generated with the estimated cost of the project. The estimated revenue was calculated on the basis of revenue generated in the neighboring circle. TSL had been following a traditional method of accounting and practically no costing system existed- Also analyse the financial status of the company and comment its performance. In 1998, the company having a total asset value of Rs 630 billion turned corporate u/s 619 of companies’ act 1956.although, the company still continued to have a 100% government owned equity, it planned to disinvest this in the next 5 years. as on date, the company enjoyed a sales of Rs 1160 billion and had an authorized capital base of Rs 1000 billion Although, the company’s
As per the case described in the question, Telestar Company Limited (TSL) needs to take two independent decisions. These are:
- How to to go about taking decision on capital investment. It need to decide on the technical specifications based on the business potential in different areas served by the company, how this business potential can be exploited, the kind of equipment and other facilities required for selected methods and the expenditures involved.
- How to obtain the fund for new projects.This decision will be based by evaluation of different source of funds including, internal surplus generation, obtaining additional equity from the government, issue of shares in the public or to some major investors, and loans of different types including issue of debentures, fixed deposits, bank loans and loans from other financial institutions.
These two decision are interlinked to the extent that the funds needed for capital investment will affect the decision of sources of obtaining these funds. This linking of the two decision is best done through the mechanism of a strategic plan that will specify among other things the following.
- Total growth in business and profits to be targeted.
- Broad ares of business expansion and criteria for selecting new projects.
- Total estimated capital expenditure requirements.
- Planned availability of spare in fund from internal sources for funding new investments.
- Broad identification of amount of additional funds to be obtained from internal sources.
Final decision on funding pattern be based on consideration such as:
- Government policy on disinvestment in public sector companies. As per the information provided in the case a decision to dis invest has already been taken in principle. However, for actual disinvestment including extent of disinvestment, profile of investor, the price per share to be charged , and the time of disinvestment. If after detailed consideration if it is found possible to get all necessary funds from this source it will not be necessary to tap any other source.
- Ability of company to borrow funds from loans of different types, along with the interest charges that will need to be incurred for borrowed funds from different source.
- Any statutory limits on the amount of funds that company can borrow from sources like fixed deposit.
The details available in the case do not cover many of the details required for deciding the capital structure. It better to collect such information and decide using the approach as outlined above, rather than take decision base on insufficient information.