Financial Management

Author: Wang Xiqi
Publisher:
Publish Date: 2004-08-01
Features: This book is one of the series textbooks for accounting majors in vocational and technical colleges. The entire book is divided into 12 chapters, including Introduction to Financial Management, Value Measurement in Financial Management, Financing Management, Current Asset Management, Fixed Asset Management, Revenue Management, Profit Management, Foreign Exchange Management, Financial Analysis, and Mergers and Acquisitions of Enterprises. [Excerpt:] 2) Bonds are divided into convertible bonds and non-convertible bonds based on whether they can be converted into the company's stock. If a company bond can be converted into the company's stock, it is a convertible bond; otherwise, it is a non-convertible bond. Generally speaking, the interest rate of the former type of bond is lower than that of the latter. According to the provisions of China's Company Law, the entities authorized to issue convertible bonds are limited to listed companies in joint-stock limited companies. The above two classifications are recognized by China's Company Law. In addition, according to international practice, company bonds have other classifications. For example, they are divided into secured bonds and unsecured bonds based on whether they have specific property guarantees; divided into participating bonds and non-participating bonds based on whether they participate in the company's surplus distribution; divided into fixed-rate bonds and floating-rate bonds based on interest rates; and divided into listed bonds and non-listed bonds based on whether they can be listed, and so on.
2. Qualification for Issuing Bonds
China's Company Law stipulates that joint-stock limited companies, state-owned sole-proprietorship companies, and limited liability companies established by two or more state-owned enterprises or two or more state-owned investment entities are qualified to issue company bonds.
3. Conditions for Issuing Bonds
China's Company Law stipulates that companies qualified to issue bonds must meet the following conditions:
1) The issuing company must have sufficient solvency and meet the required scale. The net assets of a joint-stock limited company shall not be less than 30 million RMB, and the net assets of a limited liability company shall not be less than 60 million RMB.
2) The cumulative total of all bonds issued by the company since its establishment, including the portion yet to be repaid, shall not exceed 40% of the company's net assets.
3) The average distributable profits of the company in the last three years are sufficient to cover the annual interest on the bonds.
4) The use of funds raised must comply with the national industrial policy.
5) The interest rate of the bonds shall not exceed the level limited by the State Council. Currently, it is limited to 49% of the interest rate of resident fixed-term savings deposits with the same term as those offered by banks.
6) Other conditions stipulated by the State Council.
Additionally, the funds raised by issuing bonds must be used for purposes approved by the approval authorities and cannot be used to cover losses or non-production expenditures, as this would harm the interests of bondholders.
4. Procedures for Issuing Bonds
Issuing company bonds involves a certain process and the handling of specified procedures. Generally, these include:
1) Resolution or Decision to Issue Bonds. According to China's Company Law, there are three types of entities authorized to issue bonds: joint-stock limited companies, state-owned sole-proprietorship companies, and state-owned limited liability companies. The institutions that make the resolution to issue bonds differ among these types: for joint-stock limited companies and state-owned limited liability companies, the board of directors formulates the plan, and the shareholders' meeting makes the resolution; for state-owned sole-proprietorship companies, the decision is made by the state-authorized investment institution or the state-authorized institution.
2) Application and Approval for Issuing Bonds. Any company wishing to issue bonds must first submit an application to the State Council's securities administrative department and provide documents such as the company registration certificate, articles of association, bond issuance plan, asset appraisal report, and capital verification report.
3) Formulating the Fundraising Plan and Announcement.
4) Fundraising. After the company issues the bond issuance announcement, it begins to raise funds within the specified period stated in the announcement. In China, according to relevant regulations, companies issuing bonds must sign underwriting contracts with securities operating institutions to underwrite the bonds.
5. Bond Issuance Price
The issuance price of a bond refers to the price used when the bond is issued, which is also the price paid by investors when purchasing the bond. The issuance price of a company bond typically has three types: par value, premium, and discount. Par value refers to the issuance price based on the face value of the bond; premium refers to the issuance price based on a price higher than the face value; and discount refers to the issuance price based on a price lower than the face value. The formation of the bond issuance price is influenced by many factors, primarily the consistency between the coupon rate and the market interest rate. The face value and coupon rate of the bond are determined before issuance, based on the market interest rate and the specific circumstances of the issuing company, and are stated on the bond. However, the coupon rate determined at the time of issuance may not be consistent with the current market interest rate. To coordinate the interests of both bond buyers and sellers in terms of interest, the issuance price must be adjusted, i.e.: when the coupon rate is higher than the market interest rate, the bond is issued at a premium; when the coupon rate is lower than the market interest rate, the bond is issued at a discount; and when the coupon rate is consistent with the market interest rate, the bond is issued at par. The formula for calculating the bond issuance price (P) is:
\[ P = \frac{M \times r \times (1 + i)^n}{(1 + i)^n - 1} \]
where \( M \) is the face value, \( r \) is the coupon rate, \( i \) is the market interest rate at the time of issuance, \( n \) is the bond term, and \( \Sigma \) is the number of interest payment periods.
6. Advantages and Disadvantages of Bond Financing
Advantages of Bond Financing:
① Due to the relatively high interest rates and lower investment risks of bonds, investors are willing to invest in bonds, making it easier for enterprises to raise the required funds.
② The capital cost of bond financing is relatively low and can be deducted from the company's pre-tax profits, achieving the effect of reasonable tax avoidance.
③ The interest burden of bonds is fixed. When the investment return of the enterprise is good, the owners of the enterprise will benefit more due to the financial leverage effect.
④ It ensures the control of the owners over the enterprise and the right to profit distribution.
Disadvantages of Bond Financing:
① High financial risk. Since bonds have fixed repayment and interest dates, repaying principal and interest to bondholders during periods of poor business performance will bring greater financial difficulties to the enterprise, sometimes even leading to bankruptcy.
② Limited financing amount. According to China's Company Law, the cumulative circulation amount of bonds issued by a company shall not exceed 40% of the company's net assets.
③ Many restrictive covenants. This may affect the company's financing capacity and the financial flexibility it should have.
3.3.5 Lease Financing
Leasing refers to the activity where the owner of an asset transfers its use rights, receiving periodic rent as compensation during the use period. Leasing is an important form of medium-term financing for enterprises, primarily used for financing equipment and other assets. The fixed assets needed by an enterprise can be obtained either by purchase or by lease. For enterprises, what matters is not owning these assets but having the right to use them. Therefore, enterprises can use periodic rent payments to replace a one-time purchase payment to obtain the right to use these assets. This has led to the emergence of leasing. After World War II, the leasing industry has developed rapidly, and its scope of business has also expanded, from the leasing of complete sets of equipment to the leasing of aircraft, automobiles, and ships. The reasons for this are, on one hand, the increasing cost of equipment, and on the other hand, technological advancements that cause these expensive assets to depreciate rapidly. As a result, leasing has become an important form of financing for enterprises, second only to stocks and bonds.
1. Characteristics of Lease Financing
1) Obtaining product use rights with small rent payments. Leasing does not require a large one-time debt, only periodic small rent payments are needed to obtain product use rights. Lease financing is particularly convenient for enterprises with insufficient funds, especially for small and medium-sized enterprises that face difficulties in borrowing. Moreover, the rent is spread over the entire lease term, which can appropriately reduce the risk of default.
2) Avoiding restrictive covenants of debt financing. In general loan contracts or agreements, there are usually restrictions on the borrower's activities, such as requiring the borrower to maintain a certain level of solvency before the debt is repaid, prohibiting the issuance of new bonds without the lender's permission, and restricting dividend payments. These restrictive covenants are not conducive to the operation and development of the enterprise, while lease financing generally does not have these restrictions.
3) Simple procedures, convenient and flexible. Lease financing can be completed by signing a contract between the two parties, without the cumbersome procedures required for issuing stocks or bonds, or the need for collateral or guarantees when obtaining loans from banks.
2. Types of Leases
There are many types of leases, which can be divided into two major categories based on their nature and methods: operating leases and financial leases.
1) Operating Lease. Operating leases are also known as business leases or service leases. They primarily address the temporary or seasonal needs of enterprises for assets and are a form of short-term financing. The lessor not only provides the use of the asset but also offers services such as maintenance and upkeep. The characteristics of operating leases mainly include:
(1) Short lease term. The lease term of an operating lease is generally shorter than the useful life of the asset, and the rent charged by the lessor for a single operating lease is not sufficient to cover the full cost of the asset. The assets under operating leases can be leased multiple times.
(2) The lessor provides specialized services. The leasing company is responsible for the maintenance and upkeep of the asset, and the cost of maintenance and upkeep is usually included in the rent paid by the lessee.
(3) The leased assets are general-purpose equipment or highly specialized equipment with a fast replacement cycle. The main leased assets include computer hardware, copiers, fax machines, and automobiles.