Authorised Capital and Face Value: Memorandum of Association, The Constitutional Document That A Company Submits To

Authorised Capital and Face Value
• Authorised Capital is the maximum amount of share capital, measured at face value,
that the company is authorised to issue to its shareholders and is mentioned in the
Memorandum of Association, the constitutional document that a company submits to
the government while filing the application for registration.
• Part of the authorised capital can (and frequently does) remain unissued.
• The authorised capital may be increased by the vote of the company’s shareholders
at a general meeting, provided this is permitted by the Articles of Association, which
describes the internal regulation of a company.
• Authorised capital has no economic significance. Higher the authorised capital,

higher is the registration fees and stamp duty.
• Usually, a company that has ambition to grow as a large company signals the
ambition by mentioning high authorised capital in the Memorandum of Association.
Authorised Capital and Face Value
• Face value (also called par value) of share is calculated by dividing the
authorised capital by the number of parts in which the authorised capital is
divided by the company. It is at the discretion of the company to decide the
face value.
• Authorised capital does not limit the capacity of the company to mobilise
equity capital from public. A company can issue shares at a premium, that
is at a price, which is higher than the face value.
Case Study:
• Both Ishita Limited (IL) and Jassi Limited (JL) have an
authorised capital of `10,00,000. IL has decided to divide
its authorised capital into 100,000 shares. JL has
decided to divide its authorised capital into 10,000
shares.
Required
• Determine the face value of shares to be issued by IL.
Also, determine the face value of shares to be issued by
JL.
• Solution
• Face value of share of IL:
`10,00,000/1,00,000 = `10
• Face value of share of JL: `10,00,000/
10,000 = `100
• Both Ishita Limited (IL) and Jassi Limited
(JL) have decided to issue all the shares
to mobilise `1 crore from the market.
• Required
• Determine the premium per share. Also,
discuss how the amount mobilised by IL
and JL will be presented in their respective
balance sheets.
Solution
• The issue prices of shares are as follows:
• IL: (Rs100,00,000/1,00,000) = Rs100 per share
• JL: (Rs100,00,000/10,000) = Rs1,000 per share
• Share premium per share is as follows:
• IL: Rs100 (Issue price) – 10 (Face value) = Rs90
• JL: Rs1,000 (Issue price) – 100 (Face value) = Rs900
• In the balance sheet of both the companies, the amount mobilised
will be presented as follows:
• Equity
• Share capital (Issued, subscribed and paid up)
Rs10,00,000
• Reserves and surplus (Securities premium)
Rs90,00,000
• Total Equity
Rs100,00,000
Share Capital
• Share capital shows the aggregate amount of the face value of

outstanding equity shares to the extent paid up (called paid up share
capital).
• Outstanding equity shares refer to the number of equity shares issued and
subscribed reduced by the number of equity shares bought back by the
company.
• Issued share capital refers to the number of shares offered to investors.
• Subscribed share capital refers to the number of shares allotted against

share applications received, expressing desire to participate.
• Paid up share capital refers to the aggregate amount of money

received against the face value of shares subscribed by and allotted to
investors.
Fill in the blanks:
• (i) C P Limited (CPL) issued 1,00,000 equity shares with face value
of `10 each at `150 per share. The amount of paid up share capital in
the balance sheet will increase by `………..
• (ii) The balance sheet of N M Limited (NML) as at April 1, 2018

shows number of subscribed and paid up shares at 1,50,000. During
the year 2018--19, NML bought back 50,000 shares. The number of
outstanding shares as at Mach 31, 2019 is ……………
Introduction
• Financial statement analysis is a useful
tool for both external and internal users
as they make decisions about a company
or for a company.
• Management uses financial statements to
access the adequacy of cash flow to pay
operating expenses, the efficient use of
company resources, and how to improve
the overall performance of the company.
Users
• Bankers and other lenders: Debt-to-equity
• Owners and managers: Gross margin
• Credit managers: Quick ratio of customers
• Shareholders: P/E or P/EBITDA

Intra Firm & Inter
AUDITS Firm
Comparison
• Intra firm analysis compares the
performance of different units of the
same firm.
• Inter firm analysis compares
financial variables of two or more
firms to get an idea of their relative
competitive position.
Vertical Analysis
• Vertical analysis compares financial statements
of different companies and financial statements
of the same company across time after
controlling for differences in size.
When comparing companies of different

sizes, it is useful to standardize the
statements.
Common-Size Statements
• All items have been restated
as a percentage of a selected
item on the statements.
• Remove size as a relevant
variable in ratio analysis.
• Used to compare companies
that make similar products.
• Used to compare the same
company across years.
Balance Sheet - Vertical
2010 % 2009 %
Cash Rs.6,500,000 14.0% Rs.5,500,000 14.9%
Accounts Receivable 6,500,000 14.0 6,000,000 16.2
Inventory 11,250,000 24.2 10,750,000 29.1
Prepaid Insurance 1,250,000 2.7 1,500,000 4.1
Total Current Assets 25,500,000 54.8% 23,750,000 64.2%
Long-term Investments 5,500,000 11.8 3,750,000 10.1
Land 10,000,000 21.5 8,750,000 23.6
Property and Equipment 10,750,000 23.1 4,750,000 12.8
Accumulated Depreciation (5,250,000) (11.3) (4,000,000) (10.8)
Total Assets 46500,000 100% 37,000,000 100%
Accounts Payable 3,000,000 6.5% 2,500,000 6.8%
Payroll Payable 500,000 1.1 400,000 1.1
All asset accounts
Taxes Payable 500,000 1.1 450,000 1.2
areCurrent
Total stated as a
Liabilities 4,000,000 8.7% 3,350,000 9.1%
percentage
Notes Payable of total 5,000,000 10.8 4,000,000 10.8
assets.
Capital Stock 25,000,000 53.8 20,000,000 54.1
Retained Earnings 12,500,000 26.9 9,650,000 26.1
Total Liabilities and Stockholders’
Equity 46,500,000 100% 37,000,000 100%
Working Capital
Working capital is defined as the excess
of current assets over current liabilities
and is a measure of an entity’s liquidity,
or its ability to meet its immediate
financial obligations.
An important use of common-size financial statements is to
compare companies that are in similar lines of business but are
of different sizes. This table shows such a comparison.
Liquidity Ratios (Can we pay bills?)
Liquidity ratios assess the ability of a company
to meet its immediate or short-term financial
obligations.
Cu
rr ent
Ra
ti o
Acid-
t ory tio Test
en a Ratio
Inv ver R
u rno
T Accoun
ts
Receiva
ble
Turnove
r
Current Ratio
Acid-Test Ratio
CONVERSION PERIOD
RATIOS
• Conversion Period Ratio:
indicates the average time it takes in days to convert certain
current assets and current liability accounts into cash
• Operating Cycle:
time it takes to purchase, produce, and sell the venture’s
products plus the time needed to collect receivables if the
sales are on credit
• Cash Conversion Cycle:

sum of the inventory-to-sale conversion period and the sales-
to-cash conversion period less the purchase-to-payment
conversion period
21
22
Days in Inventory
Days in Inventory (DII) = Average Inventory

COGS/day
Inventory Turnover Ratio
Or, Inventory Turnover Ratio = 360

DII
MEASURING CONVERSION
TIMES
• Average Collection Period / Days
sales Outstanding (DSO):
= Accounts Receivables
(Net Sales/day)
25
TIMES
• Days Payable Outstanding (DPO):
= Accounts Payable
(Purchase / 365)
26
TIMES
• Cash Conversion Cycle
= Inventory-to-Sale Conversion Period
+ Sale-to-Cash Conversion Period
– Purchase-to-Payment Conversion
27
Solvency Ratios
Solvency focuses on capital structure and
assesses the extent of borrowing needed.
• Solvency refers
Information
to a company’s
being used
ability to remain
infor?
business over
the long term.
Debt-to-Equity Ratio
Times-Interest-Earned/Interest
Coverage Ratio
PROFITABILITY &
EFFICIENCY RATIOS
• Profitability Ratios:
indicate how efficiently a venture controls its expenses
• Efficiency Ratios:
indicate how efficiently a venture uses its assets in
producing sales
31
MEASURING PROFITABILITY
& EFFICIENCY
• Gross Profit Margin:
= Net Sales – COGS
Net Sales
32
& EFFICIENCY
• Operating Profit Margin:
= EBIT .
Net Sales
33
& EFFICIENCY
• Net Profit Margin/Return on
Sales(ROS):
= Net Profit
Net Sales
34
MEASURING PROFITABILITY &
EFFICIENCY
• Asset Turnover Ratio:
= Net Sales .
Ave total assets
35
EFFICIENCY
• Return on Total Assets (ROA):
= Net profit .
Ave total assets
36
EFFICIENCY
• ROA Model:
the decomposition of ROA into the product of the net profit
margin and the sales-to-total-assets ratio
ROA
= (Net profit / sales) x (Net sales / Ave. total
assets)
37
EFFICIENCY
• Return on Equity (ROE):
= Net Income .
Ave owners’ equity
38
EFFICIENCY
• ROE Model:
the decomposition of ROE into the product of the net profit
margin, sales-to-total-assets ratio, and equity multiplier
ROE (or, Sustainable growth rate g)

= Net Profit / Equity
= (Net profit / sales) x (Net sales / Ave. total assets)
x (Ave. total assets / Ave. equity)
= ROA (Op. Performance) X TA/Eq (Financial Policy)
g = ROE x RR (Retention rate)

39
• DuPont Analysis (expanded ROE formula)=Net Profit Margin×AT×EM
• where:
• Net Profit Margin=Net Income/Revenue
• AT=Asset turnover Asset Turnover=Sales/Average Total Assets
• EM=Equity multiplier (or Financial Leverage) Equity Multiplier= Average Total Assets/Average Shareholders’ Equity
• https://www.investopedia.com/terms/d/dupontanalysis.asp
Common Stock Ratios
Earnings Per Share
Price Earnings Ratio

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Authorised Capital and Face Value

• Authorised capital has no economic significance. Higher the authorised capital,

• Share capital shows the aggregate amount of the face value of

• Issued share capital refers to the number of shares offered to investors.

• Subscribed share capital refers to the number of shares allotted against

• Paid up share capital refers to the aggregate amount of money

• (ii) The balance sheet of N M Limited (NML) as at April 1, 2018

• Owners and managers: Gross margin

• Credit managers: Quick ratio of customers

• Shareholders: P/E or P/EBITDA

When comparing companies of different

• Cash Conversion Cycle:

Days in Inventory (DII) = Average Inventory

Or, Inventory Turnover Ratio = 360

ROE (or, Sustainable growth rate g)

g = ROE x RR (Retention rate)

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