Three main areas of Finance
Three main areas of Finance
Financial Markets and Institutions
Investments
Financial Management (Managerial Finance)
Financial Markets and Institutions
Money markets provide companies and governments with short-term liquidity (raise cash to pay bills).
Capital markets provide companies and governments with long-term financing (“capital”).
Typical financial institutions involved: banks, investment banks, stock brokerages, mutual funds, pension funds, S&Ls, insurance companies
Levels of interest rates and changes in interest rates are of great importance.
Investments
Sale of stocks and bonds
Security analysis
Advising
Portfolio Management
Financial Management
Financial management is the study and practice of making dollar denominated decisions within a single firm. Most people in finance work in financial management.
Constant Growth Stock Valuation
Constant Growth Stock Valuation
Stock Valuation is more difficult than Bond Valuation because stocks do not have a finite maturity and the future cash flows, i.e., dividends, are not specified. Therefore, the techniques used for stock valuation must make some assumptions regarding the structure of the dividends.
A constant growth stock is a stock whose dividends are expected to grow at a constant rate in the forseeable future. This condition fits many established firms, which tend to grow over the long run at the same rate as the economy, fairly well. The value of a constant growth stock can be determined using the following equation:
where
- P0 = the stock price at time 0,
- D0 = the current dividend,
- D1 = the next dividend (i.e., at time 1),
- g = the growth rate in dividends, and
- r = the required return on the stock, and
- g < r.
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Constant Growth Stock Valuation Example |
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Find the stock price given that the current dividend is $2 per share, dividends are expected to grow at a rate of 6% in the forseeable future, and the required return is 12%. Solution:
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Example Problems |
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Use the following information to determine the stock price. |
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Current Dividend: |
$ |
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Growth Rate: |
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% |
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Required Return: |
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% |
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Stock Price: |
$ |
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Please see the Constant Growth Stock Exercise for additional example problems which illustrate the calculation of the other variables, i.e., the growth rate, required return, and dividend.
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Dividend Yield and Capital Gains Yield |
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The constant growth stock equation can be rearranged to obtain an expression for the expected return on the stock as follows:
When expressed in this manner, it is apparent that the expected return on the stock equals the expected dividend yield plus the expected capital gains yield where the dividend yield and capital gains yield are defined as follows:
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A more general form of the Constant Growth Stock Valuation formula which can be used to find the price of the stock at any period t in the future is given by the following
What are the legal rules regarding a valid offer?
When one person signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of that other person to such act or abstinence, he is said to make a proposal.”
The person making the proposal is called the ‘offeror’ or ‘promisor’. The person to whom the offer is made is called the ‘offeree’ or ‘promisee’.
Offer and Acceptance
A offers to sell his scooter to B for Rs. 5,000. This is a proposal. A is the offeror or promisor and B is the offeree.
Legal Rules Regarding Offer :
An offer to be valid must comply with the following rules:
1. Offer may be express or implied:
An offer may be express or may be implied from the conduct of the parties or circumstances of the case.
Express Offer: An express offer is made by words spoken or written.
Examples:
(1) A says to B, “Will you purchase may car for Rs. 15,000? It is an oral offer.
(2) A, through a letter asks B to buy his car for Rs. 15,000. It is a written offer.
Implied Offer – An implied offer is not made by words spoken or written. It is implied from the conduct of the parties or from the circumstances.
Example:
(1) Public Transport, like, Railways. DTC in Delhi or MEST in Mumbai offer to carry passengers for a certain fare on a particular route.
(2) Public Telephones or Weighing Machines in public places like, Railway Stations or Cinema Houses offer their services for a certain amount, say one rupee.
2. Offer may be specific or general:
A specific offer is one which is made to a particular person. It can be accepted by the person to whom it has been made, no one else can accept such an offer.
Example:
A offers to sell his watch to B for Rs. 200. This is a specific offer made to B. It is B alone who can accept this offer and no one else can accept this offer, i.e., C or D cannot accept this offer.
A general offer is made to the world at large. Therefore, it can be accepted by any person.
Example:
1. A advertised in a Newspaper that he would give Rs. 100 to anyone who finds and returns his lost dog.
2. A company advertised that a reward of Rs. 100 would be given to any person who contracted influenza after using the medicine (Smoke balls) made by the company according to the printed directions. One lady, called Mrs. Carlill, purchased and used the medicine according to the printed directions of the company but suffered from influenza. She filed a suit to recover the reward of Rs. 100. The Court held that there was a contract as she had accepted a general offer by using the medicine in the prescribed manner and as such, she was entitled to recover the reward from the company.
3. Offer must give rise to legal obligation:
An offer to be valid must create legal relationship between the parties. The very purpose of entering into an agreement is to make it enforceable at a Court of law. If the offer has not been made with this intention it will not become a contract even if it is accepted by the party to whom it was made.
Example:
A promised to pay Rs. 30 to his wife every month. Later, A failed to pay the amount. The wife filed a suit against the husband to recover the amount. The Court held that she could not recover as the promise was not made with an intention to create any legal relationship.
4. Terms of an offer must be definite and certain:
The terms of an offer should not be vague or indefinite.
Example:
A has two cars – Ambassador and Fiat. He agrees to sell one of his cars to B for Rs. 20,000.
It is not clear as to which of the cars A has agreed to sell. A might be thinking to sell the Ambassador car while B might be thinking to purchase the Fiat car. The offer is not definite.
5. Offer must be distinguished from an invitation to offer:
An offer must be distinguished from an invitation to offer. The shopkeepers generally display their goods in showcases with price tags. The shopkeeper in such cases is not making an offer so that you can accept it. He is, on the other hand, inviting you to make an offer which he may or may not accept. Thus you cannot compel a shopkeeper to sell the goods displayed in the showcase at the marked price. However, if there is specific law to sell goods at marked price then the seller will have to sell at marked price. For example, during National Emergency essential commodities like sugar etc. have to be sold at marked price.
6. Offer must be distinguished from a mere declaration of intention:
A declaration of intention to make an offer is not an offer. It is regarded as an invitation to offer. An advertisement for sale in a Newspaper or Magazine etc. is not an offer for sale.
Example:
A advertised to sell certain furniture by auction, B reached A’s house to purchase the furniture. However, A changed his mind not to sell the furniture. B cannot compel A to sell the furniture or even to recover his damages, i.e., conveyance charges and damages for inconvenience caused to him due to cancellation of the sale.
It should be noted that a general offer can be made through advertisement if the terms are certain and capable of being accepted.
Example:
A lost his camera in a DTC bus. He announced a reward of Rs. 100 to the finder who may return it to him. B found the camera after reading the advertisement and returned it to him. B is entitled to the reward.
7. Offer must be communicated:
An offer must be communicated to the person to whom it is made. A person can accept the offer only when he knows about it. If he does not know it, he cannot accept it.
Example:
G sent his servant L to trace his lost nephew. Later on G, announced a reward for tracing the boy. L without knowing about the advertisement of the reward traced the boy and restored him to G. When L came to know of the reward, he claimed it. G refused to give the reward. The Court held that L was not entitled to recover the reward as the offer was not communicated to L. He could not accept an offer which he did not know.
8. Communication of Special Terms:
Special terms of a contract must be communicated. Generally, such cases arise in respect of general offers, like tickets or receipts for depositing luggage at the Railway Station or receipts for clothes given for dry cleaning etc. The rule in these cases is that parties are not bound unless conditions printed are properly communicated.
Example:
A passenger was traveling from Dublin to White haven with his luggage. On the back of the ticket, a special condition was printed according to which the Shipping Co. would not be liable for the loss of luggage. However, this condition was not communicated to the passenger in as much as no such words as RT.O. or See Back were printed on the face of the ticket to draw the attention of the passenger. The court held that the passenger was not bound by those conditions as those were not communicated to him. Hence the company was liable to pay for the loss of the luggage.
It should be noted that an acceptor is bound by the condition even if the conditions are printed in a foreign language. He should ask for its translation.
Again, an acceptor cannot even plead that he was illiterate or blind, provided the notice is reasonably sufficient for the class of persons to which he belongs.
Again, it should be noted that the special terms of the contract should be brought to the notice of the offeree at the time of offer was made. If the special terms are brought to the notice of the offeree after the contract was made, the offeree will not be bound by them.
Example:
A and his wife took a room on hire in a hotel. After booking the room, they entered the room and saw a notice on the wall of the room. The proprietors not responsible for articles lost or stolen unless handed over to the manager for safe custody.”
Due to the negligence of the hotel staff, their property was stolen. Held, the proprietor of the hotel was liable as the notice was not binding, because it came to the knowledge of the client only after the contract to take the hotel on hire had already been made.
9. Offer must be made with a view to obtaining the consent of the other party to do or to abstain from doing the act:
The offer must be made with an intention to get the consent of the other party to do or to abstain from doing the act and not simply with a view to making known the intention of making an offer.
Example:
A tells B, “I may sell my Television if I can get Rs. 2,000 for it. It is not an offer as it has not been made with a view to get the consent of B. It is a mere declaration of intention. Therefore, B cannot accept it by saying. “I can pay you Rs. 2,000 for it.” B is not accepting A’s offer but is making his offer which A may or may not accept.
10. Offer should not impose an unnecessary obligation to communicate non-acceptance:
Thus an offeror cannot say that if acceptance is not communicated by Sunday next, the offer would be considered as accepted.
Example:
A offers his car to B for Rs. 20,000 saying, “If you do not reply by Sunday next, I shall presume, you have accepted the offer.”
In this case, no contract will be created even if the acceptor does not reply as the law does not permit a party to impose an unnecessary obligation of the acceptor if he does not want to accept the offer. Thus in the above example, if the acceptor does not accept the offer he will be put to an unnecessary burden of informing the offeror that he does not want to accept the offer.
Tender:
A continuous offer is called a standing offer. For example, in our daily life we do not ask the newspaper vendor daily to supply the newspaper or the grocer to supply bread and butter. In such cases, we do not repeat the offer to the supplier of the above articles every day. We make such offer once for all. If we do not want the supply of such article in future, we ask the supplier to stop the supply of such goods. A tender is a standing offer. It may be specific or continuous.
Continuous or Standing offer :
Very often, tenders are invited for the supply of goods as and when required. In such a case, the tender is a standing offer. When such a tender is accepted it does not become a contract. It simply indicates that as and when goods are required and order will be placed, both the parties are free to revoke the tender.
Example:
A agreed to supply coal to B up to 1,000 tons at Rs. 500 per ton as and when required for the year 1978. B placed an order for 10 tons in the month of January, 1978. However, if before any order is placed by B, A revokes his offer as to future supply, A is not bound to supply any coal. Similarly, B is not under an obligation to place the order for the supply of coal with A. B can place an order with any other coal supplier also. B is not prevented from placing an order with any other supplier.
Thus a standing offer does not create a binding contract between the parties. A binding contract is created only when an order according to the terms of the tender is placed with the party accepting the tender.
Specific Tender :
Sometimes tenders are invited for the supply of specific quantity of goods or service. In such a case, when a tender is accepted it becomes a contract.
Cross Offers :
Sometimes two parties make similar offers to each other without knowing the offer made by the other. These are called cross offers. In such a case, no binding contract will be created as no one has accepted the offer made by the other.
Example:
D of Delhi by a letter makes an offer to M of Mumbai to sell his car for Rs. 10,000. At the same time M of Mumbai makes a similar offer to D of Delhi to buy his (D’s) car for Rs. 10,000. Offers of both D and M cross each other in the post. These offers are called cross offers. Such offers do not constitute acceptance of one’s offer by another. For example, it will not mean acceptance of D’s offer by M or M’s offer by D. Both are making the offer and none of them is accepting the offer. Hence, there is no contract.
All contracts are agreements but all agreements are not contracts.
All contracts are agreements but all agreements are not contracts. Explain this statement. Ads
INTRODUCTION:
No doubt it is a valid and true statement. Before critically discussing the statement, we must know the exact and basic meanings of the two terms contract and agreement in the context of business law. For understanding the meaning, we have to go to the contract act 1872 that is applicable in subcontinent.
A contract is a legally binding agreement or relationship that exists between two or more parties to do or abstain from performing certain acts. There must be offer and acceptance for a contract to be formed. An offer must backed by acceptance of which there must be consideration. Both parties involved must intend to create legal relation on a lawful matter which must be entered into freely and should be possible to perform.
Definition of contract
According to section 2(h) of the Contract Act 1872:
” An agreement enforceable by law is a contract.”
A contract therefore, is an agreement the which creates a legal obligation i.e., a duty enforceable by law.
From the above definition, we find that a contract essentially consists of two elements:
(1) An agreement and (2) Legal obligation i.e., a duty enforceable by law.
Example;
A promises to sell a horse to B for Rs.100,000, and B promises to buy horse at that price.
All contracts are agreements:
For a Contract to be there an agreement is essential; without an agreement, there can be no contract. As the saying goes, “where there is smoke, there is fire; for without fire, there can be no smoke”. It could will be said, “where there is contract, there is agreement without an agreement there can be no contract”. Just as a fire gives birth to smoke, in the same way, an agreement gives birth to a contract.
What is agreement?
An agreement is a form of cross reference between different parties, which may be written, oral and lies upon the honor of the parties for its fulfillment rather than being in any way enforceable.
As per section 2 (e) of Contract At 1872:
” Every promise and every set of promises, forming the consideration for each other, is an agreement.” Thus it is clear from this definition that a ‘promise’ is an agreement.
What is a ‘promise‘?
the answer to this question is contained in section 2 (b) which defines the term.” When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted. A proposal, when accepted, becomes a promise.”
An agreement, therefore, comes into existence only when one party makes a proposal or offer to the other party and that other party signifies his assent thereto.
All agreements are not contracts
As stated above, an agreement to become a contract must give rise to a legal obligation. If an agreement is incapable of creating a duty enforceable by law. It is not a contract. Thus an agreement is a wider term than a contract.
Agreements of moral, religious or social nature e.g., a promise to lunch together at a friend’s house or to take a walk together are not contracts because they are not likely to create a duty enforceable by law for the simple reason that the parties never intended that they should be attended by legal consequences
On the other hand, legal agreements are contracts because they create legal relations between the parties.
EXAMPLE: a- A invites B to dinner. B accepts this invitation but does not attend the dinner. A can not sue B for damages. It is social agreement because it does not create legal obligation. So it is not a contract.
b- A promises to sell his car to B for one million. It is legal agreement because it creates legal obligations between the parties. So it is a contrac
According to section 10 of the contract act 1872,
“All agreements are contracts if they are made by the free consent of the parties, competent to contract, for a lawful consideration and with a lawful object and not hereby declared to be void.”
Thus an agreement becomes a contract when at least the following conditions are satisfied.
1-free consent
2-competency of the parties
3-lawful consideration
4- lawful object.
Conclusion:
In a nut shell, an agreement is the basis of a contract and contract is the structure constructed on these basis. An agreement starts from an offer and ends on consideration while a contract has to achieve an other milestone that is enforceability. Due to this, breach of an agreement does not give rise to any legal remedy to the aggrieved party while breach of contract provides legal remedy to the aggrieved party against the guilty party. Thus we can say that all contracts are agreements but all agreements are not contracts.
RULES REGARDING MINOR’S AGREEMENT
RULES REGARDING MINOR’S AGREEMENT
A minor’s agreement being void is wholly devoid of all effects. When there is no contract there should be no contractual obligation on either side.
1. An agreement with or by minor is void
Section 10 of the Indian Contract Act requires that the parties to a contract must be competent and Section 11 says that a minor is not a competent. BUt either section makes it clear whether the contract entered into by a minor is void or voidable. Till 1903, court in india wee not unanimous on this point the privy council made it perfectly clear that a minor is not competent to a contract and that a contract by minor is void ab initio.
The leading case is:
MOHRI BIBI V. DHARMO DAS GHOSE (1903)
“A minor borrowed Rs. 20000 from B and as a security for the same executed a mortgage in his favor. He became a major a few months later and filled a suit for the declaration that the mortgage executed by him during his majority was void and should be cancelled. It was held that a mortgage by a minor was void and B was not entitled to replacement of money.
2. No ratification
An agreement with the minor is completely void. A minor cannot ratify the agreement even on attaining majority, because a void agreement cannot be ratified. A person who is not competent authorize an act cannot give it validity by ratifying.
But If on becoming major, minor makes a new a new promise for fresh consideration, then this new promise will be binding.
3. Minor can be a promise or beneficiary
If a contract is beneficiary to a minor it can be enforced by him. Their is no restriction on a minor from bring a beneficiary, for example, being a payee or a promisee in a contract. Thus a minor is capable of purchasing immovable property and he may sue to recover the possession of the property upon tender of the purchase money. Similarly a minor in whose favor a promissory note has been executed can enforce it.
4. No estoppel against a minor
Where a minor by misrepresenting his age has induced the other party enter into a contract with him, he cannot be made liable on the contract. There can be no estoppel against a minor. It means he is not estoppel from pleading his infancy in order to avoid a contract.
5. No Specific performance Except in certain cases
A minor’s contract being absolutely void, there can be no question of the specific performance of such contract. A guardian of a minor cannot bind the minor by an agreement for the purchase of immovable property ; so the minor cannot ask for the specific performance of the contract which the guardian had no power to enter into.
But a contract entered into by guardian or manager on minor’s behalf can be specifically enforced if
(a) The contract is within the authority of the guardian or manager.
(b) It is for the benefit of the minor.
(LALCHAND V. NARHAR 89 IC 896)
6. Liability for torts
A trot is a civil wrong. A minor is liable in tort unless the tort in reality is a breach of contract. Thus, where a minor borrowed a horse for riding only he was held liable when the he lent the horse to one of his friends who jumped and killed the horse.
But a minor cannot be made liable for a breach of contract by framing the action on tort. you cannot convert a contract into a tort to enable you to sue an infant.
7. No insolvency
A minor cannot be declared insolvent as he is incapable of contracting debts and dues are payable from the personal properties of minor and he is not personally liable.
8. Partnership
A minor being incompetent to contract cannot be a partner in a partnership firm, but under Section 30 of the Indian Contract Act , he can be admitted to the benefits of partnership.
9. Minor can be an agent
A minor can act as an agent. But he will not to be liable to his principal for his acts. A minor can draw, deliver and endorse negotiable instruments without himself being liable.
10. Minor cannot bind parent or guardian
In the absence of authority, express or implied, an infant is not capable of binding his parent or guardian, even for necessaries. The parents will be held liable only when the child is acting as an agent for parents.
11. Joint contract by minor and adult
In such a case, the adult will be liable on the contract and not the minor. In Sain Das Vs Ram Chand, where there was a joint purchase by two purchaser, one of them was a minor. It was held that the vendor could enforce the contract against the major purchaser and not the minor.
12. Surety for a minor
In a contract of guarantee when an adult stands for a minor then he (adult) is liable to third party as there is direct contract between the surety and the third party.
13. Minor as Shareholder
A minor, being incompetent to contract cannot be a shareholder of the company. If by mistake he become a member, the company can rescind the transaction and remove his name from register. But, a minor may, acting through his lawful guardian become a shareholder by transfer or transmission of fully paid shares to him.
14. Liability for necessaries
The case of necessaries supplied to a minor or to any other person whom such minor is legally bound to support is governed by section 68 of the Indian Contract Act. A claim for necessaries supplied to a minor is enforceable by law. But a minor not liable for any price that he may promise and never for more than the value of the necessaries. There is no personal liability of the minor, but only his property is liable.
To render minor’s estate liable for necessaries two conditions must be satisfied.
(a) The contract must be for the goods reasonably necessary for his support in his station in life.
(b) The minor must not have already a sufficient supply of these necessaries.
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