NPVS=∑ Social Value/ (1+Ks)t
MUNIS
1:Revenue bond
3:Special tax
bonds
4: Serial form
2: General obligation
bond
Report on Business Finance
Topic:
Financing of Non-Profit-Organization
Submitted to:Submitted by:
Sir Sadiq Shahid Malik. Mudassara Hassan
BBC-08-16
What is NPO?
An organization that does not distribute its surplus funds to owners or shareholders
Non Profit organization is an association that is given tax-free status.
NPOs are often Foundation Trust Endowments Voluntary Association
NATURE OF NON PROFIT ORGANIZATION
Serve as and is served by a number of stakeholders. Goal of a not-for-profit business is stated in term of
mission statement. Motive of social welfare and social benefits. Most important motive is public serving.
GOAL AND ROLE OF NON PROFIT ORGANIZATION
Important property is tax-exempt property 501(c) (3) Corporation. Control rest in hand of Board of Trustees Residual earning is reinvested for the benefits of
society
PROPERTIES OF NON PROFIT ORGANIZATION
Two major types of nonprofit organization structure
1: Membership Organization 2: Board-only Organization
Non-profit organization structure usually includes Board of Director Programmed director
STRUCTURE OF NON PROFIT ORGANIZATION
1: Write out a business plan 2: Write out a mission statement 3: Bylaws4: Apply for a nonprofit designation from the IR
(i): Application for Recognition of Exemption(ii): Determination Letter
5: Articles of Incorporation6: Look for grants and corporate sponsors7: Hold fund-raising events8: Sponsorship packages and letters
FORMATION OF NON PROFIT ORGANIZATION
Charitable Trust (Charitable Trust) Educational Scientific Religious
DIFFERENT TYPES OF NPOs
1: Long-term financing decision
Long-term debt financing: Not-for profit business can issue tax-exempt,
or municipal, bonds, generally Munis. Municipal issues are not required to be registered
with Securities and Exchange Commission (SEC).
SOURCES OF FINANCING
MUNIS
1:Revenue bond
3:Special tax bonds
4: Serial form
2: General obligation
bond
Municipal Bond
Equity (fund) Financing: [Fundraising]:“Fundraising is the process of soliciting and
gathering money or by requesting donations from individuals, businesses, donor agencies, charitable foundations, or governmental agencies.”
SOURCES OF FINANCING
Not-for-profit businesses raise the equivalent of equity capital, which is called as fund capital.
Three positions with regard to the cost of fund capital: Fund capital has zero cost. Fund capital has some cost but that is not very high. Finally, others have argued that fund capital to not-for-profit business
has about the same cost as the cost of retained earning.
COST OF CAPITAL ESTIMATION
COST OF CAPITAL FUND=Opportunity Cost=Cost of retained earning
Not for profit businesses do not pay taxes and hence cannot reduce the cost of debt by (1-T).
CAPITAL STRUCTURE DECISION
Cost of Debt for investor owned firm:Cost of debt= Kd (1-T)
Cost of debt for NPO:Cost of debt= Kd
[Because they are tax-exempt]
There are three elements of capital budgeting:
1: Appropriate goals for project analysis.
2: Cash flow estimation/ Decision method.
3: Risk analysis
CAPITAL BUDGETING DECISION
NPOs are expected to provide a social value in addition to a purely economic value, project analysis should consider value along with financial, or cash flow, value.
Cash flow estimation/ Decision Method
TNPV=NPV+ NPSVNPV=Standard net present value of the project’s cash flow
streamNPVS= Net present social value of a project
Not for profit Investor owned firm1:Don’t distribute its surplus 1: Distribute its surplus to to owners. owners.2: no profit maximization 2: Profit maximization.purpose.3: No dividend 3: Dividend4: Tax-exempt 4: Taxation5: Cost of debt=Kd (1-T) 5: Cost of debt=Kd
NOT FOR PROFIT VERSUS FOR PROFIT
Edhi FoundationThe trust of voluntary organization
(TVO)The Pakistan Poverty alleviation (PPAF)SOS
NPOs Of Pakistan
Thank You
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