reductio ad absurdum
Reductio ad absurdum
( proof by contradiction )
corporate finance is a funny field to do summers in ! and for those engineers and science guys it is like jumping through the rabbit hole into a wonder land of numbers.
It is a land of numbers and numbers rule there and like the Queen of Hearts they overwhelm you by the sheer absurdity in their logic…. But like the queen the numbers get their whims fulfilled .. their power is too overwhelming to resist… and once you look at a credit proposal you cannot help but feel their hypnotic power…. You forsake your thinking and become a believer..
Imagine a company that has a gross profit of 10crores and a net profit of ( 10cr) on their P&L . They are on the mercy of their working capital lenders to issue BGs ( bank guarantees) and open LCs( letter of credit) for them to enable them purchase raw materials ( imported or inland ). And if such a company has contingent liabilities of 100cr you are shocked. And of the 100cr there are CGs ( corporate guarantee ) of 80cr on behalf of their subsidiaries then you are more than shocked. It is like a guy who borrows Rs100 from you to pay his son’s fees ( an amount he conveniently forgets to return on time) and then takes a rickshaw from Malad to Borivali ( which costs him Rs.55) and also offers to drop you at Kandivali bus depot. But there is a logic in there according to corporate finance… if you do not lend to your subsidiaries they do not do well and if they do not do well then your sales/profit do not reach the projected values .. and your Wcap lenders desperately need them to meet the targets as a reassurance that you will return their money on time. So carry on ..
The title proof by contradiction comes from even interesting idea to do financial jhol. How about this .. you have to pay fees to your bank for the services rendered you create a fancy name like “ financial restructuring account” and put the fees in this fancy account and push the account in loans and advances. You claim that it was not supposed to be paid till the restructuring is done completely but you have paid it and hence show it as an asset in advances. What a blatant shameless manipulation of the Balance Sheet ( and the dude gets away with it ) . surprising yet it is true …. The logic offered is accepted because the restructuring fees according to the package itself were to be included along with the interests in a FITL ( funded interest term loan) that is to be paid after 5 years. Then why did the company pay the money ? Because the banks have to show an income and so they need income…. Even though it is a liability for the banks by accounting logic but by the same accounting as it accrues that year it can be treated as an income by the bank ( to the hell with the package terms becoz the package is not even implemented fully ) So by using the package as an impedance matching IC 741 Op-Amp buffer the win win is created for both. And logic rules accounting rules stoop to conquer. So the entry is a BS in one party a P&L in another and cannot be otherwise. Hence the result has to be right.
My CA friends will be looking at me in a been there seen all gesture ( Cheshire cats)…. So this article dedicated to engineers like me who are novices in the wonderland of number jugglery.
( proof by contradiction )
corporate finance is a funny field to do summers in ! and for those engineers and science guys it is like jumping through the rabbit hole into a wonder land of numbers.
It is a land of numbers and numbers rule there and like the Queen of Hearts they overwhelm you by the sheer absurdity in their logic…. But like the queen the numbers get their whims fulfilled .. their power is too overwhelming to resist… and once you look at a credit proposal you cannot help but feel their hypnotic power…. You forsake your thinking and become a believer..
Imagine a company that has a gross profit of 10crores and a net profit of ( 10cr) on their P&L . They are on the mercy of their working capital lenders to issue BGs ( bank guarantees) and open LCs( letter of credit) for them to enable them purchase raw materials ( imported or inland ). And if such a company has contingent liabilities of 100cr you are shocked. And of the 100cr there are CGs ( corporate guarantee ) of 80cr on behalf of their subsidiaries then you are more than shocked. It is like a guy who borrows Rs100 from you to pay his son’s fees ( an amount he conveniently forgets to return on time) and then takes a rickshaw from Malad to Borivali ( which costs him Rs.55) and also offers to drop you at Kandivali bus depot. But there is a logic in there according to corporate finance… if you do not lend to your subsidiaries they do not do well and if they do not do well then your sales/profit do not reach the projected values .. and your Wcap lenders desperately need them to meet the targets as a reassurance that you will return their money on time. So carry on ..
The title proof by contradiction comes from even interesting idea to do financial jhol. How about this .. you have to pay fees to your bank for the services rendered you create a fancy name like “ financial restructuring account” and put the fees in this fancy account and push the account in loans and advances. You claim that it was not supposed to be paid till the restructuring is done completely but you have paid it and hence show it as an asset in advances. What a blatant shameless manipulation of the Balance Sheet ( and the dude gets away with it ) . surprising yet it is true …. The logic offered is accepted because the restructuring fees according to the package itself were to be included along with the interests in a FITL ( funded interest term loan) that is to be paid after 5 years. Then why did the company pay the money ? Because the banks have to show an income and so they need income…. Even though it is a liability for the banks by accounting logic but by the same accounting as it accrues that year it can be treated as an income by the bank ( to the hell with the package terms becoz the package is not even implemented fully ) So by using the package as an impedance matching IC 741 Op-Amp buffer the win win is created for both. And logic rules accounting rules stoop to conquer. So the entry is a BS in one party a P&L in another and cannot be otherwise. Hence the result has to be right.
My CA friends will be looking at me in a been there seen all gesture ( Cheshire cats)…. So this article dedicated to engineers like me who are novices in the wonderland of number jugglery.
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