LONG-TE

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LONG-TERM FINANCING

Definition:

Long term financing is a form of financing that is provided for a period of more than a year. Long term financing services are provided to those business entities that face a shortage of capital.

LONG-TERM FINANCING

Difference to Short-Term Financing:

It is different from short term financing. Short term financing is normally used to provide money that has to be paid back within a year

LONG-TERM FINANCING

Examples:

• 30-year mortgage• 10-year treasury note• Equity is another form of long-

term financing, such as when a company issues stock to raise capital for a new project.

Uses of Long Term Financing:

Long term financing is used in separate ways by different types of business entities. The business entities that are not corporations are only supposed to use long term financing for the purposes of debt. However, the corporations can use long term financing for both debt and equity purposes.

LONG-TERM FINANCING

CAPITA

L MARKETS

CAPITAL MARKETS

Definition:

A capital market is simply any market where a government or a company, usually a corporation, can raise money (capital) to fund their operations and long term investment. It is defined as a market in which money is provided for periods longer than a year.

CAPITAL MARKETS

Types of Capital market:

• Primary Market• Secondary Market

CAPITAL MARKETS

Primary Market:

Deals with the issuance of new securities. The methods of issuing securities in the primary market are:

• Initial Public offering• Rights issue• Preferential issue

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CAPITAL MARKETS

Secondary Market:

Secondary market is a market where investors purchase securities or assets from other investors, rather than from issuing companies themselves.

CAPITAL MARKETS

Kinds of Capital market:

• Stock Market• Bond Market

CAPITAL MARKETS

Stock Market:

A stock market or equity market is a public entity for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.

CAPITAL MARKETS

Bond Market:

The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds.

Types of Bond Market:

• Corporate• Government & agency• Municipal• Mortgage backed, asset backed,

and collateralized debt obligation• Funding

CAPITAL MARKETS

ACQUISIT

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EXTERNAL C

APITA

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ACQUISITION OF EXTERNAL CAPITAL

Definition:

Capital acquisition is the process of obtaining money for business projects, operational expansion, new opportunities or other purposes. Most companies use some form of external financing for their operations.

ACQUISITION OF EXTERNAL CAPITAL

Types of Capital acquisition:

• Initial Public Offering• Private Placement• Negotiated Financing

ACQUISITION OF EXTERNAL CAPITAL

Initial Public Offering:

An initial public offering (IPO), is when a company (called the issuer) issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately owned companies looking to become publicly traded.

ACQUISITION OF EXTERNAL CAPITAL

Initial Public Offering:

An IPO can be a risky investment. For the individual investor it is tough to predict what the stock or shares will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.

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Private Placement:

Private placement (or non-public offering) is a funding round of securities which are sold without an initial public offering, usually to a small number of chosen private investors.

ACQUISITION OF EXTERNAL CAPITAL

Private Placement:

Private placements may typically consist of stocks, shares of common stock or preferred stock or other forms of membership interests, warrants or promissory notes (including convertible promissory notes), and purchasers are often institutional investors such as banks, insurance companies or pension funds.

ACQUISITION OF EXTERNAL CAPITAL BACK

Negotiated Financing:

A way of making a new issue of securities in which the issuer hires an underwriting firm and negotiates all terms of the issue with them. In general, a negotiated offering involves the underwriters guaranteeing that the issue will be placed with investors at a certain price in exchange for a fee to the underwriters. It contrasts with multiple competitive bidding. Most offerings, however, are negotiated.

ACQUISITION OF EXTERNAL CAPITAL

LONG-TE

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Sources:

• Equity capital• Internal accruals• Term loans

SOURCES OF LONG-TERM FINANCING

SOURCES OF LONG-TERM FINANCING

Equity Capital:

Advantages

• No compulsion to pay dividends• No fixed maturity, no obligation

to redeem• Dividends tax exempt for

investors

SOURCES OF LONG-TERM FINANCING

Equity Capital:

Disadvantages

• Dilution of control of existing owners• High Cost: rate of return expected by

equity holders higher than debt holders• Dividends are not tax deductible: hence

cost is higher• Issue costs higher: underwriting,

brokerage, other issue expenses

SOURCES OF LONG-TERM FINANCING

Internal Accruals:It consist of depreciation charges and

retained earnings.

Advantages• Readily available, no talking to outsiders• Effectively additional equity capital, however

no issue costs of loss due to under-pricing• No dilution of control• The stock market generally views an equity

with skepticism, but retained earnings doesn’t

Internal Accruals:

Disdvantages

• Quantum very limited• High Opportunity costs: dividends

forgone by equity holders• Requires careful attention to NPV of

projects

SOURCES OF LONG-TERM FINANCING

SOURCES OF LONG-TERM FINANCING

Term Loans:

Advantages• Interest on debt is tax deductible• Does not result in dilution of control• Do not partake in value created by the firm• Issue costs of debt is lower• Interest cost is normally fixed, protection

against high unexpected inflation• Has a disciplining effect on management

SOURCES OF LONG-TERM FINANCING

Term Loans :

Disadvantages

• Entails fixed obligation for interest and principal, non payment can even lead to bankruptcy/ legal action

• Debt contracts impose restrictions on firm’s financial and operational flexibility

• If inflation rate dips, cost of debt higher than expected