sources of long-term finance 1

8/8/2019 Sources of Long-term Finance 1

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SOURCES OF LONG TERM

FINANCE

Group 3

SOURCES OF LONG TERM

FINANCE

Group

3


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Finance is the life blood of abusiness

Sources of finance:

Short term sources

Long term sources


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Purpose of long term finance:

To finance fixed assets

To finance the permanent part of

working capital

To finance the growth and expansion of a

business


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Factors determining long term

sources of finance:

Nature of business

Nature of goods produced

Technology used


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EQUITY CAPITAL

TERMS:

Authorized, Issued, Subscribed & Paid up

Capital.

Par/ face Value, Issue Price, Book Value,

Market Value.


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Rights Of Equity Share Holders:

Right to Income

Right to Control

Right in Liquidation


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EQUITY CAPITALEQUITY CAPITAL

Advantages

No fixed maturity, no obligation toredeem

No compulsion to pay dividends

Provides leverage capacity

Dividends tax exempt forinvestors

Disadvantages

Dilution of control

High Cost

Dividends are not taxdeductible: hence cost is higher

Issue costs higher:

Higher servicing costs


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PREFERENCE CAPITAL

Hybrid form of Financing

Equity Features:

out of distributable profitsdividends not tax deductible

Priority over Equity shares in case ofbankruptcy

Debenture features:

dividend rate is fixed

capital is redeemable

normally no right to vote


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PREFERENCE CAPITALPREFERENCE CAPITAL

Advantages

No obligation to pay dividend, nobankruptcy or legal action for non

payment

Financial distress of redemption

obligation not very high

Part of net worth, hence increasesits creditworthiness

No dilution of control

No pledging of assets required

Disadvantages

Expensive source since dividendsnot tax deductible

Though no legal consequences,liability to pay dividends stands,

can spoil companys image

Can acquire voting rightsin some cases

Have claim prior to

equity holders


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Retained Earnings Depreciation


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INTERNAL ACCRUALSINTERNAL ACCRUALS

Advantages

Readily available

Effective additional equity capital


Disadvantages

Quantum very limited

High Opportunity costs: dividendsforgone by equity holders

Requires careful attention toNPV of projects


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TERM LOANS

Maturities

Security

Provided by Foreign Institutes/ Bank

Repayment schedule


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Term Loan ContdTerm Loan Contd

Advantages

Interest on debt is tax deductible


Interest cost is fixed

Dividends tax exempt for investors

Disadvantages

Fixed obligation for interest and principal

Debt contracts impose restrictions onfirms financial and operational flexibility

Dividends are not tax deductible: hencecost is higher

Increases financial leverage, excessraises cost of equity to the firm:

If inflation rate dips, cost of debthigher than expected


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DEBENTURES

Interest

Security Maturity & Redemption

Convertibility


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Few types of Debenture

Non

convertible debentures

Fully convertible debentures

Partly convertible debentures


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Debentures ContdDebentures Contd

Advantages

Low cost

No ownership dilution

Fixed payment of interest

Reduced real obligation

Disadvantages

Obligatory payments

Financial Risk

Cash outflow

Restricted Covenants:


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Leasing

Hire Purchase

Asset Securitization

Government Subsidies

Selling asset

Convertible bonds Initial Public offering

Right Issue

Other Important Sources of

financing


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THANK U..!!!

sources of long-term finance 1

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