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If Possible Feel Free To Add Any Relevant Material Including Real Life Example or Examples On BD Perspective To Enrich Your Presentation

The document discusses various long-term financing sources for companies, including internal sources like retained earnings and reserves, and external sources like capital markets. Within capital markets, it describes different types of securities like common stock, preferred stock, and bonds/debentures. For each security type, it outlines key features such as voting rights, dividends/interest paid, and differences between debt and equity.

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61 views4 pages

If Possible Feel Free To Add Any Relevant Material Including Real Life Example or Examples On BD Perspective To Enrich Your Presentation

The document discusses various long-term financing sources for companies, including internal sources like retained earnings and reserves, and external sources like capital markets. Within capital markets, it describes different types of securities like common stock, preferred stock, and bonds/debentures. For each security type, it outlines key features such as voting rights, dividends/interest paid, and differences between debt and equity.

Uploaded by

raju01723031884
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

If possible feel free to add any relevant material including

real life example or examples on BD perspective to enrich


your presentation.

Long-term Finance

Internal Source
● Retained Earnings
● Different Reserves

External Source
● Capital Market
► Security Segment
➤Common Stock
➤Preferred Stock
➤Bonds or Debentures
► Non-Security Segment
➤Commercial Banks
➤Insurance/Leasing Companies
➤Investment Bank
➤Specialized Financial Institutions

Security Segment
➤Long-term Bond/Debenture:
When a company (or government) needs to borrow money from the public on a long-term basis,
it usually does so by issuing or selling debt securities generically known as bonds. All long-term
debt securities are promises made by the issuing firm to pay principal when due and to make
periodic interest payments.

Bonds or debentures are similar in all respect except bond is a secured debt whereas, debenture is
unsecured.

♦ Features of Long-term Bond/Debenture:


Par value or Face value (PV or FV)
Coupon rate (CR)
Coupon
Maturity date
Time to Maturity
Yield or Yield to maturity (YTM)
Market Interest Rate (MIR)
Current Yield (CY)

♦Bond/Debenture Indenture:
Contract between the company and the bondholders and includes:
► The basic terms of the bonds
► The total amount of bonds issued
► A description of property used as security, if any
► Sinking fund provisions
► Call provisions
► Details of protective covenants

➤Common Stock: Financial securities that represent the ultimate ownership position in a
corporation. The common stock holders are the ultimate owners of the company. They own the
company and assume the ultimate risk associated with the company. Their liability is restricted
to the amount of their investment. In the event of liquidation, common stockholders have the
residual claim on the assets of the company after all other claims have been paid. Common stock
has no maturity date; however, the stockholders can liquidate their shares in the secondary
market.

●Authorized, Issued and Outstanding Shares: The maximum authorized shares of


common stock a company can issue without amending its charter. When authorized
shares of common stock are sold they become issued shares. Outstanding shares refer to
the number of shares issued and actually held by the public. The company may
repurchase its common shares, these shares are known as treasury stock.

●Par or Face Value: Stated value of the common sharers. A common share can be with or
without par value. A common stock without par value is known as no-par-stock.

●Additional Paid-in-capital or Paid-in-surplus: The positive difference between issue


price and par or face value of common stock.

➤Different Rights of Common Stock


●Voting Rights: The common stockholders have the right to elect the board of directors
by exercising their voting right. Voting may on cumulative or straight / majority-rule
voting. Under cumulative voting, total number of votes that a stockholder may cast is
determined by the number of directors to be elected multiplied by the number of shares
owned by the stockholder. For example, if there are three directors to be nominated and a
particular shareholder owns 100 shares, then 3 x 100 = 300 votes can be given in
whatever manner desired. Under straight or majority-rule voting, maximum of 100 votes
can be given to each of the directors.
●Proxy voting: A proxy is the grant of authority by a shareholder to someone else to vote
his/her shares. For convenience, much of the voting in large corporations is actually done
by proxy.
●Other Rights:
Right to share proportionally in dividends.
Right to share proportionally in assets remaining after liabilities have been paid in liquidation.
Right to vote on stockholder matters of great importance.
Right to share proportionally in any new shares issued. This is known as preemptive right.

➤Dividends:
Payments made by the company to its stockholders in cash (or stock) either from current
year’s income or accumulated past income. Dividends are not a liability of the firm until
a dividend has been declared by the Board. Consequently, a firm cannot go bankrupt for
not declaring dividends. Dividend are not considered a business expense, therefore, they
are not tax deductible

➤Difference between Debt and Equity


Debt
– Not an ownership interest
– Creditors do not have voting rights
– Interest is considered a cost of doing business and is tax deductible
– Creditors have legal recourse if interest or principal payments are missed
– Excess debt can lead to financial distress and bankruptcy

Equity
– Ownership interest
– Common stockholders vote for the board of directors and other issues
– Dividends are not considered a cost of doing business and are not tax deductible
– Dividends are not a liability of the firm and stockholders have no legal recourse if
dividends are not paid
– An all equity firm can not go bankrupt

Preferred Stock: A type of financial security or asset that usually promises a fixed dividend but
at the discretion of the board of directors. Omission of preferred dividends will not result in a
default of the obligation. It has preference of claims over common stockholders. Generally, the
preferred stockholders do not get any voting right.

Preferred dividends may be of two types – cumulative and non-cumulative. In case of cumulative
preferred stock, if dividends are not given in a particular year, they will be carried forward as
arrear and will be paid in the future before common dividends are paid. In non-cumulative
preferred stock, if dividends are not given in any year they will not be paid in the future.

Participating Preferred Stock: This allows the holder to participate in additional dividends if
common stockholders receive increasing dividend.
Reasons for Using in Financing: About 70% of the dividends received by corporations are not
subject to tax. Unlike debt, it has no maturity date or legal obligation of payment of dividend. It
increases equity base of the firm.

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