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Sources of Long Term Finance

The document discusses various sources of long term finance for companies, including equity shares, preference shares, debentures, term loans, and retained earnings. Equity shares provide ownership rights while debentures and loans provide borrowed capital. Equity shares are a permanent form of capital but dilute ownership, while debt instruments like debentures and loans provide fixed payments but come with repayment obligations and restrictions. Preference shares have characteristics of both equity and debt. Retained earnings are profits reinvested in the company without interest costs.

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Rakesh Gupta
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620 views

Sources of Long Term Finance

The document discusses various sources of long term finance for companies, including equity shares, preference shares, debentures, term loans, and retained earnings. Equity shares provide ownership rights while debentures and loans provide borrowed capital. Equity shares are a permanent form of capital but dilute ownership, while debt instruments like debentures and loans provide fixed payments but come with repayment obligations and restrictions. Preference shares have characteristics of both equity and debt. Retained earnings are profits reinvested in the company without interest costs.

Uploaded by

Rakesh Gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Sources of Long Term Finance

• The various sources of long term finance


available to a company are:

Debt Equity

Debentures Equity Shares

Term Loans Preference Shares


Retained Earnings
• Shares provide ownership rights to investors.
• Debentures or bonds provide loan capital to
the company, and investors get the status of
lenders.
• Loan capital is also directly available from the
financial institutions to the companies.

3
Equity Shares–Features

• Claim on Income
• Claim on Assets
• Right to Control
• Voting Rights
• Pre-Emptive Rights
• Limited Liability

4
Equity Shares–Pros and Cons

• Advantages
 Permanent Capital
 Increases Borrowing Base
 Dividend Payment Discretion
• Disadvantages
 Cost
 Risk
 Earnings Dilution
 Ownership Dilution

5
Preference Shares
• Similarity to Equity Shares:
1. Non payment of dividends does not force company to
insolvency.
2. Dividends are not deductible for tax purposes.
3. In some cases, it has no fixed maturity dates.
• Similarity to Debentures:
1. Dividend rate is fixed.
2. Do not share in residual earnings.
3. Preference shareholders have claims on income and
assets prior to ordinary shareholders.
4. Usually do not have voting rights.

6
Preference Shares–Features

1. Claims on Income and Assets


2. Fixed Dividend
3. Cumulative Dividend
4. Redemption
5. No Voting Rights
6. Convertibility

7
Preference Shares–Pros and Cons

• Advantages:
 Risk less leverage advantage
 Dividend postponability
 Fixed dividend
 Limited Voting Rights
• Disadvantages:
 Non-deductibility of Dividends
 Commitment to pay dividends

8
DEBENTURES
• A debenture is a long-term promissory note for
raising loan capital.
• The firm promises to pay interest and principal as
stipulated.
• The purchasers of debentures are called debenture
holders.
• An alternative form of debenture in India is a bond.
• Mostly public sector companies in India issue
bonds.

9
Debentures–Features

• Interest Rate
• Maturity
• Redemption
• Security
• Claims on Assets and Income
• Tax Advantage on Interest

10
Types of Debentures

1. Non – Convertible Debentures


2. Fully – Convertible Debentures
3. Partly – Convertible Debentures
4. Registered / Non Registered Debentures
5. Secured / Unsecured Debentures

11
Debentures–Pros and Cons
• Advantages:
 Less Costly
 No ownership Dilution
 Fixed payment of interest
 Reduced real obligation

• Disadvantages:
 Obligatory Payment
 Financial Risk
 Cash outflows
 Restricted Covenants

12
Term Loans–Features

• Maturity
• Direct Negotiations
• Security
• Restrictive Covenants
1. Asset related covenants
2. Liability related covenants
3. Cash flow related covenants
4. Control related covenants
• Repayment Schedule

13
RETAINED EARNINGS
• These are the part of profits that are kept
aside by the company over a period of time to
meet the future capital requirements of the
company.
• These are free reserves of the company which
do not carry any cost and are available
without any interest or dividend burden on it

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