Long-term Finance-source _ Topic 6-1
Long-term Finance-source _ Topic 6-1
chapter1
Presented by:
Pisa Tatin
MBA/14/14
North Eastern Regional Institute
of Science & Technology
Why Finance is required ?
Start a business.
Finance expansions to production capacity.
To develop and market new products.
To enter new markets.
To pay for the day to day running of business.
Sources of Financing
Short Term Finance
Technology used.
Sources of long term finance
1. Shares
2. Debentures
3. Term loans
4. Retained Earnings
5. Leasing
Shares
A capital of a company is divided into small units, each unit is
called Share.
Issue of shares is the main source of long term finance.
Shares are issued by joint stock companies to the public.
Preference
Equity Shares
Shares
1. Equity Shares
Equity Shares are those shares that;
These shareholders are paid dividends only when there are
distributable profits.
Do not enjoy any preferential right in the matter of payment of
The firm with the longer equity base will have greater ability
to raise debt finance on favourable terms. Thus issue of equity
share increases the creditworthiness of the firm.
Advantages of Equity share capital
The equity shareholders enjoy full voting right and participate in the
management of the company.
The company can issue further share capital by making right issue
or bonus issue etc.
Characteristics of Debentures
Holders are the creditors of the company.
Irredeemable
Debentures
Debentures
Convertible
Debentures
Non Convertible
Debentures
Redeemable & Irredeemable Debentures
Redeemable debentures are debentures repayable on a pre-
determined date or at any time prior to their maturity, provided
the company so desires and gives a notice to that effect.
shares.
Advantages;
Debt is an allowable deduction for tax purposes hence can
have no voting rights, thus the issue of debt does not affect the
management of the company.
Term Loans
Disadvantage;
The lender is entitled to receive a fixed periodic rate of
Direct Leasing
A firm acquires the use of an asset it did not own previously. A
firm may lease an assets from the manufacture. The major lessors
are manufactures, finance companies, banks etc.
Lease Financing
Leveraged Lease
Involves third-party lender:
benefits.
After-tax Analysis for Lease versus
borrow/buy
Leasing generates the following cash follows:
Costs of leasing – payments
Required;
What is the Net-Advantage of Leasing (NAL)?
PV of leasing
PV of borrowing to buy (in
dollars)
T₁ T₂ T₃ T₄ T₅
ABC Ltd can purchase a new machine for $1,000. The machine
has a 5 year life and would be depreciated straight line to a $100
residual value. The machine could be leased for 5 annual $300
lease payments in arrears (at the end of each year)
Before tax borrowing rate = 10%, tax rate = 40% and the after
tax cost of capital for the project would be 12%.
Required;
What is the Net – Advantage of Leasing (NAL)?
PV of leasing