Long Term Sources of Financ

8/7/2019 Long Term Sources of Financ

1/44

SOURCES OF LONG TERM

FINANCE

SOURCES OF LONG TERM

FINANCE


2/44

Finance is the life blood of abusiness

Sources of finance:

Short term sources

Long term sources


3/44

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

Uncertainit


4/44

Factors determining long term

sources of finance:

Nature of business

Nature of goods produced

Technology used


5/44


6/44

Share capitalShare capital

Meaning of Share Capital:

Share capital denotes the amount of capital

raised by the issue of shares, by a company.

It is collected through the issue of shares and

remains with the company till its liquidation.

shareholder are the owners of the company

The total share capital is divided into small

parts and each part is called a share. Share is the smallest part of the total capital of

a company


7/44

Featuresof Share CapitalFeaturesof Share Capital

Owned capital

Remains with the company

Dependable sources

Raises creditworthiness

Substantial funds

Available for Expansion and

Diversification

Amendment

No charge

Opportunity to participate


8/44

EQUITY CAPITAL

TERMS:

Authorized, Issued, Subscribed & Paid up

Capital.

Par/ face Value, Issue Price, Book Value,

Market Value.


9/44

Represents ownership capital

Enjoys the rewards and bear the risks

Some Terms

Authorized capital is the amount of capital that acompany can potentially issue, as per its memorandum.

The amount offered by the company to the investors iscalled the Issued Capital.

The part of issued capital which has been subscribed toby the investors represents the Subscribed Capital.

The actual amount paid up by the investors is called thePaid-up Capital.


10/44

Par Value

Face value of the share

The stated value on a stock certificate is called

thepar value.

The par of equity shares is generally Rs. 10, or

Rs. 100.

Issue Price

The issue price is the price at which the equity

share is issued. Generally par and issue price are same for new

companies

When issue price exceeds the par value, the

difference is referred as share premium


11/44

Contributed Surplus Usually refers to amounts of

directly contributed equity capital in excess ofthe par value

For example, suppose 1,000 shares of common stock

having a par value of Rs.1 each are sold to investorsfor Rs. 8 per share. The contributed surplus would be

(8 1) 1,000 = Rs. 7,000


12/44

Book Value-Paid up capital+Reserves and Surplus

No of Equity Shares

Market Price is the price at which the share is

traded in the stock market


13/44

Rights Of Equity Share Holders:

Right to Income = Profit After Tax

Income of the shareholder is called Dividend

as recommended by the Board Unchallengeable

Right to Control Elect the board

Lack effective control


14/44

Pre emptive Right on pro rata basis

Right in Liquidation

Residual claim over assets of the firm


15/44

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


16/44

PREFERENCE CAPITAL

Hybrid form of Financing (Equity + Loan)

Equity Features:out of distributable profits

dividends not tax deductible

Priority over Equity shares in case of

bankruptcy


17/44

Debenture features:

dividend rate is fixed

capital is redeemable

normally no right to vote

Preference dividend is paid out distributableprofit Not a Tax-deductible payment

Dividend rate is fixed

Not an obligatory payment Preference over equity shareholders

No voting power


18/44

Features of Preference SharesFeatures of Preference Shares

Cumulation of dividends

Callability company may buyback whole/part at a certain price

Convertible into equity

Redeemability

No voting power Exception:

Dividend in arrear for 2/more years incase ofcumulative preference shares

Dividend not paid for an aggregate period of 3/moreyears in preceding 6 years


19/44

Types of Preference SharesTypes of Preference Shares

Cumulative or Non-cumulative

Redeemable and Non- Redeemable

Participating Preference Share or non-

participating preference shares


20/44

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


21/44


22/44

Retained Earnings Depreciation


23/44

INTERNAL ACCRUALSINTERNAL ACCRUALS

Advantages

Readily available

Effective additional equity capital

No dilution of control

Disadvantages

Quantum very limited

High Opportunity costs: dividendsforgone by equity holders

Requires careful attention toNPV of projects


24/44

TERM LOANS

Maturities

Security

Provided by Foreign Institutes/ Bank

Repayment schedule

Restrictive Covenants

Convertibility


25/44

Many industrial development banks, cooperative banksand commercial banks grant medium term loans for a

period of three to five years.

The period of repayment of short term loan is extended at

intervals and in some cases loan is given directly for a long

period.

A term loan is a monetary loan that is repaid in regular

payments over a set period of time. Term loans usually last

between one and ten years.


26/44

A term loan usually involves an unfixed interest rate.

Term loans can be given on an individual basis but areoften used for small business loans. The ability to repay

over a long period of time is attractive for new or

expanding enterprises, as the assumption is that they

will increase their profit over time. E.g.- Some student loans are essentially term loans.

These Loans are often offered to college students as a

means of paying tuition and living expenses. Part of the

loan may be subsidized, so that interest does not accrue

while the student remains in school. Students are alsotypically given a six month grace period following

graduation before beginning repayments.


27/44

One thing to consider when getting a term loan is whether the

A fixed interest rate means that the percentage of interest will never

increase, regardless of the financial market.

Floating interest rates will fluctuate with the market, which can be

good or bad for you depending on what happens with the global and

national economy.

Interest Rate

Fixed Floating


28/44

MeritsMerits

It is a flexible source of finance as loans can be repaid

when the need is met. Finance is available for a definite period, hence it is not

a permanent burden.

Banks keep the financial operations of their clients

secret. Less time and cost is involved as compared to issue of

shares, debentures etc.

Banks do not interfere in the internal affairs of the

borrowing concern, hence the management retains thecontrol of the company.

Loans can be paid-back in easy installments.

In case of small-scale industries and industries in

villages and backward areas, the interest charged is low.


29/44

DemeritsDemerits

Banks require personal guarantee or pledge of assets

and business cannot raise further loans on these assets.

In case the short term loans are extended again and

again, there is always uncertainty about this continuity.

Too many formalities are to be fulfilled for getting term

loans from banks. These formalities make theborrowings from banks time consuming and

inconvenient.


30/44

DEBENTURES

Interest

Security Maturity & Redemption

Options

Convertibility


31/44

DebenturesDebentures

Like promissory notes, are instruments for raising LTdebt

More flexible compared to term loans as they offervariety of choices as regards maturity, interest rate,security, repayment and other special features

Interest rate can be fixed/floating/deep discount

Convertibility : Can be FCDs, NCDs, PCDs

Warrants : Can have warrants attached, detachable ornon detachable, detachable traded separately

Option : Can be with call or put option

Redemption: Bullet payment or redeemed in instalments

Security: Secured or unsecured

Credit rating: Need to have a credit rating by a creditrating agency

Trustee: Need to appoint a trustee to ensure fulfilment ofcontractual obligations by company

DRR: Company needs to create a DRR if maturity more

than 18 months


32/44

Few types of Debenture

Nonconvertible debentures

Fully convertible debentures

Partlyconvertible debentures


33/44

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:


34/44

Comparison of Various sources of Long term Financing

Cost Dilution of

Control

Risk Restraint on

managerial

freedom

Equity

Capital

High Yes Nil No

Retained

Earning

High No Nil No

PreferenceCapital

High No Negligible No

Term Loans Low No High Moderate

Debentures Low No High Some


35/44

Initial Public Offering

Decision to go Public

Benefits

Cost

Eligibility

Book Building process


36/44

Right Issue

Issue of capital to existing shareholders

Offer made on pro rata basis Right shares are tradable, may be sold in

open market.

Comparison with Public issue: familiar

investors, hence likely to be more

successful

Less floatation costs

Lower pricing to benefit shareholders


37/44

Private Placement

Sale of securities directly to wholesale investorslike FIs, banks, MFs, FIIs, PE funds etc.(QIPs)

Called private placement in equity/equityrelated instruments, in unlisted companies and inall cases of debt

Called preferential allotment in case of unlistedcompanies for equity/equity relatedinstruments

Different from reservations made for such QIBs

out of a public issue Subject to SEBI regulations on pricing, lock in

period, open offer to be made to public

QIB placement guidelines recently issued by SEBIfor compliance and disclosures


38/44

Obtaining a term loan

Submission of loan application

Initial processing of loan application

P

roject Appraisal Issue of Letter of Sanction

Acceptance of terms and conditions bythe borrowing unit

Execution of loan agreement

Disbursement of loan

Creation of security

Monitoring


39/44

VENTURE CAPITAL

venture capital is a source of fund for newenterprise as well as growth of existing

enterprise but basically meant for new enterprise

and new projects of existing enterprises.


40/44

Venture capital has a number of advantages

over other forms of finance, such as:y It injects long term equity finance which provides a solid capital

base for future growth.

y The venture capitalist is a business partner, sharing both the risks

and rewards. Venture capitalists are rewarded by business success

and the capital gain.

y The venture capitalist is able to provide practical advice and

assistance to the company based on past experience with other

companies which were in similar situations.

y The venture capitalist also has a network of contacts in many areas.


41/44

Venture capitalists have differing operating

approaches.:-

These differences may relate to

1. location of the business,

2. the size of the investment,3. the stage of the company,

4. industry specialization,

5.structure of the investment and

6. involvement of the venture capitalists in thecompanies activities.


42/44

How to get venture capital..?

Enterprise have to reach with a Business plan..

Some imp. Points in business plan.

1. Background of the company

2. The product or service

3. Market analysis

4. Marketing

5. The management team

6. Financial projections7. Amount and use of finance required and exit oppurtunities.


43/44


44/44

Factors while choosing source of long-term finance..

1. Control

2. Size of the company

3. Time period

4. Risk

5. Growth and Stability

6. Cost of capital

7. Return on Investment

8. Cash flow position

9. Floatation Cost

Factors while choosing source of long-term finance..

1. Control

2. Size of the company

3. Time period

4. Risk

5. Growth and Stability

6. Cost of capital

7. Return on Investment

8. Cash flow position

9. Floatation Cost

Date post:	08-Apr-2018
Category:	Documents
Upload:	abhishek-girdhar
View:	220 times
Download:	0 times

Long Term Sources of Financ

Documents