LONG TERM SOURCES OF FUNDS

Corporate Finance

Classification

Equity Share Capital

The capital raised by issue of equity shares by a company

Equity Share Capital

Its the Owners Money Costliest Source of Money Its is the Permanent Capital for the company Shareholders enjoy the high rewards but bear the risk of ownership Shareholders Liability is limited to their capital Distribution

Equity Share Capital

Some terms
Authorized,

Issued, Subscribed & Paid-up Capital Par value, Issue Price, Book value & Market value

Rights and Position of Equity Share Holders

Right

to Income Right to Control Pre-emptive Right Right in Liquidation

Equity Share Capital

Advantages
No

compulsion to pay dividend Enhances credit worthiness of the company Has to be repaid only at the time of liquidation Democratic control over management Higher returns for investors

Disadvantages
Costliest

Source of Income Additional issue of shares dilute the control of existing shareholders Not advisable for investors who want steady income Involve more number of

Preference Share Capital

The capital raised by issue of Preference shares

Preference Share Capital

Owner Carries Preferential Rights Hybrid Form of Financing

It

has the attributes of both Equity and Debentures Similarities with Equity Capital

Preference dividend is payable only out of distributable profits Preference dividend is not an obligatory payment It is not a tax-deductable payment

Similarities

with Debentures

Fixed dividend rate Preference shareholder do not enjoy Right to vote in AGMs

Preference Share Capital

Types of Preference Shares

Cumulative & Non-Cumulative Participating & Non-Participating Convertible & Non- Convertible

Advantages
No legal Obligation to pay Preference Dividend Useful for investors desiring for fixed rate of return with lower risk Does not effect the control of Equity shareholders over management Does not create any charge against the asset of the company Enhances Credit worthiness of the firm

Disadvantages

Internal Accruals
Retained Earnings of the Company

Internal Accruals

Retained Earnings and Surplus

Internal Source of Funding Also Known as Ploughing back of Profit

Included under Shareholders Fund in Balance Sheet

Internal Accruals

Advantages
Permanent

Source of Fund Provides Greater Degree of Operational Freedom & Flexibility No Dilution of Control of Shareholders Might lead to increase in market price of Equity Shares

Disadvantages
Amount

raised is uncertain and limited Might create Dissatisfaction among Opportunity cost might give better returns

Venture Capital
also known as seed capital or private capital

Money provided by investors to startup firms and small businesses with perceived long-term growth potential. The five stages of venture capital funding are seed stage, start-up stage, second stage, third stage and bridge/pre-public stage In addition to money they also give mentoring, resources and contacts Demands a part of the companies equity Venture capitalists expect to realize their investment in 3 to 5 years More scrutiny and financial pressure