EQUITY AND DEBT

SUBMITTED TO:MR.BALASUBRAMANIAM
PRESENTED BY:RAMAKRISHNAN - RA1412002010017
VIGNESH - RA1412002010018
ABHINAV - RA1412002010019
GAUTHAM - RA1412002010020
SUGUMARAN - RA1412002010021

Topics To Be Discussed
Financial Market

Basic Terms

Obtaining Financing

Preference Capital

Types Of Finance
Main Objective
Capital Structure
Equity Shares

Types

Merits

Demerits

Features Of Equity Shares

Evaluation From View Point Of Company

Types

Debt Financing

Debentures

Term Loans

Differed Credits

Working Capital Advance

Financial Market
A market generally implies a place where exchange of goods and

services takes place.

Financial market like any other market, facilities the exchange of

financial assets amongst the dealers.

It is a place or mechanism where financial assets are sold and

purchased.
Financial instruments are not consumed but clamed against the

money and enable their holders, upon disposing off the claims, to
obtain consumable goods or services.

Obtaining Financing
Identify the advantages and disadvantages of debt

financing.
Identify the advantages and disadvantages of equity

financing.
Describe some specialized sources of financing.
Describe how debt and equity financing affect the balance

sheet.

Types Of Financial decision

Main goal is to maximize shareholders value

Financing Decision

How to pay for expenses and investment

Investment Decision

How to best allocate capital

Main Objective
Value of firm

The value of firm is defined to be the sum of value of firms debt

and firms equity.

Goal of the firm

The main goal of the firm is to

Maximize the value of firm
Minimize the weighted average cost of capital
Maximize the market value of the common stock

Capital Structure
Two broad sources of financing :

Shareholders Fund Or Equity

EQUITY CAPITAL AND RETAINED EARNING

PREFERENCE CAPITAL

Loan Funds Or Debt

DEBENTURES

TERM LOANS

DEFFERED CREDITS

WORKING CAPITAL ADVANCE

Equity Shares
An equity share, commonly referred to as ordinary share

also represents the form of fractional ownership in which a

shareholder (as a fractional owner) undertakes the
maximum entrepreneurial risk associated with business
venture.
The holders of such shares are the members of the company

and have voting rights.

Types of Equity Shares

Rights issue/Rights Shares
Bonus Shares
Preferred Stock/Preferred Shares
Cumulative Preference Shares
Cumulative Convertible Preference Shares
Participating Preference Shares
Security Receipts
Government Securities
Debentures

Merits Of Equity Shares

Company need not have the forced obligation to pay dividend to equity

shareholders.
Equity shares is a permanent source of funds which facilitate flexibility

in usage of funds
The obligation to repay the equity capital arises only at the time of

liquidation of the company.

The shareholders can participate in the management of the company

through voting rights

Equity shares can be issued without creating any change over assets

Demerits of Equity Shares

Equity shares always associated with expectations of the investors. It

is practically a difficult task to fulfill the expectations of the investors.

Equity shareholders have to bear all the losses at the time of

liquidation. Interruptions of many persons are involved in the

company working. So, in some, it creates delay in decision-making.
When the financing has to be raised for less risky projects, then this is

not a good source of raising finance.

Investors who have a desire to invest in safe or fixed returns have no

attraction of such shares.

Features of Equity Shares

Right to income
Right to control
Pre-emptive right
Right to liquidation

Evaluation from view point of company

Advantages:

Permanent Capital

No obligation to pay dividend

No charge on property

Wide scope of marketability

High credit Worthiness and Premium

Disadvantages:

Cost of equity

Floatation Cost

Interference in management

Dilution of control

Dividends are tax-deductible

Some terms we should know

Authorized Capital

Issued Capital

Subscribed Capital

Paid-up Capital

Par Value

Issue Price

Book Value

Market Value

Preference Capital
Preference Capital generally refers to hybrid form of financing.
Company stock with dividends that are paid to shareholders

before common stock dividends are paid out.

In the event of a company bankruptcy, preferred stock

shareholders have a right to be paid company assets first.

Types of Preference Shares

Cumulative shares
Non-cumulative shares
Participating shares
Non-participating shares
Redeemable shares
Non-redeemable shares
Convertible shares
Non-convertible shares

Debt Financing
Debt financing is when you borrow what you need to start your business.

This increases your companys debt.

A debt arrangement gives the borrowing party permission to borrow money

under the condition that it is to be paid back at a later date.

There are three main sources of debt financing:

Banks are the major source of debt financing for entrepreneurs. To determine how
much it might be willing to loan you, the bank will review your businesss debt-toequity ratio.

Credit unions are nonprofit cooperative organization that offer low-interest loans to
members.

Relatives and friends are a common source of start-up loans for many
entrepreneurs.

Debentures (or Bonds)

A debenture is like a certificate of loan or a loan bond evidencing the fact that the

company is liable to pay a specified amount with interest.

The money raised by the debentures becomes a part of the companys capital

structure.
A movable property.
Issued by the company in the form of a certificate of indebtedness.
It generally specifies the date of redemption, repayment of principal and interest on

specified dates.
May or may not create a charge on the assets of the company.
For Debentures issued with maturity period of more than 18 months, a DRR is

created.

Term Loans
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, but may last as long as 30 years

in some cases.
A term loan usually involves an unfixed interest rate that will add additional balance

to be repaid.
Features of term loans:

Currency

Security

Interest payment and principle payment

Restrictive Covenants

Deferred Credits
Suppliers of machinery provides deferred credits facility under which

payment for machinery purchase is done for period of time.

Deferred income (in accrual accounting),is money received for goods

or services which have not yet been delivered.

According to the revenue recognition principle, it is recorded as liability

until delivery is made, after that it is converted into revenue.

Working Capital Advance

Working capital advance by commercial banks represents

the most important source of financing current assets.

Working Capital advance by commercial is generally

provided in four different ways:

Cash Credits/Over crafts

Loans

Purchase/Discount of Bills

Letter of credits

Effects of Financing on Your Balance Sheet

What are the economic consequences of using

some form of financing for your business?

Debt Financing

Borrowing money for a business increases its debt (liabilities). You must
repay the loans or you risk losing the business.

Equity Financing

When using equity financing, your owners equity changes. With equity
financing, you give up some of your company and perhaps some control.
Consider the consequences of using equity financing to obtain capital.

EQUITY vs. DEBT

EQUITY

DEBT

Equity financing involves bringing in

Refers to borrowing money in the form

investors or partners who provide

of a loan from a bank or other financial

capital in exchange for a share of

institution

ownership of the business.

Dividend paid to shareholders is Non

Interest Paid is Tax Deductible Payment

Tax Deductible
Have Indefinite Life

Have Fixed Maturity

Have no such authority but enjoy the

Have authority to impose certain

prerogative to control the affairs of the

restrictions to protect their interest

firm

Debt Equity Ratio

A measure of a company's financial leverage calculated by dividing its

total liabilities by stockholders equity.

It indicates what proportion of equity and debt of the company is using

to finance its assets.

If this is continued the firm will go bankruptcy, which would

leave nothing for shareholders

Formulae used :-

Its Significance
Debt-to-equity ratio measure of a company's ability to repay its obligations.
A high debt/equity ratio generally means that a company has been

aggressive in financing its growth with debt.

This can result in volatile earnings as a result of the additional interest

expense.
If a lot of debt is used to finance increased operations, the company could

potentially generate more earnings and continued may lead to bankruptcy.

Optimal debt-to-equity ratio is considered to be about 1, but the ratio may

vary industry to industry.

Key Factors To Determine D-E Ratio

Cost
Nature of asset
Business Risk
Number of Lenders
Control Considerations
Market Considerations

When To Use What

EQUITY

DEBT

Tax rate applicable is negligible

Tax rate applicable is high

Business Risk exposure is high

Business Risk exposure is low

Assets of the project are mostly

Assets of the project are mostly tangible

intangible
The project has many valuable growth
options

The project has few growth options

REFERENCE

PROJECTS (PLANNING ANALYSIS SELECTION

FINANCING IMPLEMENTATION AND REVIEW)
BY PRAKASH CHANDRA-TMC
PUBLICATIONS

INTERNET:- WIKIPEDIA , INVESTOPEDIA

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