SOURCES OF FINANCE:

PRESENTED BY: MONIKA KSHIRSAGAR ASHWINI TEMBHURNE SIDDHESH TANDEL VINAYAK BHAMBURE 10 30 40 50

WHAT IS FINANCE.??
The commercial activity of providing funds and capital, The branch of economics that studies the management of money and other assets, The management of money and credit and banking and investments, Obtain or provide money for.

It is rightly said that finance is the life-blood of business. No Business can be carried on without source of finance . The financial manager is mainly responsible for raising the required finance for the business. There are several sources of Finance and as such the finance has to be raised from the right kind of source.

SOURCES OF FINANCE

EQUITY FINANCE

BORROWING FINANCE

MIXED FINANCE

EQUITY FINANCE:
Equity: Equity is the term commonly used to describe the ordinary share capital of a business. What is Equity Finance? Equity finance is the money that the owner of the business puts in himself/themselves and so they get a share of the ownership and the resulting business profits after interest payments and tax.

 The money stays in the business and the owners (called shareholders) can receive their money only on winding up or by selling their share to someone else. It is a low risk financing. A businessman can run a relatively low risk business with the help of equity capital. The backside of equity financing is that the business will run quite slowly and won't progress as much as it could, had it taken debt financing.

NEED OF EQUITY FINANCE:

The company might want to raise more cash The company might want to issue new shares partly to raise cash but more importantly to 'float' its shares on a stock market. The company might issue new shares to the shareholders of another company, in order to take it over.

SOURCES OF EQUITY FINANCE:

Retained profits: i.e. retaining profits, rather than paying them out as dividends. This is the most important source of equity. Rights issues: i.e. an issue of new shares. After retained profits, rights issues are the next most important source. New issues of shares to the public: i.e. an issue of new shares to new shareholders. In total in the UK, this is the least important source of equity finance.

BORROWING FINANCE:
To receive money from another party with the agreement that the money will be repaid. Most borrowers borrow at interest, meaning they pay a certain percentage of the principal amount to the lender as compensation for borrowing. Most loans also have a maturity date by which time the borrower must have repaid the loan.

 Borrowing occurs informally from family and friends, at the retail level through a bank, and also on a large scale involving governments and institutional investors.

 Borrowing Money from relatives and friends: having following advantages: No Lengthy Approval Process Room For Negotiation Low Interest Rates Loan Forgiveness

(1) No lengthy approval Process:

Already have an established relationship Won't make you fill out an application Have advantage if you need money in any urgency.

(2) Room For Negotiation:

Will have more of an opportunity to negotiate. Can set repayment terms that will be easy for you to keep. Relatives will understand that you have to pay them back after you receive your paycheck.

(3) Low Interest Rates:

Some of family loans are interest free. Does decide to charge interest, it will likely be less interest than what a bank would charge.

(4) Loan Forgiveness:

A family member may be willing to forgive the loan or postpone repayment until you can sort things out.

MIXED FINANCE:
It is quite difficult to run a business which is debt free, while taking debt for equity financing is a similarly bad idea. A healthy debt to equity ratio ought to be maintained if you are to run a business well. Because both debt and equity financing have their pros and cons, which can be reconciled well by having a healthy balance of the two.

 Equity & Borrowing finance are the two ends of spectrum of financing Mixed financing take some characteristics of equity & some of the borrowing financing Important forms of Mixed Financing are; Preference Capital Warrants Convertible debentures

PREFERENCE CAPITAL:
Basic features; Cumulation of Dividends Call ability Convertibility Redeem ability Participation in surplus Profit & Assets Voting rights

PREFERENCE CAPITAL cont

ADVANTAGES :
By issuing preferred shares, firm avoids the dilution of common equity that occurs when common stock is sold Obligations to pay preferred dividends is not firm, passing a preferred dividend cannot force a firm into bankruptcy

PREFERENCE CAPITAL cont

DISADVANTAGES : Not deductible to the issuer, hence after tax cost of preferred is higher than after cost of debt This are considered as a fixed cost for the firm because it need to be pay back to the investors, thus increases financial risk

WARRANTS
A certificate issued by a company that gives the holder the right but not obligation to buy a stated number of shares of the company at a specified price for specified period This are generally issued along with debt Used to induce investors to buy long term debts

 Generally used by small, rapidly growing firms Used as sweeteners when they sell debt or preferred stocks. Provides an opportunity to expand the firms mix of securities, thus appeal to a broader group of investors Lower limit for the value of warrant is Max (0, stock price- exercise price) Upper limit for the value of warrant is the stock price

CONVERTIBLE DEBENTURES
These are bond or preferred stocks which are under specified terms and conditions, can be exchanged for common stock at the option of the holder Three types of convertible debentures in India; Compulsorily Convertible Debentures Optionally Convertible Debentures Debentures that provide conversion after 36 months but carry call & put features

CONVERTIBLE DEBENTURES cont

Holders are not compelled to make an immediate choice The option of wait is valuable tool here The debenture & the option are inseparable here

CONCLUSION

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