Long term sources of funds
SHREYA JAJOO
1421646
SOURCES FOR LONG TERM FINANCE
Long-Term Finance
Long-term finance is borrowed capital that will be repaid over a specific time period longer than one year.
Need for Long-Term Finance
Long-term finance is required for modernization, expansion and diversification within the company or its products. It is when the company requires huge quantities of goods or services. Long-term finance decision is an irreversible decision.
Sources of Long-term Finance:
1. Equity Capital
A stock or any other security representing an ownership interest is called equity capital. On a company's balance sheet, the amount of the funds contributed by the stockholders plus the retained earnings or losses. It is also referred to as "shareholders' equity".
It is further segregated into:
Authorized Capital
Issued Capital
Subscribed Capital
Paid-up Capital
The rights of the equity shareholders are:
Right to Income: PAT less preferred dividends
Right to Control: Voting rights
Pre-emptive Right: Right issue in the same proportion if any issues come up
Right in liquidation: Residual claim over assets
The advantages of raising equity capital are:
There is no fixed maturity
There is no obligation to redeem
There are no compulsions to pay dividends
It provides leverage capacity
Dividends are tax exempted for investors
The disadvantages of raising equity capital are:
Dilution of control of existing owners
If the share price is of high cost, the rate of return will be expected to be high too
Dividends are not tax deductible; hence the cost is high
Issue cost is higher as it includes: underwriting, brokerage etc
2. Internal Accruals
The internal accruals of a business are the accumulation of retained earnings and depreciation charges. The term depreciation refers to the capital expenditure allocation to various time periods for which the expenditure is expected to improve the financial condition of the firm. The depreciation charge is considered an internal
1421646
SOURCES FOR LONG TERM FINANCE
Long-Term Finance
Long-term finance is borrowed capital that will be repaid over a specific time period longer than one year.
Need for Long-Term Finance
Long-term finance is required for modernization, expansion and diversification within the company or its products. It is when the company requires huge quantities of goods or services. Long-term finance decision is an irreversible decision.
Sources of Long-term Finance:
1. Equity Capital
A stock or any other security representing an ownership interest is called equity capital. On a company's balance sheet, the amount of the funds contributed by the stockholders plus the retained earnings or losses. It is also referred to as "shareholders' equity".
It is further segregated into:
Authorized Capital
Issued Capital
Subscribed Capital
Paid-up Capital
The rights of the equity shareholders are:
Right to Income: PAT less preferred dividends
Right to Control: Voting rights
Pre-emptive Right: Right issue in the same proportion if any issues come up
Right in liquidation: Residual claim over assets
The advantages of raising equity capital are:
There is no fixed maturity
There is no obligation to redeem
There are no compulsions to pay dividends
It provides leverage capacity
Dividends are tax exempted for investors
The disadvantages of raising equity capital are:
Dilution of control of existing owners
If the share price is of high cost, the rate of return will be expected to be high too
Dividends are not tax deductible; hence the cost is high
Issue cost is higher as it includes: underwriting, brokerage etc
2. Internal Accruals
The internal accruals of a business are the accumulation of retained earnings and depreciation charges. The term depreciation refers to the capital expenditure allocation to various time periods for which the expenditure is expected to improve the financial condition of the firm. The depreciation charge is considered an internal