SOURCES OF LONG TERM FINANCE

Ô Finance is the life blood of a business

Sources of finance: Ô Short term sources Ô Long term sources

Purpose of long term finance: Ô To finance fixed assets Ô To finance the permanent part of working capital Ô To finance the growth and expansion of a business .

Factors determining long term sources of finance: Ô Nature of business Ô Nature of goods produced Ô Technology used .

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Book Value. Subscribed & Paid up Capital.  Par/ face Value. Market Value.EQUITY CAPITAL TERMS:  Authorized. Issue Price. . Issued.

Rights Of Equity Share Holders: Right to Income Right to Control Pre ± emptive Right Right in Liquidation .

no obligation to redeem No compulsion to pay dividends Disadvantages Dilution of control High Cost Dividends are not tax deductible: hence cost is higher Issue costs higher: Provides leverage capacity Dividends tax exempt for investors Higher servicing costs .EQUITY CAPITAL Advantages No fixed maturity.

PREFERENCE CAPITAL Ô Hybrid form of Financing Ô Equity Features: out of distributable profits dividends not tax deductible Priority over Equity shares in case of bankruptcy Ô Debenture features: dividend rate is fixed capital is redeemable normally no right to vote .

liability to pay dividends stands. hence increases its creditworthiness Can acquire voting rights in some cases Have claim prior to equity holders No dilution of control No pledging of assets required . can spoil company¶s image Part of net worth. no bankruptcy or legal action for non payment Disadvantages Expensive source since dividends not tax deductible Financial distress of redemption obligation not very high Though no legal consequences.PREFERENCE CAPITAL Advantages No obligation to pay dividend.

Retained Earnings Depreciation .

INTERNAL ACCRUALS Advantages Readily available Effective additional equity capital Disadvantages Quantum very limited High Opportunity costs: dividends forgone by equity holders Requires careful attention to NPV of projects No dilution of control .

Ô TERM LOANS Ô Maturities Ô Security Ô Provided by Foreign Institutes/ Bank Ô Repayment schedule Ô Restrictive Covenants Ô Convertibility .

Term Loan Contd« Advantages Interest on debt is tax deductible Disadvantages Fixed obligation for interest and principal Debt contracts impose restrictions on firm¶s financial and operational flexibility Dividends are not tax deductible: hence cost is higher Increases financial leverage. excess raises cost of equity to the firm: If inflation rate dips. cost of debt higher than expected No dilution of control Interest cost is fixed Dividends tax exempt for investors .

DEBENTURES Ô Interest Ô Security Ô Maturity & Redemption Ô Options Ô Convertibility .

Few types of Debenture Ô Non ± convertible debentures Ô Fully convertible debentures Ô Partly ± convertible debentures .

Debentures Contd« Advantages Low cost No ownership dilution Fixed payment of interest Reduced real obligation Disadvantages Obligatory payments Financial Risk Cash outflow Restricted Covenants: .

as part of a £600m refinancing. .Other Important Sources of financing Ô Ô Ô Ô Ô Ô Ô Leasing Hire Purchase Asset Securitization Government Subsidies Lottery funding Selling asset Convertible bonds eg:British Airways has announced that it is to raise £300m of new funding via a convertible bond issue.

Foreign Sources Ô Foreign Collaborators Ô International Financial Institutions: Ô Non Resident Indians .

Comparison of Various sources of Long ± term Financing Cost Dilution of Control Risk Restraint on managerial freedom Equity Capital Retained Earning Preference Capital Term Loans Debentures High High High Low Low Yes No No No No Nil Nil Negligible High High No No No Moderate Some .

BENEFITS OF LONG TERM FINANCING .

Raising Long Term Finance Ô Initial Public offering Ô Right Issue Ô Private Placement Ô Preferential Allotment Ô Obtaining a Term Loan Ô Venture Capital .

Initial Public Offering Ô Decision to go Public Ô Benefits Ô Cost Ô Eligibility Ô Book Building process .

Ô Comparison with Public issue: familiar investors. hence likely to be more successful Ô Less floatation costs Ô Lower pricing to benefit shareholders .Right Issue Ô Issue of capital to existing shareholders Ô Offer made on pro rata basis Ô Right shares are tradable. may be sold in open market.

Private Placement Ô Sale of securities directly to wholesale investors like FIs. banks.(QIPÑs) Ô Called private placement in equity/equity related instruments. open offer to be made to public Ô QIB placement guidelines recently issued by SEBI for compliance and disclosures . in unlisted companies and in all cases of debt Ô Called preferential allotment in case of unlisted companies for equity/equity related instruments Ô Different from reservations made for such QIBs out of a public issue Ô Subject to SEBI regulations on pricing. FIIs. MFs. lock in period. PE funds etc.

Obtaining a term loan Ô Ô Ô Ô Ô Ô Ô Ô Ô Submission of loan application Initial processing of loan application Project Appraisal Issue of Letter of Sanction Acceptance of terms and conditions by the borrowing unit Execution of loan agreement Disbursement of loan Creation of security Monitoring .

Venture Capital Ô Equity Participation Ô Long term investment Ô Participation in management .

.Conclusion Ô During the research of this assignment we have concluded that Ô many type of finance can be used at one particular time. Ô Depending on the type of company and they should try to get the best possible finance deal Ô to save the borrower on the risk of borrowing high amount and Ô also to pay high amount on the interest rate.

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