sources of finance by jasveen kaur

7/28/2019 Sources of Finance by Jasveen Kaur

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SOURCES OF FINANCE BY JASVEEN KAUR (MBA PHARMA)

Sources of finance

Internal accruals

Securities

Term loans

Working capital advances

Internal accruals

Internal accruals of a firm consist of depreciation, amortisation, and retained earnings.

Depreciation

Depreciation represents the allocation of capital expenditure to various periods over which the

capital expenditure is expected to benefit the firm. It is a non-cash charge.

Suppose the estimated economic life of a machine costing Rs 100,000 is 5 years. The machine

would be depreciated every year in the P&L a/c with Rs 20,000( straight line method) which

represents a non cash expense which can be considered as an internal source of financing

Retained Earnings

That portion of Equity earnings ( PAT less preference dividend) which are ploughed back in the firm

Also called internal equity or ploughed back earnings.

EQUITY CAPITAL

Equity capital represents ownership capital as equity shareholders collectively own the company.

They enjoy the rewards and bear the risks of ownership

Authorised capital

Issued capital

Subscribed capital

Paid-up capital

Par value

Issue price


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Book value( Net worth/ no of outstanding equity shares)

Market value

SHARE CAPITAL

Funds raised by issuing shares in cash .The amount of share capital a company has can change over

time because each time a business sells new shares to the public in exchange for cash ,the amount

of share capital will increase

The amount of share capital a company reports on its balance sheet only accounts for the initial

amount for which the original shareholders purchased the shares from the issuing company

Any price differences arising from appreciation /depreciation as a result of transactions in secondary

market are not included

Authorized share capital also referred as registered capital . This is the total of share capital which alimited company is allowed to issue to its shareholders. The number is specified in MOA and AOA

when a firm is incorporated ,but can be changed later with shareholders approval

Issued share capital is the total of share capital issued to shareholders

Paid up share capital is the issued capital paid in full by the shareholders

RIGHTS OF EQUITY SHAREHOLDERS

Right to residual claim on Income of the firm

Right to Control and Voting rights

Equity shareholders elect the Board of Directors which in turn select the management which

controls the operations of the firm. Hence, equity shareholders exercise an indirect control over

the operations of the firm

Right in Liquidation

Equity shareholders have residual claim over the assets of the firm in the event of liquidation .

Claims of all othersemployees ,tax authorities, debenture holders, secured lenders, unsecured

lenders , other creditors and preferred shareholders are settled prior to equity holders

ADVANTAGES

no compulsion to pay dividends

equity capital provides a cushion to the lenders,


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it enhances the creditwor thiness of the company

Dividends are tax exempt in the hands of investors.

The company however is required to pay a DDT of 15%

PREFERENCE CAPITAL

Preference capital represents a hybrid form of financing(senior to equity and subordinate to debt). It

partakes some characteristics of equity and some attributes of debt.

TYPES

Cumulative and Non- cumulative

Participating preference shares and Non- participating

Redeemable and Non-redeemable

Convertible and Non- convertible

DEBENTURES

Debentures are instruments for raising debt finance. Debenture holders are the creditors of the

company. The obligation of a company toward its debenture holders is similar to that of a borrower

who promises to pay interest and principal at specified times. Debentures often provide more

flexibility than term loans as they offer greater choice with respect to maturity, interest rate,security, repayment, and special features.

TYPES

Zero coupon bonds

Does not carry coupon or interest rate

Issued at a discount over the face value and the bondholder receives the full principal amount at the

redemption date( diff bwt the issue price and redeemable price acts as interest for the holder)

Helps the issuers in conserving cash flows during the life of the bond

Attractive to investors as it protects them from reinvestment rate risk

The issue price of this bond is inversely related to their maturity period i.e longer the maturity

period lesser the issue price

CONVERTIBLE DEBENTURES

Convertible partially(PCD)s or fully in to equity shares(FCDs)


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The conversion premium and the conversion timing and guidelines should be stated in the

prospectus

SEBI restricts the conversion period to 36 months

Compulsory credit rating in conversion period exceeds 18 months

Carry a lower rate of interest than non convertible ones, so a cheaper source of finance

They entail lower financial burden but can lead to expensive dilution later

JUNK BONDS

High risk and high yield bonds

Coupon rates range from 16 to 25%

Graded below the investment grades.

sources of finance by jasveen kaur

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