identification of sources_of_finance

Jun 27th, 2015
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Abilene Christian University
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Par value: Face amount; paid at maturity. Assume $1,000. Coupon interest rate: Stated interest rate. Multiply by par value to get dollars of interest. Generally fixed.

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SOURCES OF LONG TERMFINANCENeed for long term FinanceLong term vs. short term(workingcapital) funds requirementsFor modernisation, expansion,diversification; huge quantities reqd.,irreversible decisionAsset-liability mismatch, interest raterisk, liquidity risk, if LT reqts.met by STfundsEquity CapitalAuthorised, Issued, Subscribed and Paid upcapitalPar/face value, Issue Price, Book value andMarket ValueRights of equity shareholders-Right to Income :PAT less preferred dividends-Right to Control: voting rights-Pre-emptive Right: for additional issues,rights issue in the same proportion-Right in liquidation: residual claim over assetsPros and cons of equityCapitalAdvantagesNo fixed maturity, noobligation to redeemNo compulsion topay dividendsProvides leveragecapacityDividends taxexempt for investorsDisadvantagesDilution of control ofexisting ownersHigh Cost: rate of returnexpected by equityholdershigher than debtholdersDividends are not taxdeductible: hence cost ishigherIssue costs higher:underwriting, brokerage,other issue expensesHigher servicing costs: holdAGMs, post annual reportsetc.Internal AccrualsConsists of retained earnings and depreciation chargesProsReadily available, notalking to outsidersEffectively additionalequity capital, howeverno issue costs of lossdue to underpricingNo dilution of controlNo expansion i

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