Long Term Financing-Final+raw

Long Term Financing
Long-term financing
Generally, business institute needs two types of capital to

operate the activities of the business organization properly.
They are (1) working capital (2) long term capital or long
term financing.
Long term capital is generally used to purchase the long

term asset such as land, equipment, building etc. Long-
term financing may be defined as the process of collection
& utilization of capitals which is needed for long-term
investment & fulfillment of requirement of fixed assets of
any firm. In other words, the financing of long-term
requirement of any business is called long-term financing.
To fulfill the long term objective of any business

organization, it needs long term financing. Long term
financing is very much important for the growing company.
Many financial analysts have presented numerous

definitions of long term financing. According to most of
them, “the financing system followed for more then 7years
but less than 20years is called long-term financing.”
According to J J Hampton, “long term financing generally

is thought to include maturities 7 to 15 years.”
Tanzina Hossain, M.B.A (Finance), Dhaka University

According to Guthman & Dougall , “ long term financing
ordinarily refers to loans that are for more than seven
years open for up to 15 years some times up to 20 years.”
So it is clear from the above definitions that financing for 7

years or more than 7 years period to purchase company’s
fixed or long term assets, that provides a long term
operational basis for the company is called long term
financing. The necessity of long term financing,
identification of the least cost sources, collection of money
and the process of using those is long term financing.
Characteristics of long-term financing
The characteristics of long-term financing are as follows:
1) Size of fund: Since long term financing is used for

fixed assets, the size of fund collecting from long term
financing is large. Fixed assets such as land, building,
equipment needs large amount of financing.
2) Use of fund: The fund from long term financing is used

for long-term assets such as the fixed asset of a business
e.g. the construction of building, office & other furniture
etc.
3) Nature of fund: The capital collected by long-term

financing may be used for the purpose of importing

different types of assets. So, it may be in local currency as
well as in foreign currencies.
4) Duration: Usually the duration of long-term financing is

from 7 to 20 years, sometimes it can be more than 20
years. For example, investment of capital provided by the
shareholders or the owners of the company has no
maturity.
5) Repayment method: The repayment method of this

fund is conducted according to the contract between
borrower & lender. It may be done through installment
basis. Installment may be monthly, half yearly or yearly.
But the capital provided by the owners or shareholders is
not repayable until dissolve.
6) Security: A borrower has to maintain security against

his long-term debt. Usually the fixed asset is used as his
security. But in case of capital provided by the owner, there
is no provision for security.
7) Claim on Income: We know that long-term capital has

two parties, one is owner & another is lender. They have
some claims on income. These are as follows –
 Preference on claim: The lender is preferred to the

owner on claims of profit. Sometimes lender may
provide some conditions which must be followed by
the company.
 Certainty on claim: The borrowers must pay their

interest on debt. Sometimes their assets may be
croaked if they fail to pay interest. But the owner has

no certainly of income. He may get the profit after
meeting the demand of the lender.
 Claim on asset: The bond holder has preferred claim

to stock holder on assets of the company. Sometimes
these assets are used for the interest of lender.
8) Cost of capital: Usually the cost of long-term capital is

less than the short or mid term capital, as it is invested for
long-term & income comes during a long term period.
9) Flexibility: There is a lot of flexibility in case of

collecting & using of long-term capital. As long-term capital
can be repaid through a longtime, so it can be sourced
from other part.
10) Participation in management: The owner can

participate in the management of the company but the
lender can not participate. They can control the activities of
the company passively by applying condition in the loan
contract only.

Importance of Long term Financing
All kinds of firms need some amount of Long term Capital

at the initial stage. The degree of importance of financing
depends on the size, nature and capital structure of the
term. For manufacturing firm. On the other hand, a trading
firm will prefer short term financing to Long term financing.
But, all these firms required long term fund at the initial
stage. Long term fund is needed for acquiring land,
building, equipment and furniture.
The spirit of progress must be upheld in the progressive
business world. Both Owners (Shareholders) and
Management are motivated to the firm by keeping pace
with time. In today’s complex globalize and highly
competitive business world, business firms dearly need
Long term financing for maximization of earth and keep the
very existence infect. For establishing new firms or for the
BMRE (Bangladesh Modernization, Replacement and
Expansion) of old firms there is no substitutes for Long
term financing.
The many applications of Long term financing are:

(1) Initial cost:
Long term financing is very important to bear initial cost
such as for acquiring and developing pf land for building
factory.
(2) Construction cost:
Business firms have to depend on Long term funds to meet
the cost of constructing factory building road, drainage,
generator room and other fixed assets.

(3) Incidental cost:
Other expenses such as installation cost can also be met by
Long term banking.
(4) To implement long term plan:
Long term plans can be implemented by Long term
financing. Investment decision, purchase of fixed asset etc.
are important among these plans.
(5) To face competition:
In a competitive market, consumers want high quality
goods and serves at lower costs. If out of ale machinery
and technology are used to produce products they will be
of old design and low quality. As a result, the firm may fail
to survive in the competition.
(6) To meet changing circumstance of model,
designed fashion:
Consumers want to get goods and services of new model
and design with change in their in income and mentality.
Long term financing is essential to meet these
requirements. If the firm wants to change the model,
design and fashion of its product then Long term financing
is required.
(7) To replace fixed assets:

If fixed assets need replacement then the firm will require
Long term financing.
(8) To implement Modernization and expansion
program:
If the firm needs to modems and expand if will need a
large amount of Long term found.
(9) To improve the quality of capital goods:
Long term financing plays a significant role in the
improvement of the quality of capital goods improvement
of quality of capital goods is impossible without long term
financing.
Sources of long term financing
There are two sources of long term financing. They are-
1) Internal sources
2) Externals sources.
Internal Sources: When the fund is collected from

owners and firm’s earnings or cash flow of the business,
not from outside institutions is known as Internal Sources.
Initial Capital, Retained Earnings, Provident Fund,
Outstanding expenses etc. are the internal sources of
financing.

External Sources: When the fund is collected from
outside of the business firm is known as external sources.
Creditors, Institutional credit, Non-institutional credit, Trade
credit etc. are the external sources.
(A) Internal Sources of Financing:
Internal financing indicates that the fund is collected from

inside of the business. Expansion and maturity of the
business changes the internal financing. Because when a
firm is new it needs a lot of initial capital. But when the
firm establishes and expands its business then they can run
their business thorough Retained earnings. Retained
earnings, provision for depreciation, outstanding expenses
etc. are the internal sources of finance. The internal
sources of finance are given below.
There are two types of internal sources:
1) Promoter’s initial capital

2) Retained earnings
1. Promoter’s Initial Capital: Promoter’s initial capital is

the first source of internal financing. It varies according to
the business capital, changes of capital & accounting
process of the company. But there is a similarity in capital

for every organization, which is the share capital, is the
largest source of financing. The different perspectives of
capital are described for different sort of firms.
Share capital: It is the first source of internal financing. It is the

capital of the entrepreneurs. Before starting their business, the
owners bring their own capital. It is the most essential long term
fun. It is perpetual capital as in most cases owners/ owners do not
withdraw their capital in the lifetime of a business.
In sole proprietorship business In sole proprietorship

the existence of the owner & the business is the same &
non-differentiable. So if there is any change in the capital it
affects the owner & the firm together. If there is any profit
then it is added straight way with capital, then capital
increases. If there is a loss then it is deducted from the
capital, so the capital decreases. A sole proprietorship is a
business organization which is owned & controlled by a
single individual.
Partnership Business Minimum two & maximum 20

people are combined together for partnership business. As
there are more members than sole proprietorship so the
capital collection is also more than sole proprietorship. Each
partner gets dividend from the profit & bears the loss in
certain proportions. Capital of every partner is shown
individually in the balance sheet.
Joint Stock Company Joint Stock Company is of two

types- a) Private Ltd. & b) Public Ltd. Company. As there
are more members so the amount of capital is higher. Joint
Stock Company is divided into small part & it is distributed

as share to the general people. Those who buy the shares
are known as shareholder.
2. Retained Profit: A major source of long-term finance

for a business is retained income, profit, which is not
distributed to the shareholders in the form dividends at
year end, but instead retained within the business.
Retained earnings are a part of net profit, which is used for
expansion of the business. The amount of profit retained
by the business over the years can be seen in the Profit &
Loss Reserve on the companies Balance Sheet. One of the
advantages of this form of internal finance is that it costs
far less when compared to external sources of finance
which will normally require additional interest. Further, the
business is not answerable to any additional external
financial institution for the use to which they put such
funds. Retained earnings have different forms and different
uses. They are described below:
) Retained earnings: The part of profit which is retained after

distributing dividend to shareholders is called. Retained earnings.
A firm retains profits for business expansion, to pay liabilities. If
the firm has stable profit rate, sound liquidity condition and good
investment opportunities, then Retained earrings may be utilized
as a source of internal financing.
a) General Reserve: When the total profit is not

distributed rather it is saved for routine work, there creates
a fund. The fund which is made from the net profit is
known as general reserve. A large part of profit is reserved
for general purpose. According to the banking act of 1991
no bank company will be allowed to have general reserve

more than its paid-up capital. So, general reserve is the
main capital of internal financing.
(3) General reserve: After distributing dividend the retained

earning are used to crenate some funds. The largest part of
Retained Earnings is reserve. In this fund. General reserve fund is
the first and the most important of them. The General reserve is
utilized for business expansion and investment in profitable
projects ort face off financial difficulty. Thus it a very useful
source of internal financing.
b) Dividend Equalization Fund: Shareholders of any

company expect regular dividend from that company. But
because of instability of earnings company can’t declare
always the same amount of dividend every year.
Sometimes the earning is so poor that the company can’t
pay any dividend. But on the other hand when there is a
huge profit then it can distribute that profit as a dividend to
the shareholders. So to keep the equality among the
dividend of different years a part of earnings is reserved in
Dividend Equalization Fund. A year in which there is a poor
earnings or no earnings, dividend is declared from that
fund to equalize the amount of dividend per year. So, this
fund of dividend can be used as internal financing until it is
paid to the shareholders.
(6) Dividend equalization fund: If a firm wants to follows stable

dividend, then it has to form this fund. Each year a part of profit
is transferred to this fund. It enables the firm to maintain its stable
dividend even in the years of financial loss. This fund can also be
used in internal financing.

c) Sinking Fund: Most of the companies face a condition
for making a sinking fund in the time of collecting long
term loan or issuing bond from lenders. According to this
condition business organization has to form a sinking fund
to overcome the pressure of repaying a large amount of
debt at a time. This fund is made by a part of earnings
every year, which is used for the repayment of loan. Until
the repayment of the loan those money can be used for
internal financing.
(7) Sinking fund: This fund is formed to enable the firm to retire
a bond or other security. A small part of profit is transferred to
this fund each year. It can also be used for internal financing.
d) Workmen’s Compensation & Welfare Fund: This

fund is created for making compensations to the workers or
employees if any employee dies or injured in an accident
during his working period. Until the compensation is made
from the fund to the workers it can be used for internal
financing.
(8) Workmen’s compensation and Welfare fund: If any

workmen or worker gets hurt during work, they are given
compassion form this fund. Until being used this fund can be
used for internal financing.
e) Credit Balance after profit & loss: The amount from

the profit & loss appropriation account, which is transferred
to the Balance Sheet after making payment as dividend and

to the general reserve or any other reserves, is Credit
Balance of profit and loss account. This balance can be
used for internal financing.
5) Credit balance of profit and Loss Account: By preparing

Profit and Loss Appropriation A/C is apart of net profit which is
taken in this A/C after giving dividend and placing in different
reserves, can be a source of internal financing.
(B) External sources: External sources are of two

types.
a) Owners Capital from Capital

Market
b) Institutional sources.
a) Owners Capital from Capital Market

Capital which is supplied by the promoters at the very
beginning of the business such as sole-proprietorship,
partnership, and joint stock company, is considered as the
internal source. But when Joint Stock Company collects
additional capital for further expansion and activities of the
company from capital market by selling shares to the
public, it is considered as external source of financing.
From external sources company can finance through share
capitals, and debentures

1) Share Capital
The most important source of long-term finance for a
limited company is usually that raised from shareholders,
the owners of the business. Share Capital is raised through
the sale of shares to individuals or institutions, who in
return for their investment receive interest in the form of a
dividend, which constitutes a share of the profits made by
the business. In addition the shareholder may be able to
make a Capital Gain on their investment by selling their
share holding at a latter date. There are two main types of
Share, 1) the Ordinary Share and, 2) the Preference Share.
These are discussed below:
Common stock capital/ ordinary share capital: Common stock
is a security representing he residual ownership of corporation.
The common stock has indefinite life. Common stockholders
have voting rights and gets dividend. This the most important
source of long term financing.
a) Ordinary Share Capital or Common Stock
Capital: The majority of Share Capital will be raised
through the issue of Ordinary Shares. Generally, there are
three ways to collect fund from issuing common shares in
the market. They are-
I. Initial Public offering (IPO): The total

capital of an organization if divided into smaller and equal
proportion, each of which represents the ownership is
called common share. Generally, general public are
provoked to purchase the shares by advertisement in
newspaper. The fund which is created by selling shares to
the public is known as share capital.
II. Right Share: After the IPO, if Company needs

additional capital for the expansion of the company it can

collect it by selling shares to the existing shareholders at
priority basis. For example, a company has authorized
capital of Tk. 2 crore. It has already sold shares in the
market for Tk. 1 crore. For further expansion it needs
another Tk. 50 lakh. Now it can do it by selling shares to
the existing shareholders proportionately. This is Right
share. The benefit of doing this is, it increases share capital
but not the number of shareholders.
b) Preference Share Capital: Preference shares are

designed for the investors who do not wish to take the
degree of risk associated with being an ordinary
shareholder. They are offered a guaranteed dividend,
although this fixed level of return can potentially be less
than that received by an Ordinary Shareholder. Preference
Shareholders are not the owners of the business and
therefore have limited voting rights, in comparison to the
Ordinary Shareholder.
Preferred stock: Preferred stock is a hybrid form of security
combining the features of Bond and Common stock. It is
generally perpetual. Preferred stockholders gets fixed dividend
each year.
2) Debentures
Debentures are normally associated with limited
companies. A business will offer potential investors the
opportunity to invest in the company through purchasing of
debentures which are divided into units, similar in principle
to shares. The investors, called debenture holders, are
deemed as creditors to the business and not owners, and
will receive interest payments from the company until, at
an agreed date, the loan is redeemed, paid back in full.
Most debentures are secured, in that the holder of the

debenture will have claim over either specified assets of the
business should the business default on interest payments,
or claim over general assets of the business up to the value
of the debenture loan.
2) Bond: Bond is a long term date instrument and generally have

definite maturity period bondholders are paid period band hooters
are paid periodic interests.
b) Institutional sources
There are several types of institutional sources from where

firm can collect money. Those are explained below.
1. Commercial Bank
2. Investment Bank
3. Insurance Company
4. Underwriter
5. Development Financing Institutions
6. Leasing Company
7. Specialized Financial Institutions
Commercial Bank
Commercial bank is the main source for collecting long
term fund among all the institutional sources. As an
intermediary of fund, commercial banks deposit public’s
savings and gives loan from that deposits at a particular
interest rate to the business institutions. Generally, long
term loans are sanctioned for long term expansion of
business, establishment of industry, modernization of
industry, etc. Most of the cases, security is needed against
long term loan.

(4) Commercial banks: They are the largest source of long term
loan. Commercial banks gives loans to establish new industries of
for BMRE of existing industries.
Investment Bank
The main task of Investment bank is to buy the newly
issued shares from the public limited company, and sell
those shares in the capital market. Investment bank also
provides underwriting and bridge financing services along
with filling up the shortage of capital to public limited
companies by buying shares directly from various
institutions and investors. As an external source investment
banks play an important role, especially at the very
beginning of the establishment of the institution and at the
first few years of starting the activities of the company.
(5) Investment Bank: These institutions underwrites new
securities and participates in bridge financing and also gives long
term loan. For example in Bangladesh, ICB is working as an
Investment Bank.
Insurance Company
Insurance companies take premium from policyholders

regularly but in comparison they are to compensate to a
few number of holders. As a result a huge amount of fund
is saved in their accounts for a long period. For that
reason, now-a-days insurance companies also provide loan
to business firm along with commercial banks. But they
only provide loan to those firms which have little risk,
enough resources and enough organization power.
Generally, insurance companies charge more interest rate

compared to the interest rate of bank loan as there is no
provision for compensation balance in case of insurance
companies term loan. In some cases, insurance companies
sanction a larger amount of loan for a long time without
any security than commercial banks.
(6) Insurance company: Insurance comparing give range
amount of long term land to large and established term.
Underwriter
Underwriters work as a long term source of financing for
the joint stock companies. They provide assurance of
selling shares or bonds of public limited companies or the
companies those are newly established or those are not
well known in the capital market. They some times
purchase the shares or the bonds of the companies to
provide long term financing if those are not possible to sell
in the market. They charge a commission for this service.
Development Financing Institution
This type of financing institutions are created and directed
for the development of specific fields. B.S.B (Bangladesh
Shilpa Bank), B.S.R.S (Bangladesh Shilpa Rin Shangstha)
are working for the development of the industrial sector in
Bangladesh.
Leasing Company
Leasing companies play an important role for long term
financing. They provide financing through leasing function
to the different companies for the industrial development
by giving them the opportunity to use their fixed assets for
a particular period. Industrial Development Leasing
Company (IDLC), United Leasing Company (ULC), etc are

providing this service in our country. These companies
provide financing through giving the opportunity to use
fixed assets like computers, machineries, equipments under
various from of lease agreements.
Specialized Financial Institutions

This type of institution provides loan only to the business
institution having special purposes. So the firm doing
various activities other than a particular purpose, can not
collect loan from them. There are several institutions in
Bangladesh which provide this type of loan. They are-
1. Bangladesh House Building Finance Corporation
(BHBFC)
2. Bangladesh Krishi Bank (BKB)
3. Rajshahi Agriculture Development Bank (RADB)
4. Bangladesh Small and Cottage Industry Corporation
(BSCIC)
(7) Specialized financial institutions: In Bangladesh specialized

financial institutions like Bangladesh Shilpa Bank (BSB) and
Bangladesh Shilpa Rin Sangstha (BSRS) gives long term
industrial loan to large industries. Bangladesh Small and Cottage
Industries corporation (BSCIC) gives loan to smaller industries.
Bangladesh Krishi Bank (BKB) and Rajshahi Krishi Unnoyan
Bank (RAKAB) gives long term loan to agro-hased, fisheries,
livestock and forestry related industries.

Methods of raising long-term fund by a company
There are different methods of raising long-term fund by
a company. A business institution can collect long-term
finance by applying the following methods.
(1) Venture Capital: The capital which is provided by the

promoters to establish a new business institution at the
very beginning of a business, is known as venture
Capital. Venture capital is collected from different
sources. Among the sources the promoter’s own savings,
different financial institution such as Bank pension fund,
Trust, life insurance Company etc are main. Generally,
the following three ways are followed to invest venture
capital in the business institute.
Direct venture capital: In this way, promoters provide

necessary capital from their own savings after planning
and analyzing different projects.
Indirect venture capital: In this case promoters

present the potential financial profit of the projects to
the second party after planning and analyzing of those
projects and collect funds from them by ensuring
dividend.
Partnership venture capital: Promoters collect capital

in advance and start the project and make the project
suitable to the investor for investment and thereby
collect funds from them.

(2) Financing through sale of share: Business
institutions sell their shares to collect fund for a long
time to the general public or existing shareholders. As
long as a company is directed by promoter’s capital it is
known as a private limited company. But when it collects
its capital by selling shares to the public then it is known
as a public limited company. Different ways of collecting
fund through selling of shares are discussed below.
IPO (Initial Public Offering): If the promoters face

success in their own business using the capital provided
by themselves, they may go for issuing the shares of
their company to the public to collect additional capital.
Public Offering: When a company needs fund for a

long time in the time of operating its business activities
properly, it can collect it through public offering by
selling its shares to the public or to the existing
shareholders or to any financial institutions.
Initial Public Offering and Public offering are generally

completed through underwriting. There are various types
of investment banks which take this responsibility of
selling shares of the companies.
Direct Private Placement: Sometimes a company

does not sell its shares to the public rather it sells to
institutional investors, which is called Direct Private
Placement. Though it is done privately, the company
may take help from the investment bank in case of
choosing potential institutional investors and setting up
the conditions between the investors and the company.

(3) Financing through sale Bond: Apart from collecting
fund through venture capital, sale of share etc. a
company can raise long term fund through sale of bond.
Though public offering is followed in the process of
selling bond but most of the bonds are sold through
Direct Private Placement.
(4) Institutional loan: Intuitional loan is another

important way to raise long term fund for a company. By
using different types of security in a bank a company
can collect necessary amount of fund for a long time
from commercial banks, insurance companies, leasing
company, Investment Bank etc.
Instruments of Long term Financing
Two long-term securities or instruments available to a

company for raising capital are – shares and debentures.
Shares include Common (Ordinary) shares and Preference

shares. Common shares provide ownership rights to
investors. Debentures or bonds provide loan capital to the
company and in this time the investors get the status of
lenders. These instruments are elaborated as follows:
 Common Stock:
Basically, the total capital of an organization if divided into

smaller and equal proportion, which still represent the
ownership is called common stock. Common Stock is the
evidence of participation in the ownership of a corporation
that takes the form of printed certificates. Each share of
common stock constitutes a contract between the
shareholder and the corporation. The holders of common
shares, called shares or stockholders, are the legal owners
of the company. Common shares are the source of
permanent capital since they do not have a maturity date.
The owner of a share of common stock is ordinarily entitled
to participate in and to vote at stockholders' meetings- the
Annual General Meeting (A.G.M.), or at Extra-Ordinary
General Meetings (E.G.M.s). For the capital contributed by
share holders by purchasing common shares, they are
entitled for dividends. The amount or rate of dividend is not
fixed; it is declared by the company’s board of directors. A
common share is, therefore, known as a variable income
security. Being the owners of the company, shareholders
bear the risk of ownership; they are entitled to dividends
after the income claims of others have been satisfied.
Similarly, when the company is wound up, they can
exercise their claims on assets after the claims of other
suppliers of capital have been met.

Rights of the shareholders:
Shareholders may acquire the following rights and

privileges when they purchase shares of a company's
common.
 Right to income:
Common stock holders have a residual ownership right.
They have a right to the residual income, which is,
earnings available for common stockholders, after paying
expenses, interest charges, taxes and preference
dividend, if any. This income may be split into two parts,
dividends and retained earnings. Dividends are
immediate cash flows to shareholders. Retained earnings
are reinvested in the business, and shareholders stand to
benefit in the future in the form of the firm’s enhanced
value and earnings power and ultimately enhanced
dividend and capital gain. Thus, residual income is either
directly distributed to the shareholders in the form of
dividend or indirectly in the form of capital gains on the
common shares held by them.
Claim on income: Common stockholders have a residual

ownership claim. They have a claim to the residual income,
which is Earnings available for common stockholders, after
paying expenses, interest charges, taxes and preferred dividend
 Right to vote:
Owners of common stock have the right to vote on a
number of important company matters. The most
significant proposals include: election of directors and
change in the memorandum of association. For example,

they can vote on whether to allow a stock split, or
whether the objective of the company should be
changed. They cannot, however, vote on whether
dividends should be distributed.
Each common share carries one vote. Thus, a common

shareholder has votes equal to the number of shares
held by him. Shareholders also elect the management of
the corporation.
 Right of Proxy:
Shareholders may vote in person or by proxy. When
common stock holders can not present at the meeting,
he / she can take the help of proxy. A proxy gives a
designated person right to vote on behalf of a
shareholder at the company’s Annual General Meeting or
the shareholder can vote by filling a particular
application form.
 Preemptive Rights:
Preemptive rights may give shareholders the right to
keep their proportionate ownership of the company. If
the company offers a new issue of stock to the public,
shareholders are accorded the right to buy new shares
to keep their percentage of ownership the same. The
law grants shareholders the right to purchase new
shares in the same proportion as their current
ownership. Thus, if a shareholder owns 1 percent of the
company’s common shares, he has Pre-emptive right to
buy 1 percent of new shares issued. With preemptive
rights, they can maintain voting control, share of
earnings and share of assets.

Preemptive rights let common shareholders buy new
shares of stock before non-stockholders. Thus, these
rights assure the keeping of previous percentages of
ownership.
 Right to inspect books of accounts : Every

stockholder has the right to examine or inspect the
books of accounts of his company. But this right is
limited. If the management of the company thinks that
the Audited Financial Statement is enough to satisfy the
shareholders then it may deny disclosing other
documents to them. At that time shareholders can sue
against the management in the court.
 Right to claim on residual assets: Common stock

holders also have a residual claim on the company’s
assets in case of liquidation. Liquidation can occur on
account of business failure or sale of business. Out of
the realized value of assets, first the claims of debt-
holders and then preference shareholders are satisfied,
and the remaining balance, if any, is paid to common
stock holders. In case of liquidation, the claim of
common stock holders may generally remain unpaid.
) Claim on assets: Common stockholders also have a residual

claim on the company assets in the case of liquidation. Out of the
relaxed value of assets, first the claims of Bond-holders and then
Preferred stockholders are satisfied and the remaining balance, if
any, is paid to common stockholders. In a liquidation, the claims
of the many generally remain unpaid or partly paid.

Method of selling share to raise long-term capital
When a company requires long-term fund & it wants to

raise the fund by issuing common stock, the company can
appoint a number of methods to raise capital for sale of
share to raise capital from the market. Though a company
starts its business with promoter’s capital in initial stage,
later its sells its shares in the market. When company sells
its shares in the market for the first time, it is called Initial
Public Offering (IPO) and selling shares after first time is
called Public Offering (PO). Methods of selling shares for
both IPO and PO are same. They are-
Underwriting Method : Underwriting is a process by

which an underwriter firm, after having contact with the
company that wants to raise long-term fund, sells securities
on behalf of the company for commission. Normally an
investment firm performs the function of underwriter. In
our country, investment banks such as ICB or other banks
perform this function. Underwriter buys the shares at
discount price from the issuer and put best effort to sell all
the shares at an agreed upon price i.e. face value. If the all
shares are not sold at agreed upon price, the underwriter
keeps it i.e. buys it from the issuing company. The
difference between selling price and purchasing price of
shares is the profit of investment banks.
Functions of a investment bank :

Investment bank as issue manager or underwriter
performs a variety of activities. These include the
following:

 Underwriting: Investment banks work as
underwriter in the process of selling shares. All risks
associated with selling shares are borne by investment
banks.
 Counseling: Investment bank while performs as an

issue manager may also support the firm regarding
the following matters:
o Timing of the issue
o Price of the issue
o Amount of issue or size of the issue etc.
 Administrative support: Investment bank may

support the issuing company in terms of
administrative function i.e. in preparing required
documents & in fulfilling the regulatory obligations
etc.
 Distribution of share: Investment bank may

perform the allotment function i.e. select the investor
to whom a share or a no. of share will be distributed
either first come first serve basis or lottery basis &
then distribute share to them.
1. Best Effort Method : Company has investment bankers

to sell as many of new shares as possible at the agreed
upon price. There is no guarantee concerning how much
cash will be raised as all share many not be sold.
Underwriter put best effort & if the all shares are not sold
at agreed upon price, the issuer withdraws the share i.e.

the underwriter returns the unsold shares to the issuing
company. Here investment bank acts as an agent and work
for commission. The underwriter receives commission on
the basis of the success it has made i.e. the amount of
share it could have sold.
2. Shelf Registration : Shelf registration permits a

company to register an offering of potential number of
shares that it reasonably expects to sell within a certain
period of time (generally two years) . After self registration,
it can issue as much shares with the help of underwriters
as it requires by only providing notice to the registrar of
Joint Stock Company.
3. Right Issue Method : Company offers new stock

directly to its existing shareholders. If the company offers a
new issue of stock to the public, shareholders are accorded
the right to buy new shares to keep their percentage of
ownership the same. This is called Preemptive right.
Preemptive rights let common shareholders buy new shares
of stock before non-stockholders. By letting shareholders to
exercise this right, company collects long term capital from
the shareholders.
4. Private Placement : Sometimes a company does not

sell its shares to the public rather it sells to institutional
investors, which is called Direct Private Placement. Though
it is done privately, the company may take help from the
investment bank in case of choosing potential institutional
investors and setting up the conditions between the
investors and the company.

 Preferred Stock
Preferred stock is a hybrid security--- it is similar to bonds

in some respects and to common stock in others. The
hybrid nature of preferred stock becomes apparent when
we try to classify it in relation to bond and common stock.
Like bonds preferred stock has a par value. Preferred
dividends also are similar to interest payments in that they
generally are fixed in amount and must be paid before
common stock dividends can be paid. However, if the
preferred dividend is not earned, the directors can omit or
pass it without throwing the company into bankruptcy.
Accountants classify preferred stock as equity and report it

in the equity portion of the balance sheet under “preferred
stock” or “preferred equity”. However, financial analysis
sometimes treats preferred stock as debt and sometimes as
equity, depending on the type of the analysis being made.
If the analysis is being made by a common stack holder,
the key consideration is the fact that the preferred dividend
is fixed charge that reduce the amount that can be
distributed to common shareholders, so from the common
stockholder’s point of view preferred stock is similar to
debt. Suppose, however, that the analysis is being made by
bondholders studying the firm’s vulnerability to failure in

the event of a decline in sales and income. If the firm’s
income declines, the debt holders have a prior claim to
assets when the firm is liquidated. Thus, to a bondholder,
preferred stock is similar to common equity.
From management’s perspective, preferred stock lies

between debt and common equity. Because failure to pay
dividends on preferred stock will not force the firm to
bankruptcy, preferred stock is safer to use than debt. At
the same time if the firm is highly successful, the common
stockholders will not have to share the success with the
preferred stockholders because preferred dividends are
fixed. Preferred stockholders do have a higher priority claim
than the common stockholders. We see, then, that
preferred stock has some of the characteristics of debt and
some of the characteristics of common stock, and it is used
in situations in which conditions are such that neither debt
nor common stock is entirely appropriate.
What is Preferred stock? Discuss its features/ characteristics

or What are the major feature of Preferred stock? (BBA 2 nd
batch)
Ans. Preferred stock is a hybrid form of security combing the
features of Bond and Common stock. The characteristics of
Preferred stock are:
(1) Per value: The Preferred stock have par value or 1 nice value.
(2) Preference to dividends: The Preferred stockholders have
preference over common stockholders in receiving dividends.
Whenever dividend is declared the Preferred stockholders muse
revive their dividend before common stockholders.
(3) Preference over assets: In the even of liquidation of the firm,
the Preferred stockholders peccary a middle ground between.
Creditors and common stockholders. After the assets are

liquidated, the Bondholders are paid first. If any money self, the
Preferred stockholders are paid second. If money is still
remaining, it is shared by the coon stockholders. Just as
Bondholders can receive only assets equal to the face amount of
debt, so the Thanked stockholders can receive only the assets
equal to the part value of common stock. For $ 100 Preferred
stock, the maximum settlement in a liquidation is $ 100.
(4) Basically a fixed return: The maximum return on Preferred
stock is usually limited to stated dividend. Thus a 12%, $ 100 par
issue will return no more than $ 12 par share a year. However in
some case Preferred stock contains a participating feature that
allows the holders to share tin earnings above some specific
point.
(5) Indefinite life: Most Preferred stock issues have late
maturity. At the same time most issues have a call feature similar
to Corporate bonds. This slows the firm to retire an issue should
the firm decide to do so.
(6) Usually Nonvoting: Most Preferred stocks are not nonvoting.
In very rare cases. Prefers stockholders have limited voting
rights.
(7) Commutative Dividends: Most Preferred stocks have a
Curnulative features that requires umpped dividends to be carried
forward to the next. When this happens, the Preferred dividends
are said to be in arraigns. The dividends accumulated in arrears
must be paid before the corporation is allowed to pay any
Dividends on common stock. If the features is not present, the
stock is non-cumulative.
(8) Miscellaneous features: Preferred stock can have other
fetters similar to bonds. The stock certificate can provide that the
Preferred stock be convertible it to Common stock at the option
of the holder. The issue may provide for a Sinking, Found to all
with the orderly retirement of the stock over a period of time or at
the end of a certain period.

Major Provisions of Preferred Stock Issues
Preferred stock has a number of features. The most
important of which are discussed as follows:
Priority to Assets and Earnings: Preferred stockholders

have priority over common stockholders with regard to
earning and assets. Thus, dividends must be paid on
preferred stock before they can be paid on the common
stock, and, in the event o bankruptcy, the claims of
pr0eferred shareholders must be satisfied before the
common stockholders receive anything. To reinforce these
features, most preferred stocks have coverage
requirements similar to those on bonds. These restrictions
limit the amount of preferred stock a company can use,
and they also require a minimum level of retained earnings
before common dividends can be paid.
Par Value Unlike common stock, preferred stock always

has a par value (or its equivalent under some other name),
and this value is important. First, the par value establishes
the amount due the preferred stockholders in the event of
liquidation. Second, the preferred dividend frequently is
stated as a percentage of par values. For example, an issue
of Duke Power’s preferred stock has a par value $100 and
a stated dividend of 7.8 percent of par. The same result
would, of course, be produced if this issue of Duke’s
preferred stock simply called for an annual dividend of
$7.80.
Cumulative Dividends: Most preferred stock provides for

cumulative dividends; that is, any preferred dividend not
paid in previous period must be paid before common

dividends can be paid. The cumulative feature is a
protective device because if the preferred stock dividend
were not cumulative, a firm could avoid paying preferred
and common stock dividends for say, 10 years, plowing
back all its earnings and then pay a huge common stock
dividends but pay only the stipulated annual dividend to
the preferred stockholders. Obviously, such an action
effectively could void the preferred position the preferred
stockholders are supposed to have.
Convertibility: Approximately 40% of the preferred stock

that has been issued in recent years in convertible in to
common stock. For example, on march 25, 1999 global
Maintech issued 1600 shares of serious C convertible
preferred that can be converted in to a minimum of 400
shares of common stock at the option the preferred
stockholder.
Other Provisions: Occasionally found in preferred stocks

include the following:
1. Voting rights: all the preferred stock is not voting

stock, preferred stockholders generally are given the
right to vote for directors if the company has not paid
the preferred dividend for a specified period, such as
10 quarters. This feature motivates managements to
make every effort to pay preferred dividends.
2. Participating: A rare type of preferred stock is on that

participates with the common stock in sharing the
firm’s earnings. Participating preferred stock generally
work as follows: a) the stated preferred dividend is
paid---- for example, $5 a share; b) the common sock

is the entitled to a dividend in an amount up to the
preferred dividend; c) if the common dividend is
raised, say to $5.50, the preferred dividend must
likewise be raised to $5.50.
3. Sinking Fund: in the past (before the mid-970s), few

preferred issues has sinking funds. Today, however,
most newly issued preferred stocks have sinking funds
that called for the purchase and retirement of a given
percentage of preferred stock each year. If the
amount is 2%, which frequently is used, the preferred
issue will have an average life of 25 years and a
maximum life of 50 years.
4. Call Provision: Call provision give the issuing

corporation the right to call in the preferred stock for
redemption as in the case bond, call provisions
generally states that the company must pay an
amount greater than the par value of preferred stock,
the additional some being termed a call premium. For
example, Bangor Hydro-Electric Company has various
issues of preferred stock outstanding, tow of which
are callable. The call prices on the two issues are
$100 and $110. Before it was called in December
1997, Bangor had another callable preferred issue that
included a sinking fund provision.
5. Maturity: Before the mid-1970s, most preferred stock

was perpetual- it had no maturity and never needed
to be paid off. Today, however, most new preferred
stock has a sinking fund and thus an effective
maturity date.

Pros and Cons of Preferred Stock
There are both advantages and disadvantages to financing
with preferred stock.
Issuer’s (Firm’s) View Points: By using preferred stock, a

firm can fix its financial costs and thus keep more of the
potential future profits for its existing set of common stock
holders, yet still avoid the danger of bankruptcy if earnings
are too low to meet these fix charges. Also, by selling
preferred stock rather than common stock, the firm avoids
sharing control with new investors.
However preferred stock does have a major disadvantage

from the issuer’s standpoint: it has a higher after – tax cost
and capital than debt. The major reasons for this higher
cost are taxes: Preferred dividends are not deductible as a
tax expense, whereas interest expense is deductible. This
make the component cost of preferred stock much greater
than that of bonds—the after-tax cost of debt is
approximately two-thirds of the stated coupon rate for
preferred firms, whereas the cost of preferred stock is the
full percentage amount of the preferred dividend. Of
course, the deductibility differential is most important for
issues that are in relatively in high tax brackets. If a
company pays little or no taxes because it is unprofitably or
because it has a great deal of accelerated deprecation, the
deductibility of interest does not make much difference.
Thus, the lower a company’s tax bracket, the most likely it
is to issue preferred stock.
Bondholder’s (Investor’s) Viewpoints: In designing

securities, the financial manager must consider the points

of view. It is sometimes asserted that preferred stock has
so many disadvantages to both the issuer and the investor
that it should never be issued. Nevertheless, preferred
stock is being issued in substantial amounts. Is provides
investors with a steadier and more assured income than
common stock, and it has the preference the common
stock in the event of liquidation. In addition, 70% of the
preferred dividends received the corporation are not
taxable. For this reason, corporations own most preferred
stock.
Discuss the advantages and disadvantages of Preferred stock

Ans.
Advantages Disadvantages
1. The long term fund raised from 1. If the return from the project
issuing preferred stock can be where fund raised from
used as capital and as a result, preferred stock is invested is
Profitability and thereby EPS of less than the cost of
the firm may increase. Preferred stock, then it
2. In time of inflation the cost results in decline in the EPS.
financing of Preferred stock is 2. The Preferred divided is not
much less. a tax decidable expense. So
3. Preferred stockholders does not the time gets no tax benefit
have voting rights and thereby from prefaced stock.
controlling rights. So the 3. If the firm fails to pay
controlling rights of the existing Preferred dividend over a
shareholders does not decline. number of years then about
4. The inability to Preferred the firms financial condition
dividend does not make the and the market price of both
company insolvent. Preferred stock and common
stock declines.

Why a Preferred stock is called Horiba security? (B.Com. 93)
Ans. Preferred stock has come features of found.
(1) The bend deer generally goers a fixed mutest rate. Similarly.
They Preferred Stockholm proctored dividend at their fixed rate.
(2) Just like bond holders, Preferred stockholders don’t have the
right to vote.
(3) Bond generally have call provision. Most Preferred stock also
entail this provision.
Preferred stock has some features of Common stock:
(1) There is no such risk of insolvency in case Preferred stock and
common stock, there is no such risk of insolvency. They firms
pay dividend only if the firm has sufficient earnings. If the firms
is mable to pay dividends to Preferred stock and Common
stockholders, then the firm can’t be declared insolvent.
(2) The dividend payment to Preferred stock and common
stockholder are not considered tax deductible expense. So there is
no tax benefit from financing by. Preferred stock or common
stock.
Hence wee conclude that, Preferred stock is a hybrid security
combing the features of Bond and common stock.
 Debt capital
Long-term debt is often called funded debt. When a funds

its short term debt this means that it a replaces short terms
debt with securities of longer maturity, Funding does not
imply that the firm places money with a trustee or other
repository, it is simply part of the jargon of finances at it

means that the firm replaces short term with permanent
capital.
There are many types of long terms debt capital such as

term loans, bonds, secured and unsecured notes
marketable and non marketable debt and so on.
Term Loan: A loan, generally obtained from a bank or

insurance company, on which the borrower agrees to make
a series of payments consisting of interest and principal on
specific dates.
Bonds: A bonds is a long-term contract under which a

borrower agrees to make payments of interest and
principal on specific dates to the holder of the bond.
Although bonds traditionally have been issued with
maturities of between20 and 30 year’s in recent years
shorter maturities, such as seven to ten years have been
used to an increasing extent.
Basically we collect debt capital in two ways. One is
collection of institutional loan and another is selling by
bonds.
What is BOND? What are its characteristics.

or Briefly explain the important features of Bonds? (B. com.
93)
Ans. Bond is a long term debt instrument with a final maturity of
10 years of more. The characteristics of band are:
(1) Debt indenture: It a legal agreement, also called debt of
rivets, between the corporation issuing bonds and the
bondholders naming the Trustee am establishing the terms of the
bond issue and other importing matters.

(2) Maturity period: Bonds generally have a final maturity of 10
years of more. However some bands are perpetual.
(3) Call provision: Bonds may have Call Provision. That means
that the corporation issuing bonds can repurchase the bonds
before their maturity period. The firm may call back bonds for
various reasons.
(4) Denomination: Bonds are generally issues in the
denominations of Taka 1000. 3000 or 10000.
(5) Security of Collateral: Bond may be secured
(6) Voting rights: Normally bondholders do not have any voting
rights.
(7) Trustee: A trustee may be appointed to look after the interest
of the bondholders.
(8) Rate of interest: The fixed rate of interest or Coupon rate is
contained in the bond indenture. However, in the case of some
bonds interest rate may be variable.
(9) Priority in liquidation: In the case of the liquidation of a
firm, the bondholders get priority in payment over referred
stockholders and Common stockholders.
(10) Sinking fund: In many cases, there is a provision made in
the bond indenture to create a sinking fund that will enable the
bond issuing company to repay after the end of duration.
Institutional Loan: The most important part of long term

financing is institutional loan. Long term debt financing can
of ten be sued once a firm has established a report with a
bank or other financial institution, such an insurance
company or pension fund. For a small business, the small
business administration (SBA) can after be a good source
of loans:

Sell bonds: We can also collect debt capital by selling
bonds. Bonds have several types.
1. Classification on the basis of security: - Bonds can be

classified on the basis of security
(a) Unsecured bond: Unsecured bonds are issued

against the general credit of the borrower.
(b) Secured bond: Secured bonds have specific assets

of the issuer pledged as collateral for the bonds.
2. Classification on the basis of mortgage: -
(a) Mortgage Bond: - A bond backed by fixed assets.

First mortgage bonds are senior in priority to claims of
second mortgage bonds. There are tow types of
mortgage.
 Closed end mortgage: - Meaning that no new bonds

might be issued under the existing indenture.

 Open-end mortgage: - Meaning that new bonds might
be issued from time to time under the existing
indenture.
(b) Equipment trust certificate: - In this case debt can
be collect under secured equipment.
(c) Chattel mortgage: - Debt should be collect under

secured personal assets.
Other types of Bonds: -

(a) Income bond: - Income bonds pay interest only
where the firm has sufficient income to cover the
interest payments.
(b) Convertible bond: - A bond that is exchangeable,

at the option of the holder for common stock of the
issuing firm.
(c) Put bond: A bond that can be redeemed at the

bondholder’s options
(d) Callable bonds: Bonds subject to retirement at a

stated dollar amount prior to maturity at the option of
the issuer are known as callable bonds.
(e) Registered bonds: Bonds issued in the name of the

owner are called registered bonds. Interest payments
on registered bonds are made by cheek to bond
holders of record.
(f) Coupon bond or Bearer bond: Bonds not registered

are called bearer bonds. Holders of bearer bonds must
send coupons many be transferred directly in another
party
(g) Zero coupon bonds: - A bond that pays on annual
in interest but is sold at a discount below par, thus
providing compensation to investors in the form of
capital appreciations
Discuss the advantages and disadvantages of Bond.

Ans.
Advantages Disadvantages

1. Less cost: the bond is the 1. Decrease in EPS: If the firm
cheapest source of financing. As is unable to increase its net
the interest payments on bonds operating income, them EPS
are regarded as an expenses. may decrease due to the
2. Repayment method: in case of issuance of bond.
Bond, the purchasers and he 2. Insolvency: If the firm is
issuing firm can work out the unable to pay interest and
terms of repayment. principal, it can be declared
3. Fixed interest: In cases of Bank inforlvent or bankruni by
loan interest may be increased court.
for inflection. But in case of 3. Negative covenants Lnds
bond, it remains fixed. The may entiain these convents
effective debt but in becomes for examplethe firm may be
lighter in time of inflation. required to maintain
4. Flexibility: There may be minimum level of net
different options in the bound working capital.
indenture source as call 4. Negative convents Lands
provision, convertibility etc. may initial these convents for
5. Control: The bondholders have example the firm may be
no voting rights. So they can not required to maintain
control the management of a minimum level of net
firm. working capital.
Advantages of debt financing:
1. Low cost: - Normally collect debt financing is low cost

from others normal share.
2. Normal condition: - Except debt capital, for other long

term financing fixed repayment schedule must be
followed. But for debt capital repayment date can be
changed.

(a) Fixed interest: - Interest rates are always fixed in
every situation.
(b) Flexibility: - debt capital has some opportunity
such as call option convertibility etc.
(c) Control: - Debt capital holders have not Voting
right. So a Company never face debt holders inter fare
(d) More profit: - It when a company’s business
position is good in the market then company can sell
their bond and can profit. The cost of debt will low.
Disadvantages of debt financing:-
1. More real cost: - Though bond issue cheap their debt

financing cost, debt has a fixed amount of capital it
can never overtake a company. After take loan for
company’s Bankruptcy cost agency cost is are more
because bonds cost will high so financing will be loss.
It has another disadvantage that is earnings
per share are low.
Q.8. What is Bond indenture? What are the important

provisions included in a Bond indenture? (BBA 3rd batch)
Ans. End indenture is the legal agreement also called lead of
trust, between the corporation issuing bond and the bondholders,
establishing the terms of the bond issue and other important
matters.
The important provisions included in a Bond indenture are:

(1) General provisions: It includes such things as:
(a) The size of bond issue
(b) The role of interest
(c) Maturing day
(d) The date of payment of interest and maturity value
(e) The name of the Trustee
(2) Collateral provision: to case of debenture, there is no
collateral provision. In case of soured Hondas there are
provisions that if the firm is unable to repay then the Trustee will
takeover the mortgaged asset and sell it to pay off the debt.
(3) Protection provisions: There provisions are made to make
sure that the firm is able to repay the loan. These provisions
include:
(a) Recovery: If a bond issuing is unable to abide by any
provilch, them bondholders can demand their money back at any
time. Even they earn demand their money back by declaring the
firm Bankrupt or insolvent by jaking wait against the firm in
court.
(b) Acceleration clause: If a bond issuing its unable to abide by
any provision, then the bondholders can secrete their repayment
at any time, that is to get their money back before the maturity
date.
(c) Compulsory clause: This clause may include that bond
issuing firm a minimum level of Net Working capital, minimum
amount of dividend. Or it restricts on takeover and merger deals
or issue additional bonds without the promotion of the
bondholders.
(4) Repayment of Retirement-provisions: Among these:
(a) Call provision: This provision allows the bond issuing
company to call back or retire bounds before their maturity.
(b) Sinking fund: The bond issuing firm may be required to
create a sinking fund wilt helps to make sure that the firm is able
repay when the bonds become matured.

(c) Convertibility provision: There may be some convertibility
provision giving the bond holders the option to convert their
bonds into Common stock or Preferred stock after some period of
issuing the bonds.
Q.9. Briefly discuss different kind of Long-term debt.

(B.Com. 92)
or What are the different forms of Bonds? (B.com 93)
or Discuss the different types of debt financing? (BBA 1 st
batch)
Ans. The different type of Bonds are:
(1) Debenture: Debenture refers to the unsecured bonds of the
corporation.
(2) Secured bond: It refers to a bond for which issuer assess are
peddled as collateral.
(3) Subordinated debenture: A long term unsecured debt
instrument with a lower claims on assets and income, than other
classes of debt. It is also known as junior bond.
(4) Income bond: A bond where the payment of interest is
contingent on the sufficient earning of the firm.
(5) Blue chip found: Blue chip bond are the bast quality at is
time. These bonds are high rated as AAA bonds.
(6) Junk bond: A high yield high risk (often unsecured) bond
rated below investment grade.
(7) Mortgage bond: It refers to a bond secured by issuer’s
property.
(8) Equipment trust certificate: An intermediate to long term
security usually issued by a transportation company.
(9) Convertible bonds: A bond which can be converted to
Common stock or Preferred stock is called Convertible bond.

(10) Callable bond: It refers to a bond which includes a call
provision that is a provision that allows the hand issuing company
to call back or retire the bonds before its maturity.
(11) Put bond: It refers to a bond for which the bond holder may
have to purchase more bond in the future.
(12) Zero coupon bond: It refers to a bond which is sold at a
discount and the difference between the maturity value and
purchase value is the bondholders gain.
(13) Fixed income bearing bond: It refers to a bond in which the
bond is paid at a fixed rare.
(15) Registered bond: The registered bond specify in the register
of the company who is/ are the present owner of the bond and to
whom interest is payable.
(16) Coupon bond or Bearer bond: The Bearer bond does not
spective in the register of the company who is/ are the present
owner of the bond. The holder of the bond is entailed to receive
the interest upon claim.
(17) Perpetual bond: It is a bond which has no maturity period.

Long Term Financing-Final+raw

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Long Term Financing-Final+raw

Uploaded by

Copyright:

Available Formats

Long Term Financing

Generally, business institute needs two types of capital to

Long term capital is generally used to purchase the long

To fulfill the long term objective of any business

Many financial analysts have presented numerous

According to J J Hampton, “long term financing generally

Tanzina Hossain, M.B.A (Finance), Dhaka University

So it is clear from the above definitions that financing for 7

Characteristics of long-term financing

The characteristics of long-term financing are as follows:

1) Size of fund: Since long term financing is used for

2) Use of fund: The fund from long term financing is used

3) Nature of fund: The capital collected by long-term

Tanzina Hossain, M.B.A (Finance), Dhaka University

4) Duration: Usually the duration of long-term financing is

5) Repayment method: The repayment method of this

6) Security: A borrower has to maintain security against

7) Claim on Income: We know that long-term capital has

 Preference on claim: The lender is preferred to the

 Certainty on claim: The borrowers must pay their

Tanzina Hossain, M.B.A (Finance), Dhaka University

 Claim on asset: The bond holder has preferred claim

8) Cost of capital: Usually the cost of long-term capital is

9) Flexibility: There is a lot of flexibility in case of

10) Participation in management: The owner can

Tanzina Hossain, M.B.A (Finance), Dhaka University

All kinds of firms need some amount of Long term Capital

The many applications of Long term financing are:

Tanzina Hossain, M.B.A (Finance), Dhaka University

Tanzina Hossain, M.B.A (Finance), Dhaka University

Sources of long term financing

There are two sources of long term financing. They are-

Internal Sources: When the fund is collected from

Tanzina Hossain, M.B.A (Finance), Dhaka University

(A) Internal Sources of Financing:

Internal financing indicates that the fund is collected from

There are two types of internal sources:

1) Promoter’s initial capital

1. Promoter’s Initial Capital: Promoter’s initial capital is

Tanzina Hossain, M.B.A (Finance), Dhaka University

Share capital: It is the first source of internal financing. It is the

In sole proprietorship business In sole proprietorship

Partnership Business Minimum two & maximum 20

Joint Stock Company Joint Stock Company is of two

Tanzina Hossain, M.B.A (Finance), Dhaka University

2. Retained Profit: A major source of long-term finance

) Retained earnings: The part of profit which is retained after

a) General Reserve: When the total profit is not

Tanzina Hossain, M.B.A (Finance), Dhaka University

(3) General reserve: After distributing dividend the retained

b) Dividend Equalization Fund: Shareholders of any

(6) Dividend equalization fund: If a firm wants to follows stable

Tanzina Hossain, M.B.A (Finance), Dhaka University

d) Workmen’s Compensation & Welfare Fund: This

(8) Workmen’s compensation and Welfare fund: If any

e) Credit Balance after profit & loss: The amount from

Tanzina Hossain, M.B.A (Finance), Dhaka University

5) Credit balance of profit and Loss Account: By preparing

(B) External sources: External sources are of two

a) Owners Capital from Capital

a) Owners Capital from Capital Market

Tanzina Hossain, M.B.A (Finance), Dhaka University