1] Characteristics of Equity Shares
1. Maturity of the shares 2. Residual claim on
income 3. Residual claims on assets 4. Right to
control 5. Voting rights 6. Pre-emptive right 7.
Limited liability
Merits of Equity Shares 1. Permanent sources of
finance 2. Voting rights 3. No fixed dividend 4.
Less cost of capital 5. Retained earnings
Demerits of Equity Shares 1. Irredeemable 2.
Obstacles in management 3. Leads to speculation
4. Limited income to investor 5. No trading on
equity 6. Ownership Dilution
2] Characteristics of Preference Shares
1. Maturity period 2. Residual claims on income
3. Residual claims on assets
4. Control of Management
Types of Preference Shares
1. Cumulative 2. non-cumulative
3. Redeemable 4. Irredeemable
5. Participating 6. Non-Participating
7. Convertible 8. Non-convertible
Merits of Preference Shares
1. Fixed dividend 2. Cumulative dividends
3. Redemption 4. Participation
5. Convertibility
Demerits of Preference Shares
1. Expensive sources of finance 2. No voting right
3. Fixed dividend only 4. Permanent burden
5. Taxation
3] Characteristics of Debentures
1. Maturity period 2. Residual claims in income
3. Residual claims on asset 4. No voting rights
5. Fixed rate of interest
Merits of Debenture 1. Long-term sources 2.
Fixed rate of interest 3. Trade on equity 4. Income
tax deduction 5. Protection
Demerits of Debentures 1. Fixed rate of interest
2. No voting rights 3. Creditors of the company 4.
High risk 5. Restrictions of further issues
4] Characteristics of Term Loans
1. Security 2. Obligation 3. Interest 4. Maturity
5. Restrictive Covenants 6. Convertibility
Merits of Term Loans:
i) From Point of View of the Borrower:
1. Cheap 2. Tax Benefit 3. Flexible 4. Control
ii) From Point of View of the Lender:
1. Secured 2. Regular Income 3. Conversion
Demerits of Term Loans i) From Point of View
of the Borrower 1. Obligation 2. Risk
3. Interference ii) From Point of View of the
Lender 1. Negotiability 2. Control
5] Symptoms of Over Capitalization
1. High proprietary ratio 2. Low earnings per share
3. Low assets utilization particularly with a lot of
fixed assets and small revenue generated 4. Too
much capital invested in unproductive fixed assets
Causes of Over Capitalization
1. Over-issue of capital 2. Promotion, formation
or development during inflation 3. Buying assets
of lower value at higher prices 4. High Promotion
expenses 5. Inadequate depreciation 6. Liberal
dividend policy 7. Taxation Policy 8. Inadequate
demand for products 9. Payment of high rate of
interest 10. Under-estimation of capitalization rate
Effects of Over Capitalization
A. Effects on the Company: (i) Loss of goodwill
(ii) Poor creditworthiness (iii) Difficulties in
obtaining capital (iv) Decline in efficiency of the
company (v) Loss of market (vi) Inflated profits
(vii) Liquidation of company
B. Effects on Shareholders: i) Reduced dividends
(ii) Fall in the value of shares (iii) Unacceptable
as collateral security (iv) Loss on speculation
(v) Loss on re-organisation
C. Effects on Society (i) Loss to Consumers (ii)
Loss to Workers
Remedies for Over-Capitalization:
1. To have Efficient Management 2. Redemption
of Preference Shares 3. Reduction of Funded Debts
4. Reorganization of Equity Share Capital
6] Causes of Under Capitalization
1. Under-Estimation of Capital Requirements
2. Under-Estimation of Future Earnings
3. Promotion during Depression 4. Conservative
Dividend Policy 5. Very Efficient Management
6. Desire of Control and Trading on Equity
Effects of Under Capitalization:
1. Limited marketability of shares
2. Industrial unrest 3. Consumer dissatisfaction
4. Government interference
5. Inadequacy of capital 6. Cut-throat competition
Remedies for Under-Capitalization:
1. Fresh Issue of Shares 2. Issue of Bonus Shares
3. Increasing the Par Value of Shares
4. Splitting Stock
7] Scope of Business Finance
1. Financial Planning and Control 2. Deciding
Capital Structure 3. Selection of Source of Finance
4. Financial Statement Analysis 5. Working Capital
Management 6. Capital Building 7. Management
of Financing 8. Dividend Management
8] Profit Maximization: 11] Factors influencing the capital structure
Profit Maximization is the capability of the firm in 1. Risk of cash insolvency 2. Risk in variation
producing maximum output with the limited input, of earnings 3. Cost of capital 4. Trading on equity
or it uses minimum input for producing stated 5. Government policies 6. Size of the company
output. It is termed as the foremost objective of the 7. Needs of the investors 8. Period of finance
company. 9. Nature of business 10. Purpose of financing
Wealth Maximization: 12] Types of Leasing
Wealth maximization is the ability of a company to A) Lease based on the term of lease
increase the market value of its common stock over 1) Finance Lease 2) Operating Lease
time. The market value of the firm is based on B) Lease based on the method of lease
many factors like their goodwill, sales, services, 1) Sale and lease back 2) Direct lease
quality of products, etc. C) Lease based in the parties involved
9] Factors Influencing Investment Decisions 1) Single investor lease 2) Leveraged lease
1. Technological change 2. Competitors' strategy D) Lease based in the area 1) Domestic lease
3. Demand forecast 4. Type of management 13] Cash Management Techniques / Processes
5. Fiscal policies 6. Cash flow 1) Cash Management Planning 2) Cash
7. Return expected from the investment Management Control i) Accelerating Cash Inflows
10] Factors influencing dividend decisions ii) Controlling Cash Outflows 3) Determining the
1. Legal constraints 2. Contractual constraints Optimum Cash Balance 4) Investing Surplus Cash
3. Internal constraints 4. Growth prospects 14] Cardinal Principles of Capital Structure
5. Owner considerations 6. Market Considerations A) Cost Principle B) Risk Principle
7. Taxation C) Control Principle D) Flexibility Principle
E) Timing Principle