LONG-TERM FINANCE

Finance is defined as the provision of money at the time

when it is required. Every enterprise, whether big,
medium or small needs finance to carry on its operations
and to achieve its targets.

Long term funds are required to create production facilities

through purchases of fixed assets such as plant,
machinery, land, building, furniture etc. investment in
these assets represent that part of firm’s capital which is
blocked on a permanent or fixed basis and is called fixed
capital.
 Equity Shares

 Preference share

 Debentures

 Public deposits
Equity shares, also known as ordinary shares or commonn shares,
represent the owner’s capital in a company. The holders of these
shares are the real owners of the company. They have a control
over in working of the company. Equity shareholders are paid
dividend after paying it to the preference shareholders. The rate
of dividend on these shares depend upon the profits of the
company.
Characteristics of Equity shares:-
1. Maturity
2. Claims /Right to income
3. Claim on Assets
4. Right to control or voting rights
5. Pre-emptive Right
6. Limited liability
PROS AND CONS OF EQUITY FINANCING
Advantages:-
1. Voting rights
2. Right to sell or Transfer equity shares
3. Permanent Capital
4. Pre-Emptive Rights
5. Right to receive annual report

Disadvantages:-
1. Paid after Tax
2. Dividend paid after preference share holders
3. Risk of not getting dividend
PREFERENCE SHARES
As The name suggest , preference share is a type of security through
which a company obtain funds in exchange for certain type of
preferential treatment to its share holders, which are not
usually accorded to holder of the equity share.

Characteristics of Preference shares:

1. Claims on income and assets
2. Fixed dividend
3. Redemption
4. Voting rights
5. convertibility
A debenture is a long-term promissory note for raising loan capital. The firm
promises to pay interest and principal as stipulated. The purchasers of
debentures are called debenture holders.

 Non Convertible Debentures (NCD): These instruments retain the debt

character and can not be converted in to equity shares 
 Partly Convertible Debentures (PCD): A part of these instruments are
converted into Equity shares in the future at notice of the issuer. The issuer
decides the ratio for conversion. This is normally decided at the time of
subscription
 Fully convertible Debentures (FCD): These are fully convertible into Equity
shares at the issuer's notice. The ratio of conversion is decided by the issuer.
Upon conversion the investors enjoy the same status as ordinary shareholders
of the company. 
 Optionally Convertible Debentures (OCD): The investor has the option to either
convert these debentures into shares at price decided by the issuer/agreed upon at
the time of issue. 

 Secured Debentures: These instruments are secured by a charge on the fixed

assets of the issuer company. So if the issuer fails on payment of either the
principal or interest amount, his assets can be sold to repay the liability to the
investors 

 · Unsecured Debentures: These instrument are unsecured in the sense that if the

issuer defaults on payment of the interest or principal amount, the investor has to
be along with other unsecured creditors of the company
1. Interest rate
2. Maturity
3. Redemption
4. Buy-back (call) provision
5. Security
6. Claims on asset
7. Claims on income
 AAA ( highest safety)
 AA (high safety)
 A (adequate safety
 BBB (low safety)
 BB (Inadequate safety)
 B (high risk)
 C (substantial risk)
 D( in default)
Advantages:-
1. Less costly
2. No ownership dilution
3. Fixed payment of interest
4. Reduced real obligation

Demerits:-
1. Obligatory payments
2. Financial risk
3. Cash outflows
 Meaning of "public deposits".

 Besides the issue of shares- equity and preference and debentures, a company can
accept deposits from the public to finance its medium and short-term
requirements of funds. This source has become very popular recently because, a
company offers interest at a rate higher than offered by banks. Under this method,
companies are able to obtain funds directly from public without
financial intermediaries.
 I. It is beneficial to the company accepting deposits since it receive
finance at a lower rates of interest than charged by the banks and special
financial institutions on lending.

 II. Interest paid on deposits is a deductible expense for income tax

purpose.

 III. Administrative cost of deposits is lower than that involved in issuing

shares and debentures. The company has to fulfil lesser formalities in
accepting public deposits.
 IV. As the rate of interest on public deposits is fixed.

 V. Depositors have no interference in the management and control of the

affairs of the company as they have no voting rights. Thus, there is no
dilution of control of shareholders. 
Factors determining fixed capital requirements

1. Nature of business

2. Size of business

3. Stage of development

4. location of that area

5.Economic condition
 What is long term source of Finance
 Types of sources of finance
 What is equity shares, preference & debentures
 Diff between them
 Factor affecting long term finance