Chapter 4

Long Term Financing

Definition of long term financing:
There is no definite and universal
definition or predetermined time
frame for long term period.
Normally, financing with maturity
from 7-15 years and maximum for
20 years is called long term
financing. It is made up of long-
term debt, common stock, preferred
stock and retained earnings.
Instruments of long term financing:

i.Common stock
ii.Preferred stock
iii.Bond or Debenture
iv.Warrant
v.Convertible Security
 Common stock:
Common stock is security that
represents the ultimate ownership and
risk position in a company. Common
stock is the small and equal portion of
the share in the ownership of a
company. The common stockholders
differ from bond and preferred
stockholders with respect to claim on
asset, claim on income, voting rights
and the protection of their position as
owners.
 Preferred stock:

Preferred stock is a type of stock that

promises a fixed dividend. It has
preference over common stock in
the payment of dividend and claim
on assets.
 Bond and Debenture:

A bond is a long term contract

under which a borrower agrees
to make payments of interest
and principal on specific dates
to the bondholder.
 Warrant:
Warrant is a relatively long
term option to purchase
common stock at a specified
exercise price over a
specified period of time.
 Convertible security:

It is a bond or a preferred stock

that is convertible into a
specified number of shares of
common stock at the option of
the holder.
Definition of Hybrid Security
Hybrid security is a form of debt or
equity financing that possesses
characteristics of both debt and
equity financing.
Why preferred stock is called Hybrid
Security?
Preferred stock is a unique type of long-
term financing that combines some of
the features of equity as well as bonds. A
s a hybrid form of financing preferred
stock is similar to bond insofar as:
i. It carries a fixed rate of dividend.
ii.It ranks higher claim to income/assets
than common stock.
iii.It normally does not have voting rights.
iv.It does not have a share in residual
earnings/assets.
On the other hand, it is similar to common
stock in that-
i. The non-payment of dividends does not
force the company to insolvency.
ii. Dividends are not deductible for tax
purposes.
iii. In some cases, it has no fixed maturity
date.
Thanks to All