CHAPTER 25:

SOURCES OF LONG-TERM
FINANCING
 SOURCES OF CAPITAL FOR BUSINESS FIRMS

Suppliers of Debt Financing Suppliers of Equity

Financing
 TERM LOANS
• COMMON CHARACTERISTICS
a) Have maturities of more than 1 to
10 years
b) are repaid in periodic
installments over the life of the
loan
c) Are usually secured by a chattel
mortgage on equipment or a
mortgage on real property
MATURITY
.
the agreed-upon date on which the investment
ends, often triggering the repayment of a loan or
bond, the payment of a commodity or cash
payment, or some other payment or settlement
term.
 DEBT FINANCING
ADVANTAGE DISADVANTAGE

1. Interest payments are tax-

deductible
2. The financial obligation is clearly
specified and of a fixed nature
3. Inflationary Economy may be
paid back with cheaper peso
4. Use of debt up to a prudent point
may lower its capital to the firm

COLLATERAL
• an item of value pledged to secure
a loan. Collateral reduces the risk
for lenders. If a borrower defaults
on the loan, the lender can seize
the collateral and sell it to recoup
its losses. Mortgages and car loans
are two types of collateralized
loans.
RESTRICTIVE
COVENANTS
• clauses that prevent, prohibit,
restrict, or limit the actions of a
person or entity named in a contract.
Restrictive covenants are common
in real estate transactions and apply
to everything from the colors you
can paint your house to how many
tenants can live in a building.
REPAYMENT
SCHEDULE

• the act of paying back money

previously borrowed from a
lender. Typically, the return of
funds happens through periodic
payments, which include both
principal and interest. The
principal refers to the original
sum of money borrowed in a
loan.
 BONDS
TRADING PROCESS FOR CORPORATE BONDS

• can be bought and sold in the “secondary

market” after they are issued. While some
bonds are traded publicly through
exchanges, most trade over-the-counter
between large broker-dealers acting on
their clients' or their own behalf.
FIRM COMMITMENTS UNDERWRITING OF A CORPORATE
BOND

Competitive sale

Negotiated sale

Best efforts underwriting basis

Bond features and prices

PAR VALUE
COUPON INTEREST RATE
MATURITY
INDENTURE
CURRENT YIELD
YIELD TO MATURITY
FORMULA:
Credit Quality Risk

BOND RATINGS
It is a chance that the Involve judgment about the
bond issuer will not be future risk potential of the
able to make timely bond provided by rating
agencies.
payments.
Credit Ratings
 UNSECURED LONG-TERM BONDS

Debentures

Subordinated Debentures

TYPES OF
BONDS Income bonds

B. SECURED LONG-TERM BONDS

Mortgage Bonds

• First mortgage bonds

b) Second mortgage bonds
c) Blanket or general Mortgage
bonds
d) Closed-end mortgage bonds
e) Open-end mortgage bonds
f) Limited Open-end mortgage
bonds
 FLOATING RATE OR VARIABLE BONDS

JUNK OR LAW-BONDS
Other types of
Bonds
EURO BONDS

TREASURY BONDS
METHODS OF RETIRING DEBT

SERIAL CONVERSION CALL BOND

PAYMENTS PROVISION REFUNDING
PREFFERED SHARE

a type of security that offers characteristics

similar to both common shares and a fixed-
income security. The holders of preference
shares are typically given priority when it
comes to any dividends that the company
pays.
PREFERRED SHARE
FEATURES
1. PAR VALUE
2. DIVIDENDS
3. CUMULATIVE AND NON CUMULATIVE
DIVIDENDS
4. NO DEFINITE MATURITY DATE
5. CONVERTIBLE PREFERRED SHARE
6. VOTING RIGHTS
7. PARTICIPATING RIGHTS
8. PROTECTIVE FEATURES
9. CALL PROVISON
10. MATURITY
Advantages and disadvantages of financing with
preferred value

ADVANTAGES DISADVANTAGES
1. FINANCING FLEXIBILITY 1. HIGH COST
2. FAVORABLE FINANCIAL
LEVERAGE 2. SENIORITY OF THE
3. NO DILUTION OF CONTROL HOLDER’S CLAIM
4. NO MATURITY
5. ASSET PRESERVATION
6. NO EQUAL PARTICIPATION IN
EARNINGS
PREFERRED
SHARE
VALUATION
 ORDINARY
EQUITY SHARE
Features of Ordinary
Equity shares
1. PAR VALUUE/ NO PAR VALUE
2. AUTHORIZED, ISSUED AND OUTSTANDING
3. NO MATURITY
4. VOTING RIGHTS
5. BANK VALUE PER SHARE
6. NUMEROUS RIGHTS OF STOCK HOLDER
2 COMMON SYSTEMS OF VOTING

MAJORITY CUMULATIV
VOTING E
COMPARATIVE
FEATURE OF
ORDINARY EQUITY
SHARES, PREFERRED
SHARES AND DEBT
ORDINARY EQUITY SHARES OVER
PREFERRED SHARES AND BOND

ADVANTAGES DISADVANTAGES
1. No mandatory fixed charges 1. Dilution of Control and
2. No definite maturity date Earnings
3. Potentially greater ease of sale 2. Higher issue cost
4. Increased creditworthiness
3. Cause increase in
5. Avoidance of restrictive component cost of capital
provisions
6. From a social view points