Transcript Chapter
KITNE SOURCE
HAIN --------------Financial Management, Ninth Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
1
Sources of Funds and
Capital Structure
Rahul jain
Equity Shares–Features
Claim on Income
Claim on Assets
Right to Control
Voting Rights
Limited Liability
Financial Management, Ninth Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
3
Ordinary Shares–Pros and Cons
Advantages
1.
2.
3.
Permanent Capital
Borrowing Base
Dividend Payment Discretion
Disadvantages
1.
2.
3.
4.
Cost
Risk
Earnings Dilution
Ownership Dilution
Financial Management, Ninth Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
4
Right Shares – Pros and Cons
Advantages
1.
2.
3.
Control is maintained
Less flotation cost
Issue more likely to be successful
Disadvantages
1.
Shareholders lose if fail to exercise their right
Financial Management, Ninth Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
5
Debentures–Features
Interest Rate
Maturity
Redemption
Sinking Fund
Indenture
Security
Yield
Claim on Assets and Income
Financial Management, Ninth Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
6
Types of Debentures
Non – Convertible Debentures
Fully – Convertible Debentures
Partly – Convertible Debentures
Financial Management, Ninth Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
7
Debentures–Pros and Cons
Advantages
1.
2.
3.
Less Costly
No ownership Dilution
Fixed payment of interest
Disadvantages
1.
2.
3.
4.
Obligatory Payment
Financial Risk
Cash outflows
Restricted Covenants
Financial Management, Ninth Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
8
Term Loans–Features
Maturity
Direct Negotiations
Security
Restrictive Covenants
1.
2.
3.
4.
Asset related covenants
Liability related covenants
Cash flow related covenants
Control related covenants
Convertibility
Repayment Schedule
Financial Management, Ninth Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
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Preference Shares
Similarity to Ordinary Shares:
1.
2.
Non payment of dividends does not force
company to insolvency.
Dividends are not deductible for tax purposes.
Similarity to Debentures:
1.
2.
3.
Dividend rate is fixed.
Do not share in residual earnings.
Usually do not have voting rights.
Financial Management, Ninth Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
10
Preference Shares–Features
Claim on Income and Assets
Redemption
Sinking Fund
Convertibility
Financial Management, Ninth Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
11
Preference Shares–Pros and Cons
Advantages
1.
2.
3.
4.
Risk less Leverage advantage
Dividend postponability
Fixed dividend
Limited Voting Rights
Disadvantages
1.
2.
Non-deductibility of Dividends
Commitment to pay dividends
Financial Management, Ninth Edition © I M Pandey
Vikas Publishing House Pvt. Ltd.
12