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.
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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.
9
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