Long Term Financing. A topic of corporate Finance.

1. Long Term financing:
Long term financing is a form of financing that is provided for a period of more than a year.
Long term financing services are provided to those business entities that face a shortage of
capital. Equity is another form of long-term financing, such as when a company issues stock to
raise capital for a new project.
Purpose of Long Term Finance:
 To finance fixed assets.
 To finance the permanent part of working capital.
 Expansion of companies.
 Increasing facilities.
 Construction projects on a big scale.
 Provide capital for funding the operations. This helps in adjusting the cash flow.
Factors determining Long-term Financial Requirements:
 Nature of Business
 Nature of Goods produced
 Technology used
Common Stock:
Securities that represent the ultimate ownership & risk position in a corporation. Common stock
is a component of shareholder equity on a company's balance sheet which represents the interest
of the company's owners.
Unlike a sole proprietorship or a partnership (in which the capital is contributed by one or a
limited number of people), companies are normally owned by hundreds and thousands of people.
The share capital of companies is divided into large numbers of shares called common shares. A
common share is evidence of ownership in a company and represents a right to its net assets. It
makes transfer of ownership easy and is the prime reason for popularity of companies as a form
of business.
Objectives and Risks:
Over the long term, no investment provides better returns at a reasonable risk than common
stock. History dictates that common stocks average 11-12% per year and outperform just about
every other type of security including bonds and preferred shares. Stocks provide potential for
capital appreciation and income and offer protection against moderate inflation.

2. Strengths:
 Common stock is very easy to buy and sell.
 Thanks in large part to the growth of the Internet, it is very easy to find
reliable information on public companies, making analysis possible.
 There are over 11,000 public companies in North America to choose from.
Weaknesses:
Your original investment is not guaranteed. There is always the risk that the stock you invest in
will decline in value, and you may lose your entire principal.
Your stock is only as good as the company in which you invest - a poor company means poor
stock performance.
Three Main Uses:
1. Capital Appreciation
2. Income
3. Liquidity
Features of Common Stock
Par value:
Par value is also referred to as face value, par or nominal value of common stock. Par value
refers to the value written on the face of the common stock certificate or in the corporation’s
organization or operating documents. In the formation of a corporation and registration with the
secretary of state, many states mandate that the founders issue stock with a specified par value.
Legal Liability of Par Value:
The par value mandate creates a subsequent legal liability that the shareholders of this stock
contribute, at a minimum, this face value of the stock in order to fund the company. If the
shareholders don't do so and the corporation requires the funds, these shareholders would be
liable for the difference between the actual issue price and the face value, if the issue price is less
than the face value, essentially “under par.”
Par Value Importance:
Par value is an important term for any small business owner or aspiring entrepreneur to
understand prior to forming a corporation, issuing stock or pursuing investors. Although it is
primarily a legal and accounting term, improper understanding could lead to difficult
consequences. For example, a business issuing 1,000 shares stock at a par value of $10.00
creates an immediate on paper capitalization, or book value, of $10,000.
No Par Value:

3. Stock that is issued without the specification of a par value indicated in the company's articles of
incorporation or on the stock certificate itself. Most shares issued today are classified as no-par
or low-par value stock. No-par value stock prices are determined by what investors are willing to
pay for them in the market.
Companies find it beneficial to issue no-par value stock as they have flexibility in setting higher
prices for future public offerings and have less liability to shareholders in the case that their stock
falls dramatically. Such shares are common in Belgium, Canada, and the US, but illegal in the
UK. Example, Apples Inc. has no par value assigned to its shares.
Authorized Common Stock:
Incorporating a business means issuing stock. A business owner must take into account not only
how many shares of stock the company needs at the time it incorporates, but how many it might
need in the future as the company grows and adds investors. The incorporation documents spell
out how many shares the company is allowed, or authorized, to make available. It will be up to
the leadership to decide how many of those to actually issue.
When a company incorporates, no matter its size, it files a charter with its state government.
Often called the articles of incorporation, the charter provides the basics of the company: the
name, the address, the purpose of the business and so on. The articles of incorporation typically
must describe the new corporation's stock structure -- specifically, what kinds of stock it will
distribute to its owners and the total number of shares it can make available. That number is the
company's authorized shares. The authorized number can be changed only by a vote of the
shareholders. The authorized number of shares is the maximum number the company can sell.
However, the company is not obligated to make that many shares available. In fact, many
companies authorize far more shares than they sell. To take a familiar example, General Electric
is among the companies that have made the most shares available to the public. At the end of
2011, the company had sold nearly 11.7 billion shares to the public. However, it was authorized
to sell as many as 13.2 billion. Having "extra" authorized shares gives the company the ability to
sell more if necessary to raise cash.
Issued Common Stock:
When authorized shares of common stock are sold, they become issued share.
The total number of a company's shares that have been sold and are held by shareholders. Issued
stock can be held both by insiders and by the general public. Issued shares include the stock that
a company sells publicly in order to generate capital and the stock given to insiders as part of
their compensation packages. Unlike shares that are held as treasury stock, shares that have been
retired are not included in this figure. The amount of issued shares can be all or part of the total
amount of authorized shares of a corporation. The total number of issued shares outstanding in a
company is most often shown in the annual report.

4. Capital Surplus:
Stockholders equity in excess of par value of common stock (ordinary shares), representing
excess of assets over liabilities.
A capital surplus is the additional paid-in capital in excess of par value that an investor pays
when buying shares from the issuing entity. The term is no longer commonly used; instead, the
concept is now called additional paid-in capital in the accounting literature.
For example, if ABC Company were to sell 100 shares of its $1 par value common stock for $9
per share, it would record $100 of the $900 in total proceeds in the Common Stock account and
$800 in the Additional Paid- in Capital account. In earlier days, the $800 entry to the Additional
Paid-In Capital account would instead have been made to the Capital Surplus account.
Thus, if the capital surplus term were still used, a company would acquire a capital surplus by
selling its stock to investors at a price above the designated par value of the stock, with the
incremental amount above the par value being identified as capital surplus.
Retained Earnings:
Retained earnings are the portion of a company's net income which is kept by the company
instead of being paid out as dividends to equity holders. This money is usually reinvested into
the company, becoming the primary fuel for the firm's continued growth, or used to pay off
debts. Calculating retained earnings and preparing a statement of retained earnings is an
important part of any accountant's job. Usually, retained earnings for a given reporting period is
found by subtracting the dividends a company has paid to stockholders from its net income.
Why it Matters:
It is important to understand that retained earnings do not represent surplus cash or cash left over
after the payment of dividends. Rather, retained earnings demonstrate what a company did with
its profits; they are the amount of profit the company has reinvested in the business since its
inception. These reinvestments are either asset purchases or liability reductions.
Retained earnings somewhat reflect a company's dividend policy, because they reflect a
company's decision to either reinvest profits or pay them out to shareholders. Ultimately, most
analyses of retained earnings focus on evaluating which action generated or would generate the
highest return for the shareholders.
Differentiation:
Both retained earnings and capital surplus represent an increase in the shareholders’ equity of an
organization, but both affect it in different ways. Contributed surplus is the amount of money or
assets invested in the company by shareholders, while retained earnings are the profits made by

5. the organization but that have not yet been paid out to shareholders. Surplus can be thought of as
checks shareholders are writing to the organization, while retained earnings can be thought of as
the shareholders choosing to leave some of the profits with the organization rather than taking
them.