The document discusses long-term financing, which refers to loans and financial obligations lasting over one year. Long-term debt for companies includes any financing or leasing obligations due in over 12 months. Characteristics of long-term debt include loan periods exceeding 12 months, being secured by collateral like property, relatively low fixed interest rates, and higher risk for companies with high debt-to-equity ratios. Common sources of long-term financing are share capital, retained earnings, debentures, term loans, and venture funding. The document also describes various long-term financing instruments like common stock, preferred stock, bonds, and debentures.

1. Chapter-06
Long term financing
6.1 Definitions:
Long-termdebtconsistsof loans andfinancial obligationslastingoverone year. Long-termdebtfora
companywouldincludeany financingorleasingobligationsthatare tocome due inagreaterthan12-
monthperiod. Long-term debt also applies to governments: nations can also have long-term debt.
6.2 Characteristics:
A business can have different types of debt, but not all debt is created equal. Unsecured debt
refers to debt that is not linked to a physical asset. A good example of unsecured debt is a credit
card. Many businesses also have short-term debt, which is debt with a repayment period of less
than a year. A business also can have long-term debt, which has particular characteristics that
distinguish it from any other kind.
1. Loan Period
The loan period for a long-term debt exceeds 12 months. The length of the term corresponds
to the perceived value of the item. A car loan, for instance, would not receive financing over a
20-year period because the item does not have enough value to sustain such a loan. A mortgage,
on the other hand, would because the inherent value of the property can justify such a loan
term. After the property's appraisal, the value is stretched out for the length of that term minus
any upfront downpayment.
2. Collateral
Long-term debt is secured by some form of collateral. An example of this would be a mortgage
on a building, a loan on construction equipment or a loan on a piece of land. If the borrower
defaults, the holder of the loan receives the property and can dispose of it in such a way as to
allow the holder to recoup some of the money owed by the borrower.
3. Interest Rate
The interest rate for a long-term debt is relatively low and remains fixed for the duration of the
loan. The reason for this is because the loan is secured by an asset, unlike unsecured loans,
which tend to have a higher interest rate. As such, the payments on the loan remain the same
throughout the life of the loan. The amount of interest that the borrower pays is consistently
reduced month by month as the original principal becomes smaller. Such predictable payments
increase the company's ability to budget accurately.
4. Risk
A business with a lot of long-term debt is considered risky. Long-term debt is calculated into
the company's debt-to-equity ratio, which is the difference between its long-term debt, also
known as its liabilities, and stockholder's equity. If the debt-to-equity ratio is low, analysts may

2. consider that a good risk for investors. Consequently, if the opposite is true and the company's
liabilities are higher than its equity, then most investors would surmise that an investment in it
would not prove profitable. Such companies are considered top heavy when it comes to debt,
and that is what makes them risky.
6.3 Long Term Sources of Finance:
Long-term financing means capital requirements for a period of more than 5 years to 10, 15,
20 years or maybe more depending on other factors. Capital expenditures in fixed assets like
plant and machinery, land and building etc of a business are funded using long-term sources of
finance. Part of working capital which permanently stays with the business is also financed
with long-term sources of finance. Long term financing sources can be in form of any of them:
 Share Capital or Equity Shares
 Preference Capital or Preference Shares
 Retained Earnings or Internal Accruals
 Debenture / Bonds
 Term Loans from Financial Institutes, Government, and Commercial Banks
 Venture Funding
 Asset Securitization
 International Financing by way of Euro Issue, Foreign Currency Loans,
ADR, GDR etc.
6.4 Instruments:
Common stock:
Common stock is a security that represents ownership in a corporation. Holders of common
stock exercise control by electing a board of directors and voting on corporate policy. Common
stockholders are on the bottom of the priority ladder for ownership structure; in the event of
liquidation, common shareholders have rights to a company's assets only after bondholders,
preferred shareholders and other debt holders are paid in full.
Preferred stock:
A preferred stock is a class of ownership in a corporation that has a higher claim on its assets
and earnings than common stock. Preferred shares generally have a dividend that must be paid
out before dividends to common shareholders, and the shares usually do not carry voting rights.
Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it
has the potential to appreciate in price. The details of each preferred stock depend on the issue.
Debt Capital:
Debt capital is the capital that a business raises by taking out a loan. It is a loan made to a
company that is normally repaid at some future date.
Debt
Capital
Bank Loan Bond Debenture

3. A bond is a debt investment in which an investor loans money to an entity (typically corporate
or governmental) which borrows the funds for a defined period of time at a variable or fixed
interest rate. Bonds are used by companies, municipalities, states and sovereign governments
to raise money and finance a variety of projects and activities. Owners of bonds are debt
holders, or creditors, of the issuer.
A debenture is a type of debt instrument that is not secured by physical assets or collateral.
Debentures are backed only by the general creditworthiness and reputation of the issuer. Both
corporations and governments frequently issue this type of bond to secure capital. Like other
types of bonds, debentures are documented in an indenture.
Why Is Preferred Stock a Hybrid Security?
Common Stock Features
Preferred stock represents partial ownership in a corporation and pays quarterly dividends.
Bond Features
Preferred stock pays high current income (although in the form of dividends) and can be called
(redeemed) at par (face value) under certain conditions. Some preferred stocks are convertible
to common stock under certain conditions.
Unique Features
Preferred stockholders do not have voting rights. Common stocks are perpetual securities,
whereas most preferred stocks have call dates. Preferred stocks can be cumulative (entitling its
holder to any dividends and arrears), whereas if dividends on common stocks are suspended or
omitted, common stockholders have no recourse.
Unlike bond interest, preferred dividends can be omitted or suspended without triggering
default provisions.
Worst of Both Worlds
Preferred stocks have limited upside potential because of the call feature. Bonds have a priority
claim over preferred stocks against corporate assets in bankruptcy or liquidation.