Sources of finance

1. 10-1
1
CHAPTER
Sources of Finance
Equity?
Debentures
? Lease
finance,

2. 10-2
NEED FOR FINANCE
 Long term Financial requirements
More than five years
For purchase of Fixed Assets
 Medium term financial requirements
1-5 years
R&D , replacement of machinery
 Short term Financial requirements
less than 1 year
To meet seasonal requirements

3. 10-3
Sources of Finance
 Equity shares
 Preference shares
 Ploughing back of profits
 Debentures
 Loan from Financial institutions
 Lease Financing

4. 10-4
 Public Deposits
 Medium term
loan from
commercial banks
 Cash credit
 Bank overdraft
 Term loans
 Discounting of
bills
 Trade credit
 Commercial
papers

5. 10-5
Equity Shares
 Residual Claim on Income
 Residual Claim on Assets
 Right to Control
 Pre-emptive Rights
 Limited Liability

6. 10-6
Advantages to Company
 Permanent Source of
Funds
 Increases Borrowing
Capacity
 Not bound to pay
Dividend
 No need to mortgage
the assets
Advantages to Investors
 Right to control
 Increase in rate of
Dividend
 Increase in Market
Value
 Bonus Shares
 Rights Shares
 Easy to Sell
Equity Shares

7. 10-7
Disadvantages to
Company
 High Cost of Funds
 No advantage of
trading on equity
 Manipulation by a
group of shareholders
Disadvantages to
Investors
 Irregular Dividend
 Fall in the market value
of shares
 No real control over the
company
 Loss on Liquidation
Equity Shares

8. 10-8
Reporting of Ordinary Shares
Tata Motors' Share Capital as on 31 March 2008

9. 10-9
Preference Shares
 Claim on Income
 Claim on Assets
 Controlling Power
 Fixed Dividend
 Cumulative Dividends
 Redemption
 Participation Feature
 Convertibility

10. 10-10
Advantages to Company
 Good for less adventurous
investors
 Permanent source of funds
 No need to mortgage
 Benefit of trading on equity
 Not bound to pay dividend
 Increase in borrowing
capacity
 No interference in
management
Advantages to Investors
 Fixed rate of income
 Prior claim over income and
assets
 Voting Rights
 Benefit Conversion
 Right of participation in
extra profits
Preference Shares

11. 10-11
Disadvantages to
Company
 High Cost of Funds
 Permanent burden of
Dividend
 Fear of Loss of Control
Disadvantages to
Investors
 No certainty of payment
of dividend
 No right to vote
 No right to participate
in increased earnings
 No certainty of
redemption
Preference Shares

12. 10-12
Debentures
Debenture is a certificate issued by a company
under its seal acknowledging a debt due by it to
its debenture holders.
 Maturity
 Claim on Income
 Claim on Assets
 Controlling Power
 Buy back Provision

13. 10-13
Advantages to Company
 Cheaper Source of Finance
 Availability of Finance for
a Fixed Period
 Benefit of Trading on
Equity
 No interference in the
management
 Flexibility in Capital
Structure
 Easy to Issue During
Depression
 Helpful in removing over
capitalization
Advantages to Investors
 Fixed and regular income
 Minimum Risk
 Definite Maturity Period
 Liquidity
 Benefit of Conversion
Debentures

14. 10-14
Disadvantages to
Company
 Legal Obligation to pay
Interest and Principal
 Mortgaging of Assets
 Higher Rate of Interest
 Cash Outflows
 Restrictive Conditions
in the Debenture Trust
Deed
Disadvantages to
Investors
 Fluctuation in market
price with change in
interest rate
 No right to vote
 No certainty of regular
payments in financial
crisis.
Debentures

15. 10-15
Lease Financing
 Owner ‘Lessor’ of asset surrenders right to
use asset to another party ‘lessee’ for a
agreed period of time for a agreed
consideration called lease rental.
 Leasing – similar to borrowing funds in
order to purchase an asset.

16. 10-16
Types of Lease Financing
According to length of lease period
 operating lease – short-term, the contract period much
shorter than the economic life of an asset, is cancellable,
after a set period an asset is returned to the lessor, rewards
and risks of ownership stay with the owner.
 financial lease – long-term relation between the lessor
and the lessee; although legal ownership remains with the
lessor, it virtually transfers all the rewards and risks to the
lessee; covers a significant part of the economic life of the
asset; generally cannot be cancelled ; transfers ownership
to the lessee by the end of the lease period ; allows the
lessee to purchase the asset at a price lower than the fair
market value of the asset when the lease expires.

17. 10-17
Other Types of Leases
 Direct leasing – the lessor purchases the property
directly from the manufacturer and leases that
property to the lessee
 Sale and leaseback agreement – a business
sells an asset to a lessor and simultaneously
enters into a lease contract to lease it back in
order to raise finance and continues to use the
asset
 Leveraged lease – has 3 parties involved: lessee,
lessor, lender (supplies funds to the lessor to
acquire an asset)

18. 10-18
Advantages to Lessee
 Additional Source of
finance
 Simplicity
 Free from restrictive
covenants
 Flexibility in fixing the
rentals
 Safety from risk of
obsolescence
 Benefit of maintenance
 No effect in debt equity
ratio
 Tax benefits
Advantages to Lessor
 Fully Secured
 Tax Benefit
 High Profitability.
Lease Financing

19. 10-19
Disadvantages of Lease Financing
 Costly source of finance
 Restriction on use of asset
 Consequences of default
 Excessive Penalties
 Not entitled to tax benefits
Lease Financing