This document discusses different sources of long-term financing for businesses, including debt and equity. It provides details on term loans, maturity dates, debt financing advantages and disadvantages. Collateral and restrictive covenants for loans are defined. The document also examines corporate bonds, including features, prices, yields, ratings and types. Methods for retiring debt and preferred shares are outlined, along with preferred share features, valuation, advantages and disadvantages. Finally, the key features of ordinary equity shares are compared to preferred shares and debt.

1. CHAPTER 25:
SOURCES OF LONG-TERM
FINANCING

2. SOURCES OF CAPITAL FOR BUSINESS FIRMS
Suppliers of Debt Financing Suppliers of Equity
Financing

3. TERM LOANS
• COMMON
CHARACTERISTICS
a) Have maturities of more than
1 to 10 years
b) are repaid in periodic
installments over the life of the
loan
c) Are usually secured by a
chattel mortgage on
equipment or a mortgage on
real property

4. MATURITY
the agreed-upon date on which the
investment ends, often triggering the
repayment of a loan or bond, the payment
of a commodity or cash payment, or some
other payment or settlement term.
.

5. DEBT FINANCING
ADVANTAGE
1. Interest payments are tax-
deductible
2. The financial obligation is clearly
specified and of a fixed nature
3. Inflationary Economy may be
paid back with cheaper peso
4. Use of debt up to a prudent point
may lower its capital to the firm
DISADVANTAGE

6. COLLATERAL
• an item of value pledged to
secure a loan. Collateral reduces
the risk for lenders. If a borrower
defaults on the loan, the lender
can seize the collateral and sell it
to recoup its losses. Mortgages
and car loans are two types of
collateralized loans.
RESTRICTIVE COVENANTS
• clauses that prevent, prohibit,
restrict, or limit the actions of a
person or entity named in a
contract. Restrictive covenants
are common in real estate
transactions and apply to
everything from the colors you
can paint your house to how
many tenants can live in a
building.

7. REPAYMENT
SCHEDULE
• the act of paying back money
previously borrowed from a
lender. Typically, the return of
funds happens through
periodic payments, which
include both principal and
interest. The principal refers to
the original sum of money
borrowed in a loan.

8. BONDS
TRADING PROCESS FOR CORPORATE BONDS
• can be bought and sold in the
“secondary market” after they are
issued. While some bonds are traded
publicly through exchanges, most
trade over-the-counter between large
broker-dealers acting on their clients'
or their own behalf.

9. FIRM COMMITMENTS UNDERWRITING OF A CORPORATE
BOND
Competitive sale
Negotiated sale
Best efforts underwriting basis

10. Bond features and prices
PAR VALUE
COUPON INTEREST RATE
MATURITY
INDENTURE
CURRENT YIELD
YIELD TO MATURITY

11. FORMULA:
𝐴𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑦𝑖𝑒𝑙𝑑 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦 =
𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑝𝑎𝑦𝑚𝑒𝑛𝑡
+ 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 − 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑏𝑜𝑛𝑑
.6 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑏𝑜𝑛𝑑 + .4(𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑝𝑎𝑦𝑚𝑒𝑛𝑡)

12. Credit Quality Risk
It is a chance that the
bond issuer will not be
able to make timely
payments.
BOND RATINGS
Involve judgment about
the future risk potential of
the bond provided by
rating agencies.

13. Credit Ratings

14. TYPES OF
BONDS
UNSECURED LONG-TERM BONDS
Debentures
Subordinated Debentures
Income bonds
B. SECURED LONG-TERM BONDS
• First mortgage bonds
Mortgage Bonds

15. b) Second mortgage bonds
c) Blanket or general Mortgage
bonds
d) Closed-end mortgage bonds
e) Open-end mortgage bonds
f) Limited Open-end mortgage
bonds

16. Other types of
Bonds
FLOATING RATE OR VARIABLE
BONDS
JUNK OR LAW-BONDS
EURO BONDS
TREASURY BONDS

17. METHODS OF RETIRING DEBT
SERIAL
PAYMENTS
CONVERSION CALL
PROVISION
BOND
REFUNDING

18. PREFFERED
SHARE
a type of security that offers
characteristics similar to both common
shares and a fixed-income security. The
holders of preference shares are typically
given priority when it comes to any
dividends that the company pays.

19. PREFERRED
SHARE FEATURES
1. PAR VALUE
2. DIVIDENDS
3. CUMULATIVE AND NON CUMULATIVE
DIVIDENDS
4. NO DEFINITE MATURITY DATE
5. CONVERTIBLE PREFERRED SHARE
6. VOTING RIGHTS
7. PARTICIPATING RIGHTS
8. PROTECTIVE FEATURES
9. CALL PROVISON
10. MATURITY

20. Advantages and disadvantages of financing
with preferred value
ADVANTAGES
1. FINANCING FLEXIBILITY
2. FAVORABLE FINANCIAL
LEVERAGE
3. NO DILUTION OF CONTROL
4. NO MATURITY
5. ASSET PRESERVATION
6. NO EQUAL PARTICIPATION IN
EARNINGS
DISADVANTAGES
1. HIGH COST
2. SENIORITY OF THE HOLDER’S
CLAIM

21. PREFERRED
SHARE
VALUATION

22. ORDINARY
EQUITY
SHARE

23. Features of Ordinary
Equity shares
1. PAR VALUUE/ NO PAR VALUE
2. AUTHORIZED, ISSUED AND OUTSTANDING
3. NO MATURITY
4. VOTING RIGHTS
5. BANK VALUE PER SHARE
6. NUMEROUS RIGHTS OF STOCK HOLDER

24. 2 COMMON SYSTEMS OF VOTING
MAJORITY
VOTING
CUMULATIVE

26. COMPARATIVE
FEATURE OF
ORDINARY EQUITY
SHARES,
PREFERRED
SHARES AND DEBT

27. ORDINARY EQUITY SHARES OVER
PREFERRED SHARES AND BOND
ADVANTAGES
1. No mandatory fixed charges
2. No definite maturity date
3. Potentially greater ease of sale
4. Increased creditworthiness
5. Avoidance of restrictive provisions
6. From a social view points
DISADVANTAGES
1. Dilution of Control and Earnings
2. Higher issue cost
3. Cause increase in component
cost of capital