This document discusses various types of external sources of finance for companies, including shares and preference shares. It provides details on what shares are, the different types of shares (equity/ordinary shares), rights that come with shares like voting rights and claims on profits/assets. It also discusses the merits and demerits of equity financing for both companies and shareholders. Preference shares are also covered, outlining the four types and merits for companies and shareholders as a source of finance, as well as some disadvantages.

1. External Sources
of
Finance

2. Shares
 What is share?
 A share is the capital of a company and includes stock except the
difference between stock and share is expressed or implied.
 Company divides its capital into small sub-parts of equal value
 The sub-divided are called SHARES.
 Public limited companies are allowed to issue their shares to he public.
 Whereas Private Limited Companies DON’T.

3. According to Webster
“New world dictionary”
 It is a unit of ownership in a corporation, mutual fund or less commonly
same other type of financial investment.

4. Equity share/ordinary shares
 No company can come into existence without equity capital.
 The shareholders are the legal owners of the company.
 Equity share capital represents permanent capital of company since a
company need not repay the money so raised.

5. Voting rights
 The eight to vote on important occasions.
 Helps the shareholders to gain control over the management company.
 Each share carries one vote

6. Claim on profits of the company
 The remaining profits amog the shareholders in the form of cash
dividends.
 Retained earnings benefit the owners in the form of enhanced value of
shares or increased dividend
 THE COMPANY IS UNDER LEGAL OBLIGATION TO PAY THE DIVIDEND.
SHAREHOLDERS GET DIVIDEND WHEN DIRECTORS DECLARE THE
DIVIDEND.

7. CLAIM ON ASSETS
 THE CLAIM OF SHAREHOLDERS ON THE ASSETS OF THE COMPANY IS
RESIDUAL CLAIM.
 THE EQUITY SHAREHOLDERS NORMALLY REMAIN UNPAID, WHEN A
COMPANY CLOSES DOWN DUE TO BUSINESS FAILURE.

8. PREEMPTIVE RIGHTS
 THEY ARE GIVEN BY WAY OF SUBSCRIPTION WARRANT, MEANING THE
NUMBER OF NEW SHARES THAT SHAREHOLDERS IS ENTITLED TO BUY.
 THE SHAREHOLDERS MAY BUY THE SHARE OR ALLOW THE RIGHT TO
LAPSE OR SELL THE RIGHT AT THE STOCK MARKET.

9. RIGHT TO CONTROL
 CONTROL MEANS THE RIGHT TO INFLUENCE THE MANAGEMENT OF THE
COMPANY.
 SHAREHOLDERS THE RIGHT TO ELECTR THE DIRECTORS, THROUGH THE
EXERCISE OF VOTING RIGHTS. THEY CAN EVEN REMOVE THE DIRECTORS
IF THE PERFORMANCE IS NOT VERY GOOD.
 THEY ARE ABLE TO CONTROL THE MANAGEMENT OF THE COMPANY
THROUGH THEIR VOTING RIGHTS AND TO MAINTAIN PROPORTIONATE
OWNERSHIP.

10. Merits and Demerits of equity FINANCING
ADVANTAGES TO THE COMPANY
 PERMANENT CAPITAL
 NO DIVIDEND BURDEN
 NO CHAREG ON ASSETS
 EASY BORROWING
 LARGE AMOUNTS

11. DISADVANATGES OF THE COMPANY
 HEAVY COST
 NO TRADING ON EQUITY
 CONCERNING OF SHARES
 FEAR OF TRANSFER OF CONTROL

12. ADVANTAGES OF SHAREHOLDERS
 VOTING RIGHTS
 PRE-EMPTIVE RIGHTS
 TRANSFER OF SHRES
 HIGH DIVIDEND AND EARNING
 FAVE VALUE IS SMALL

13. DISADVANTAGES OF THE SHAREHOLDERS
 UNCERTAIN RETURNS
 PRINCIPLE AMOUNT
 FALL IN EPS
 DILUATION OF OWNERSHIP

14. Preference Shares
 Like ordinary shares, confer ownership rights to its holders who are
entitled to fixed rates of dividends out of the profits of the company.
 Four types of preference shares
1. Cumulative and non-cumulative shares
2. Redeemable and irredeemable shares
3. Participating and non- participating shares
4. Convertible and non-convertible shares

15. Merits if preference shares as a Source of Finance
Advantages for the company
 No dividend
 Long term funds
 No risk of insolvency
 No charge on assets
 No dilution of ownership and control
 Stronger financial base

16. Disadvantages to the company
 Non-Deductibility of liquid
 Commitment to pay dividend
 Dilution of the claim of ordinary shareholders

17. Advantages to the preference shareholders
 Fixed Dividend
 Preferences
 Right to nominate

18. Disadvantages to the preference shareholders
 No voting rights
 Rates of dividend fixed
 Redemption