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Long Term Financing


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long term financing by jim

Long Term Financing

  1. 1. LONG TERM FINANCE <ul><li>by Group – 1 </li></ul><ul><li>Anish </li></ul><ul><li>Aravind </li></ul><ul><li>Charlie </li></ul><ul><li>Jacob </li></ul><ul><li>Jovita </li></ul><ul><li>Nelson </li></ul>
  3. 3. NEED FOR LONG TERM FINANCE <ul><li>Increasing the facilities </li></ul><ul><li>Expansion, diversification; huge quantities reqd., irreversible decision </li></ul><ul><li>Buying fixed assets </li></ul>
  4. 4. SOURCES <ul><li>Equity capital </li></ul><ul><li>Preference capital term loans </li></ul><ul><li>Internal accruals </li></ul><ul><li>Debentures </li></ul><ul><li>Term loans </li></ul>
  5. 5. SHARES
  7. 7. EQUITY CAPITAL <ul><li>Some terms </li></ul><ul><li>Authorized, Issued, Subscribed and Paid up capital </li></ul><ul><li>Par/face value, Issue Price, Book value and Market Value </li></ul><ul><li>Rights of equity shareholders </li></ul><ul><li>- Right to Income :PAT less preferred dividends </li></ul><ul><li>- Right to Control : voting rights </li></ul><ul><li>- Pre-emptive Right : for additional issues, rights issue in the same proportion </li></ul><ul><li>- Right in liquidation : residual claim over assets </li></ul>
  8. 8. EQUITY CAPITAL <ul><li>Advantages </li></ul><ul><li>No compulsion to pay dividends </li></ul><ul><li>No fixed maturity, no obligation to redeem </li></ul><ul><li>Dividends tax exempt for investors </li></ul><ul><li>Disadvantages </li></ul><ul><li>Dilution of control of existing owners </li></ul><ul><li>High Cost: rate of return expected by equity holders higher than debt holders </li></ul><ul><li>Dividends are not tax deductible: hence cost is higher </li></ul><ul><li>Issue costs higher: underwriting, brokerage, other issue expenses </li></ul>
  10. 10. <ul><li>Advantages </li></ul><ul><li>No obligation to pay dividend, no bankruptcy or legal action for non payment </li></ul><ul><li>Financial distress of redemption obligation not very high </li></ul><ul><li>Part of net worth, hence increases its creditworthiness/ leverage capacity </li></ul><ul><li>No dilution of control </li></ul><ul><li>No pledging of assets required </li></ul>
  11. 11. <ul><li>Disadvantages </li></ul><ul><li>Expensive source since dividends not tax deductible </li></ul><ul><li>Though no legal consequences, liability to pay dividends stands, can spoil company’s image </li></ul><ul><li>Can acquire voting rights if company skips dividend for certain period </li></ul><ul><li>Have claim prior to equity holders </li></ul>
  12. 12. INTERNAL ACCRUALS <ul><li>It consist of depreciation charges and retained earnings </li></ul><ul><li>Advantages </li></ul><ul><li>Readily available, no talking to outsiders </li></ul><ul><li>Effectively additional equity capital, however no issue costs of loss due to under-pricing </li></ul><ul><li>No dilution of control </li></ul><ul><li>The stock market generally views an equity with skepticism, but retained earnings doesn’t </li></ul>
  13. 13. INTERNAL ACCRUALS <ul><li>disadvantages </li></ul><ul><li>Quantum very limited </li></ul><ul><li>High Opportunity costs: dividends forgone by equity holders </li></ul><ul><li>Requires careful attention to NPV of projects </li></ul>
  14. 14. DEBENTURES <ul><li>Trustee: Need to appoint a trustee to ensure fulfillment of contractual obligations by company </li></ul><ul><li>Security: Secured or unsecured </li></ul><ul><li>Interest rate can be fixed/floating/deep discount </li></ul><ul><li>More flexible compared to term loans as they offer variety of choices as regards maturity, interest rate, security, repayment and other special feature </li></ul><ul><li>Convertibility </li></ul><ul><li>Option : Can be with call or put feature </li></ul><ul><li>Redemption: Bullet payment or redeemed in installment </li></ul>
  15. 15. TERM LOANS <ul><li>Provided by FIs/banks </li></ul><ul><li>Repayable in less than 10 years </li></ul><ul><li>Can be in domestic/foreign currency, liability on FC loans translated to rupees for payment </li></ul><ul><li>Are typically secured against fixed assets/ hypothecation of movable properties, prime security / collateral security </li></ul><ul><li>Definite obligations on interest and principal repayment; interest paid periodically; based on credit risk and pegged to a floor rate </li></ul><ul><li>Carry restrictive covenants for future financial and operational decisions of the company, its management, future fund raising, projects, periodic reports called for </li></ul>
  16. 16. TERM LOANS <ul><li>Advantages </li></ul><ul><li>Interest on debt is tax deductible </li></ul><ul><li>Does not result in dilution of control </li></ul><ul><li>Do not partake in value created by the firm </li></ul><ul><li>Issue costs of debt is lower </li></ul><ul><li>Interest cost is normally fixed, protection against high unexpected inflation </li></ul><ul><li>Has a disciplining effect on management </li></ul>
  17. 17. TERM LOANS <ul><li>Disadvantages </li></ul><ul><li>Entails fixed obligation for interest and principal, non payment can even lead to bankruptcy/ legal action </li></ul><ul><li>Debt contracts impose restrictions on firm’s financial and operational flexibility </li></ul><ul><li>If inflation rate dips, cost of debt higher than expected </li></ul>
  18. 18. RAISING LONG TERM FINANCE RAISING LONG TERM FINANCE <ul><li>Initial Public Offer (IPO) </li></ul><ul><li>Secondary Public offer </li></ul><ul><li>Rights Issue </li></ul><ul><li>Bought out deals </li></ul><ul><li>Euro Issues </li></ul><ul><li>Private Placement </li></ul><ul><li>Preferential allotment </li></ul><ul><li>Venture Capital/ Private Equity transactions </li></ul><ul><li>Obtaining a term loan </li></ul>
  19. 19. REFERENCE <ul><li>Prasanna Chandra – Fundamentals of Financial Management </li></ul><ul><li>I M Pandey - Financial Management, 9 th edition </li></ul><ul><li>Thank You </li></ul>