1Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.

KITNE SOURCE HAIN

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Sources of Funds and Capital Structure

Rahul jain

3Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.

Equity Shares–Features Claim on Income Claim on Assets Right to Control Voting Rights Limited Liability

4Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.

Ordinary Shares–Pros and Cons Advantages

1. Permanent Capital2. Borrowing Base3. Dividend Payment Discretion

Disadvantages1. Cost2. Risk3. Earnings Dilution4. Ownership Dilution

5Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.

Right Shares – Pros and Cons Advantages

1. Control is maintained2. Less flotation cost3. Issue more likely to be successful

Disadvantages1. Shareholders lose if fail to exercise their right

6Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.

Debentures–Features Interest Rate Maturity Redemption Sinking Fund Indenture Security Yield Claim on Assets and Income

7Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.

Types of Debentures Non – Convertible Debentures Fully – Convertible Debentures Partly – Convertible Debentures

8Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.

Debentures–Pros and Cons Advantages

1. Less Costly2. No ownership Dilution3. Fixed payment of interest

Disadvantages1. Obligatory Payment 2. Financial Risk3. Cash outflows4. Restricted Covenants

9Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.

Term Loans–Features Maturity Direct Negotiations Security Restrictive Covenants

1. Asset related covenants2. Liability related covenants3. Cash flow related covenants4. Control related covenants

Convertibility Repayment Schedule

10Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.

Preference Shares Similarity to Ordinary Shares:

1. Non payment of dividends does not force company to insolvency.

2. Dividends are not deductible for tax purposes. Similarity to Debentures:

1. Dividend rate is fixed.2. Do not share in residual earnings.3. Usually do not have voting rights.

11Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.

Preference Shares–Features Claim on Income and Assets Redemption Sinking Fund Convertibility

12Financial Management, Ninth Edition © I M PandeyVikas Publishing House Pvt. Ltd.

Preference Shares–Pros and Cons Advantages

1. Risk less Leverage advantage2. Dividend postponability3. Fixed dividend4. Limited Voting Rights

Disadvantages1. Non-deductibility of Dividends 2. Commitment to pay dividends