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Corporate Finance
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Classification
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The capital raised by issue of equityshares by a company
Equity Share Capital
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Equity Share Capital
Its the Owners Money Costliest Source of Money
Its is the Permanent Capital for the companyShareholders enjoy
the high rewards but bear the risk of ownership
Shareholders Liability is limited to their
capitalDistribution
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Equity Share Capital
Some terms Authorized, Issued, Subscribed & Paid-up
CapitalPar value, Issue Price, Book value & Market value
Rights and Position of Equity Share HoldersRight to IncomeRight
to ControlPre-emptive RightRight in Liquidation
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Equity Share Capital
AdvantagesNo compulsion to pay dividendEnhances credit
worthiness of the company
Has to be repaid only at the time of liquidationDemocratic
control over managementHigher returns for investors
DisadvantagesCostliest Source of Income
Additional issue of shares dilute the control of
existingshareholdersNot advisable for investors who want steady
income
Involve more number of
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The capital raised by issue of Preferenceshares
Preference Share Capital
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Preference Share Capital
Owner Carries Preferential RightsHybrid Form of Financing
It has the attributes of both Equity andDebenturesSimilarities
with Equity Capital
Preference dividend is payable only out of
distributableprofits
Preference dividend is not an obligatory paymentIt is not a
tax-deductable payment
Similarities with DebenturesFixed dividend rate
Preference shareholder do not enjoy Right to vote in AGMs
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Preference Share Capital
Types of Preference SharesCumulative &
Non-CumulativeParticipating & Non-ParticipatingConvertible
& Non- Convertible
AdvantagesNo legal Obligation to pay Preference DividendUseful
for investors desiring for fixed rate of return with lower risk
Does not effect the control of Equity shareholders over
managementDoes not create any charge against the asset of
thecompanyEnhances Credit worthiness of the firm
Disadvantages
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Retained Earnings of the Company
Internal Accruals
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Internal Accruals
Retained Earnings and Surplus
Internal Source of Funding
Also Known as Ploughing back of Profit
Included under Shareholders Fund in BalanceSheet
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Internal Accruals
AdvantagesPermanent Source of FundProvides Greater Degree of
Operational Freedom &FlexibilityNo Dilution of Control of
ShareholdersMight lead to increase in market price of Equity
Shares
Disadvantages Amount raised is uncertain and limitedMight create
Dissatisfaction amongOpportunity cost might give better returns
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Venture Capitalalso known as seed capital or private
capital
Money provided by investors to startup firms and smallbusinesses
with perceived long-term growth potential.The five stages of
venture capital funding are seed stage, start-up stage, second
stage, third stage and bridge/pre-public stage In addition to money
they also give mentoring, resourcesand contactsDemands a part of
the companies equityVenture capitalists expect to realize their
investment in 3to 5 yearsMore scrutiny and financial pressure
