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Ordinary SharesFeatures
Claim on Income
Claim on Assets
Right to Control Voting Rights
Pre-Emptive Rights
Limited Liability
Advantages
1.
2. 3.
Disadvantages
1. 2. 3. 4.
Sweat Equity
The term Sweat Equity means equity shares
issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value addition. The purpose of sweat equity is to ensure more loyalty and participation.
Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd.
shareholders of the company. The price of the share before the ex-rights date is called as right-on or cum-rights while the price after this date is referred to as the ex-rights price. In India along with the letter of right, generally four forms may be sent.
Advantages
1. 2. 3.
Disadvantages
1. 2.
DebenturesFeatures
Interest Rate Maturity Redemption Sinking Fund Buy-back (call) provisions Indenture ( Debenture Trust Deed ) Security Yield Claim on Assets and Income
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Types of Debentures
Non Convertible Debentures
Advantages
1. 2. 3. 4.
Less Costly No ownership Dilution Fixed payment of interest Reduced real obligation Obligatory Payment Financial Risk Cash outflows Restricted Covenants
Disadvantages
1. 2. 3. 4.
Preference Shares
2. 3.
Non payment of dividends does not force company to insolvency. Dividends are not deductible for tax purposes. In some cases it has no fixed maturity dates. Dividend rate is fixed. Do not share in residual earnings. Usually do not have voting rights.
Similarity to Debentures:
1. 2. 3.
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Preference SharesFeatures
Claim on Income and Assets Fixed Dividend Cumulative Dividend Redemption Sinking Fund Call Feature ( buy-back ) Participation Feature Voting Rights Convertibility
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Advantages
1.
2.
3. 4.
Risk less Leverage advantage Dividend postponability Fixed dividend Limited Voting Rights Non-deductibility of Dividends Commitment to pay dividends
Disadvantages
1. 2.
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Internal Financing
Retained Earnings or Ploughing Back of
Profits The tool of ploughing back of profits can be successfully employed only by those concerns which have stable earnings.
Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd.
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Pros: 1. A cushion to absorb the shocks of economy. 2. Flexible financial structure 3. Increase in the value of shares 4. Enhanced earning capacity 5. Stimulates industrialization Cons: 1. Over-capitalization 2. Creation of monopolies 3. Misuse of retained earnings 4. Evasion of taxes
Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd. 14
Loan Financing
A. Short-term :Loans and Credits:
1. Indigenous Bankers 2. Trade Credit
3. Commercial Paper
4. Commercial Banks
5. Public Deposits
6. Factoring
Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd.
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B. Term Loans from specialized financial institutions: 1. Industrial Finance Corporation of India(IFCI) 2. Industrial Credit and Investment Corporation of India (ICICI ) 3. State Financial Corporations (SFCs) 4. State Industrial Development Corporations (SIDCs) 5. Industrial Development Bank of India (IDBI) 6. Small Industries Development Bank of India (SIDBI)
Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd. 16
Term LoansFeatures
Asset related covenants Liability related covenants Cash flow related covenants Control related covenants
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4. Lease Financing
5. Hire Purchase
6. Securitization
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Financial Management, Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd. 18