Long-Term Finance:

Shares, Debentures
and Term loans
Presented by :
Ananthu bharat
Ritesh kumar
Muhammed sadathu
Anurag singh

Long-Term Finance
Long term financing means capital

requirements for a period of more than 5

years to 10, 15, 20 years or may be more
depending on other factors.
Capital expenditures in fixed assets like plant
and machinery, land and building etc of a
business are funded using long term sources
of finance.
Part of working capital which permanently
stays with the business is also financed with
long term sources of finance.

EQUITY SHARES
Equity shares also known as Ordinary shares.
Equity shares represent the ownership

position in a company. The shareholders of

equity shares are the legal owner of the
company.
Equity shares are the source of the
permanent capital since they do not have a
maturity date.
shareholders are entitled for dividend.
The amount or rate of dividend is not fixed:
the companys board of directors decides it.
An ordinary share is known as variable
income security

Authorized Share Capital represents the

maximum amount of capital, which a company

can raise from shareholders. The portion of the
authorized share capital, which has been
offered to shareholders, is called Issued Share
Capital.
Subscribed Share Capital represents that
part of the issued share capital, which has been
accepted by shareholders. The amount of
subscribed share capital actually paid up by
shareholders to the company is called Paid-Up
Share Capital.
The companys earnings, which have not been
distributed to shareholders and have been

RIGHT ISSUE OF EQUITY

SHARES
A rights issue is a way in which a company

cansell new sharesin order to raise capital.

The law in India requires that the new ordinary
shares must be first issued to the existing
share holder.

PREFERENCE SHARES
Preference shares are a long term source of

finance for a company.

They are neither completely similar to equity
nor equivalent to debt.
The law treats them as shares but they have
elements of both equity shares and debt.
For this reason, they are also called hybrid
financing instruments. These are also known
as preferred stock, preferred shares, or only
preferred in different part of the world.

Features of Preference Shares

1. Fixed Dividends
Preference shares have fixed dividends. Also

preference dividends are not tax deductible.

2. Preference over Equity
Preference share dividend has to be paid
before any dividend payment to ordinary
equity shares & at the time of liquidation also,
these shares would be paid before equity
shares.
3. No Share in Earnings
Preference shareholders can not claim on the
residual earnings and residual assets.

4. Fixed Maturity
Like debt, preference shares also have fixed
maturity date.
5. Cumulative dividend
It requires that all past unpaid preference
dividend be paid before any ordinary
dividends are paid.
6. Dividend from PAT
Preference share dividend is paid out of the
profits left after all expenses and even taxes.

DEBENTURES

A debenture or a bond

is long-term

promissory note for raising loan capital.

The firm promises to pay interest and
principal as stipulated.
The

purchaser of debenture is called

lender or debenture-holder.
Although

debentures

the

money

becomes

raised

by

the

part

of

the

Features of Debentures

1. Interest rate:
The interest rate on a debenture is fixed
and known.
Debenture interest is tax deductible.
2. Maturity:
Debentures are issued for a specific
period of time.
3. Redemption:
Debentures are mostly redeemable, they
are generally redeemed on maturity.

4. Sinking fund:
A sinking fund

is cash set aside

periodically for retiring debentures.
Periodic retirement of debt through sinking
fund reduces the amount required to
redeem the remaining debt at maturity.
5. Buy-back (call) provision:
Buy-back provisions enable the company
to redeem debenture at a specified price
before the maturity date.
Buy-back price may be more than par
value.

6. Indenture or debenture trust deed:

An indenture is a legal agreement between
the company issuing debentures and the
debenture trustee who represents the
debenture holders.
Trustee ensures that the company will fulfill
the contractual obligations.
7. Security:
Debentures
are
either
secured
or
unsecured.
A secured debenture is secured by a lien on
the companys specific assets.

8. Yield
The yield is related to its market price; Two
types of yield:
The current yield on a debenture is the
ratio of the annual interest payment to the
debentures market price.
The yield-to-maturity takes into account
the payments of interest and principal,
over the life of the debenture.
9. Claims on assets and income
Debenture holders have a claim on the
companys earning, prior to that of the
shareholders.

Types of Debentures

1. Non-convertible debentures (NCDs):

NCDs are pure debentures without a feature
of conversion. They are repayable on maturity.
The investor is entitled for interest and
repayment of principal.
2. Fully-convertible debentures (FCDs):
FCDs are converted into shares as per the
terms of the issue, with regard to the price
and time of conversion.
3. Partly-convertible debenture (PCDs):
The investor has advantages of both
convertible and non-convertible debenture
blended into single debenture.

Term Loans:
Term loans are obtained directly from the

banks and financial institutions for long

term debt.
They are obtained for financing large

expansion. Modernization or diversification

projects.
It has a maturity of more than one year.

Features:
1. Maturity:
Financial institutions provide loan for a period

of 6 to 10 years. This is the period during

which the company will not needs to make
any payment.
2. direct negotiation:
A firm negotiates term loans for project
finance directly with a bank or institutions.
3. security:
The assets acquired using term loan funds
secure them. This is called primary security.
If Current assets are secured then it is called
secondary security.

4. Restrictive covenants:
FI add a number of restrictive covenants
on loan from lenders.
The borrowing firm has generally to keep
the lender informed by furnishing financial
statements
and
other
information
periodically. The covenants may be
categorized as follows:
1. Asset-related covenants
2. Liability-related covenants
3. Cash flow-related covenants
4. Control-related covenants

5. Convertibility:
6.Repayment schedule:
It specifies the time schedule for paying
interest and principal.
It is also known as loan amortization
schedule.
It requires to repay the principal in equal
installment and pay interest on the unpaid
loan.
Thus, interest payment will decline over
the years and total loan payment will not
be equal in each period.

Long Term Investment

Long Term Investing refers to the fact that

investment is made for a period greater than

1 year.
The various factors to be considered are:Fixed asset turnover ratio
Return on Equity
Return on capital employed
Operating profit margin
Dividend yield ratio
Dividend payout ratio

Each of these factors has a role to play in the

selection of the company for investment.

However, the degrees to which they affect the
returns vary in response to the other factors as
well.
1)
Fixed-asset Turnover Ratio:
The fixed-asset turnover ratio measures a
company's ability to generate net sales from
fixedasset investments - specifically property,
plant and equipment (PP&E) - net of
depreciation.

What does FA Turnover ratio say?

A higher fixed-asset turnover ratio shows that the company has been more
effective in using the investment in fixed assets to generate revenues.
12

10

9.8

7.81

7.49

5.35
4.73

4.6

6.26

6.09
5.63

HUL
GCPL

4.18

0
2011

Trend analysis

2012

2013

2014

2015

The ratio is increasing for both the companies but for

GCPL, it is increasing at a higher rate as compared to HUL,
also, the absolute value for GCPL is higher than HUL. So,
GCPL is more efficient of the two

2)

Return on Equity

It is the amount of net income as a

percentage of shareholders equity.

Return on Equity = Net
Income/Shareholder's Equity
What does it say?
Return on equity measures a corporation's
profitability by revealing how much profit a
company generates with the money
shareholders have invested. So higher the
ROE, better is the performance of the
company .

Trend analysis
ROE for both the companies are decreasing but

for HUL the absolute value is much higher as

compared to GCPL. Hence, of the two, HUL is a
better option.
140.00 %

122.91 %
121.27 %

120.00 %

100.00 %

98.47 %

85.25 %

87.54 %
76.62 %

80.00 %

HUL
60.00 %

GCPL

40.00 %

30.08 %

29.98 %

28.36 %
23.94 %

20.00 %

0.00 %
2011

2012

2013

2014

2015

3)

ROCE

It is the ratio that indicates the efficiency and

profitability of a company's capital

investments.
ROCE = EBIT / (Total asset current
liabilities)
What does ROCE say?
ROCE measures a corporation's profitability
by revealing how much profit a company
generates with respect to the total investment
made. So higher the ROCE, better is the
performance of the company

Trend analysis
ROCE has been decreasing for both the

companies but the absolute value of ROCE for

HUL is more than 4 times than GCPL, which
shows that HUL is performing much better and
hence, it is a better option
160
140

138.72

120

118.59
106.78

100

102.47
93.08
HUL

80

GCPL

66.03

60
40

35.73

32.65

28.43
21.42

20
0
2011

2012

2013

2014

2015

4) Operating Profit
Margins
A ratio used to measure a company's pricing

strategy and operating efficiency.

Operating Profit Margin = Operating Income /
Net Sales
What does it say?
Operating margin gives analysts an idea of how
much a company makes (before interest and taxes)
on each dollar of sales. When looking at operating
margin to determine the quality of a company, it is
best to look at the change in operating margin over
time and to compare the company's yearly or
quarterly figures to those of its competitors. If a
company's margin is increasing, it is earning more
per dollar of sales. Higher the operating profit

Trend analysis
HUL is a better option as its operating margin is

high as well as it is increasing from the last year

which is not the case with GCPL
0.2
0.18

0.175

0.16
0.14

0.142

0.136
0.127

0.12

0.128
0.12

0.131

0.122

0.111

0.118

HUL

0.1

GCPL

0.08
0.06
0.04
0.02
0
2011

2012

2013

2014

2015

5) Dividend Yield
A financial ratio that shows how much a company

pays out in dividends each year relative to its share

price.
Dividend Yield = Annual Dividends per share /
price per share
What does it say?
Dividend yield is a way to measure how much cash
flow you are getting for each dollar invested in an
equity position - in other words, how much "bang
for your buck" you are getting from dividends.
Investors who require a minimum stream of cash
flow from their investment portfolio can secure this
cash flow by investing in stocks paying relatively

Trend analysis
HUL is better option since the absolute value

4.5

of Dividend yield is greater than GCPL but for

both the companies dividend yield is
decreasing.
4.2

4
3.5
3.2

3.1

3.01

2.7

2.5
HUL

2.2
2
1.8
1.62

1.5

1.23
1

0.99

0.5
0
2011

2012

2013

2014

2015

GCPL

6) Dividend Payout
Ratio
The percentage of earnings paid to

shareholders in dividends.
Dividend Payout Ratio = Dividends / Net

Income What does it say?

The payout ratio provides an idea of how well
earnings support the dividend payments. More
mature companies tend to have a higher
payout ratio. This is because they do not
retain the earnings for re investing in
business.

Trend analysis
HUL is a better option since it doesnt retain

much of its earnings for the purpose of

expansion as compared to GCPL
140
131.8
120

100

80

76.47
74.58

73.26

75.2

60

71.2

69.99

GCPL

59.34
45.19

40

30.11
20

0
2011

2012

2013

HUL

2014

2015

Overall Analysis
After considering all the parameters, we can

say that HUL is better for long term

investment since it provides better dividends
as compared to GCPL. Not only that, in terms
of ROE, ROCL and operating profit margin,
HUL is a better company to invest for the long
term.