1. Long term Finance Shares Debentures Term loans leasing
Venture capital investing
Private equity

2. Ordinary/Common/Equity Shares
Ordinary shares represent the ownership position in a company.
The holders of ordinary shares, called shareholders.
Real owners of the company as they have voting rights and enjoy decision making authority.
Return –dividend
Enjoy-high return if company performs well

3. Ordinary Shares–Features
Maturity –refund of capital at the time of liquidation
Claim on Income – earnings available for ordinary shareholders.
Claim on Assets- residual claim at the time of liquidation.
Cost of equity – cost of equity is higher than any other source of finance. Risk taken by eq. shareholder is high and equity dividend are not tax deductable.
Right to Control- able to control the management through voting rights.
Voting Rights – election of directors, to change the objectives of business, it requires their approval
Pre-Emptive Rights- the law grants shareholders the right to purchase new shares in the same proportion as their current ownership.
Limited Liability- limited to the amt of their investment

4. Ordinary Shares–Pros and Cons
Advantages to investors
Permanent Capital- no outflow of cash
Capital profit –capital gain-sell at high
Interest in the company’s activities –owners
Best for investment – the person who enjoys to take risks for them
More Income – if company is progressive then it can be a good source of income
Right to interfere in management – right to participate in management, they elect the board of directors.
Borrowing Base – debt raised- lenders lend in proportion to eq. capital
Dividend Payment Discretion – not obliged to pay dividend for the co. .

5. Advantages to company:
No fixed burden of dividend
No outflow of cash
Bear the risk
Simple source
Increase in debt capacity
Availability of fixed capital

6. Disadvantages Disadvantages to Investors Uncertainty of income
Irregular income
Capital loss
Less attractive to modest investor
Loss in the case of liquidation
Earning Dilution
Ownership Dilution

7. Disadvantages to company
Difficult to remove over capitalization
Centralization of control – can go in the hands of few people
Change in management policy
Speculation

8. Right Issue of Equity Shares
Selling of Ordinary Shares to the existing shareholders of the company.
Value of Right

9. Right Shares – Pros and Cons
Advantages
Control is maintained
Less flotation cost
Issue more likely to be successful
Disadvantages
Shareholders lose if fail to exercise their right
If shareholding concentrated in hands of Financial institutions- they prefer public issue than right issue.

10. Preference Shares
Preference shares represents a hybrid form of financing – it par takes some characteristics of equity and some attributes of debenture.
Similarity to Ordinary Shares:
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.
Similarity to Debentures:
Dividend rate is fixed.
Do not share in residual earnings.
Usually do not have voting rights.

11. Preference Shares–Features
Claim on Income and Assets
Fixed Dividend
Cumulative Dividend
Redemption
Sinking Fund
Call Feature-permits co to buy back the preference shares at a buy back price/call price
Participation Feature-sometimes participate in extraordinary profit
No Voting Rights
Convertibility

12. Preference Shares–Pros and Cons
Advantages to investors
Risk less Leverage advantage
Best security-during recession
Dividend postponability
Fixed dividend
Safety of Interest
Advantages to company
No interference in management
Economical financing
Availability of wide capital market
No change on assets

13. Disadvantages to investors
Non-deductibility of Dividends
Dividend at fixed rate
Uncertain position of redeemable preference shares
Commitment to pay dividends
Disadvantages to company
Disadvantage to equity shareholder
Fixed economic burden
High cost of capital
Difficult to receive additional capital

14. Difference between preference and equity share
basis
Preference shares
Equity shares
dividend
Preference in getting dividends
No such preference
Repayment of capital
Preference over equity shareholder in repayment of capital
After payment to the preference holder
Right of management
No right to participate
Have voting rights
Dividend rate
fixed
Higher than others
redemption
redeemed
Cannot redeemed
Issue expense
More expenses as compared to equity
cheap

15. Debentures
A debenture is a long-term promissory note for raising loan capital.
Promise to pay interest and principal.
The purchaser of debentures called debenture holders.

16. Debentures–Features Interest Rate- fixed
Maturity-specific period of time
Redemption- redeemable
Sinking Fund-cash set aside periodically for retiring debentures.
Buy-back (call) provisions- redeemed at a specified price before the maturity date.
Indenture-bank, financial institution-will be trustee appoint as trustee to protect the interest of debenture holder.
Security- secured- lien on specific asset; unsecured-not protected.
Yield – market price of the bond
Claim on Assets and Income- prior to preference and equity holders

17. Types of Debentures
Non – Convertible Debentures- repayment of interest and principal
Fully – Convertible Debentures-less interest than NCD, but being converted into equity
Partly – Convertible Debentures-A no. of debt issued by cos. in India have a convertible and non-convertible. Such debentures are known as PCDs.

18. Debentures Advantages to the company Lower rate of interest
Trading on equity
Freedom in management
Tax benefits
Certainty of finance
Capital from moderate investor
Boon during depression
Controlling over-capitalization
Consolidation of debt-short duration

19. Advantages to the Investor
Fixed and stable income
Safety investment
Liquidity
Fixed maturity period
Conversion of loan

20. Disadvantage of debentures
To the company
Fixed charge on assets
Fixed burden
Risk of winding-up
To the investors
No control
No extra profits
Uncertainty

21. Debentures–Pros and Cons
Advantages
Less Costly
No ownership Dilution
Fixed payment of interest- no participation in extra earnings
Reduced real obligation
Disadvantages
Obligatory Payment – if not –force the co into liquidation.
Financial Risk
Cash outflows
Restricted Covenants- restrict co’s futureoperational flexibility

22. Difference between share & Debenture
Basis
Shares
Debenture
Capital Vs Loan
Part of owned capital
A loan
Rewards
dividend
Fixed interest
Fluctuations
Rate of dividend - vary
No change
Charge Vs Appropriation
Dividend cannot paid when there is no profit
It should be paid even no profit
Payment of dividend/interest
No priority over the payment of interest
Gets priority over the payment of dividend
Repayment of principal
Payment of share capital is made after the repayment of debentures
Payment of debenture is made before the payment of share capital.
Secured by charge
Shares are not secured by any charge
Debenture are usually secured by a charge
Restriction on issue
Restriction on issue of shares at discount
No restriction is imposed on the purchase by the company.