Long-term Sources of Finance Essay Example | Topics and Well Written Essays - 3500 words

Long-term Sources of Finance - Essay Example Hence to meet the requirement of long-term capital, there are long-terms sources of finance which the business should seek for ensuring viability in their operations. Main sources are equity, debt and derivatives. While equity comes from share capital from the public and promoters, debt finance and derivatives can be procured in the form of debentures,, convertible notes, warrants etc. The share holders acquire right of ownership in the company by which they are entitled to share of profits, to vote in general meeting to elect and remove directors and pass or reject important resolutions concerning the company's management. In case of liquidation of company due to loss, the share holders may lose their money invested the shares of the company or in part in accordance with the company's liquidity position. Ordinary share form bulk of the company's capital having no special rights over the other shares. As already mentioned, in case of liquidation, the ordinary share will rank last for being paid after all other liabilities of the company are met. The management of the company may decide not to pay dividends in any one or more years for reasons of losses or any such reason. Most important feature of share form investment is that the share holders' liabilities are limited to the value of their shares and they will not be called upon to pay more than that in case of l osses incurred by the company... ThiPreference Shares This type of shares carries a right of dividend over ordinary share holders above discussed. The dividend is generally a fixed amount every year whether there is profit or not earned by the company. At the time of liquidation also, the preference share holders are paid before ordinary share holders. Preference share holders do not have voting rights but it may be exercised in case of failure to pay dividends to them. Several types of preference shares as follows. a) Participating preference shares. These share are entitled to additional dividends which may fluctuate as per profits earned by the company. b) Cumulative preference shares. If in any particular year, dividends are not paid, they are carried over and cumulative of such dividends is paid in subsequent years. c) Non-cumulative preference shares. They are so called as are not entitled to accumulate arrears of dividends. d) Redeemable preference shares. Company can redeem these shares and pay the owners a redemption price usua lly set above the par value in order to compensate them for untimely redemption. e) Convertible preference shares. Holders of theses shares have an option to convert them into other types of shares usually ordinary shares. This form of investment being less risky, carries lesser returns than ordinary shares which may be eligible for higher dividends in case of abnormal profits. Practical example of above said shares is taken from the Annual Report of M/S Reckittenkisser, Uk for 2004-05. The Annual Report says that parent company holds 4,500,000 nos 5% cumulative preference shares. The rights and restrictions of these shares are mentioned in note 16 to the report. Number of ordinary shares at the book price of m76 as at 31 December 2005, is mentioned as 722,160,934. as against