Equity Shares

Submitted to:-Mr.Balasubramaniam

Presented by:-Ramakrishnan - Ra1412002010017Vignesh - Ra1412002010018Abhinav - Ra1412002010019Gautham - Ra1412002010020Sugumaran - ra1412002010021EQUITY AND DEBTTopics To Be DiscussedFinancial MarketObtaining FinancingTypes Of FinanceMain ObjectiveCapital StructureEquity SharesTypes MeritsDemeritsFeatures Of Equity SharesEvaluation From View Point Of CompanyBasic TermsPreference CapitalTypesDebt FinancingDebenturesTerm LoansDiffered CreditsWorking Capital AdvanceFinancial MarketA market generally implies a place where exchange of goods and services takes place.Financial market like any other market, facilities the exchange of financial assets amongst the dealers. It is a place or mechanism where financial assets are sold and purchased.Financial instruments are not consumed but clamed against the money and enable their holders, upon disposing off the claims, to obtain consumable goods or services.Obtaining FinancingIdentify the advantages and disadvantages of debt financing.Identify the advantages and disadvantages of equity financing.Describe some specialized sources of financing.Describe how debt and equity financing affect the balance sheet.

Types Of Financial decisionMain goal is to maximize shareholders valueFinancing Decision How to pay for expenses and investmentInvestment Decision How to best allocate capital

Main ObjectiveValue of firmThe value of firm is defined to be the sum of value of firms debt and firms equity. Goal of the firmThe main goal of the firm is toMaximize the value of firmMinimize the weighted average cost of capitalMaximize the market value of the common stock

Capital StructureTwo broad sources of financing :-Shareholders Fund Or EquityEQUITY CAPITAL AND RETAINED EARNINGPREFERENCE CAPITALLoan Funds Or DebtDEBENTURESTERM LOANSDEFFERED CREDITSWORKING CAPITAL ADVANCEEquity SharesAn equity share, commonly referred to as ordinary share also represents the form of fractional ownership in which a shareholder (as a fractional owner) undertakes the maximum entrepreneurial risk associated with business venture. The holders of such shares are the members of the company and have voting rights.

Types of Equity SharesRights issue/Rights SharesBonus SharesPreferred Stock/Preferred SharesCumulative Preference SharesCumulative Convertible Preference SharesParticipating Preference SharesSecurity ReceiptsGovernment Securities DebenturesMerits Of Equity SharesCompany need not have the forced obligation to pay dividend to equity shareholders.Equity shares is a permanent source of funds which facilitate flexibility in usage of fundsThe obligation to repay the equity capital arises only at the time of liquidation of the company.The shareholders can participate in the management of the company through voting rightsEquity shares can be issued without creating any change over assetsDemerits of Equity SharesEquity shares always associated with expectations of the investors. It is practically a difficult task to fulfill the expectations of the investors.Equity shareholders have to bear all the losses at the time of liquidation. Interruptions of many persons are involved in the company working. So, in some, it creates delay in decision-making.When the financing has to be raised for less risky projects, then this is not a good source of raising finance.Investors who have a desire to invest in safe or fixed returns have no attraction of such shares.Features of Equity SharesRight to incomeRight to controlPre-emptive rightRight to liquidationEvaluation from view point of companyAdvantages:-Permanent CapitalNo obligation to pay dividendNo charge on propertyWide scope of marketabilityHigh credit Worthiness and PremiumDisadvantages:-Cost of equity Floatation CostInterference in managementDilution of controlDividends are tax-deductible

Some terms we should knowAuthorized CapitalIssued CapitalSubscribed CapitalPaid-up CapitalPar ValueIssue PriceBook ValueMarket Value

Preference CapitalPreference Capital generally refers to hybrid form of financing.Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a company bankruptcy, preferred stock shareholders have a right to be paid company assets first.Types of Preference SharesCumulative sharesNon-cumulative sharesParticipating sharesNon-participating sharesRedeemable sharesNon-redeemable sharesConvertible sharesNon-convertible shares

Debt FinancingDebt financing is when you borrow what you need to start your business. This increases your companys debt.A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date.There are three main sources of debt financing:Banks are the major source of debt financing for entrepreneurs. To determine how much it might be willing to loan you, the bank will review your businesss debt-to-equity ratio. Credit unions are nonprofit cooperative organization that offer low-interest loans to members.Relatives and friends are a common source of start-up loans for many entrepreneurs.

Debentures (or Bonds)A debenture is like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest.The money raised by the debentures becomes a part of the companys capital structure.A movable property.Issued by the company in the form of a certificate of indebtedness.It generally specifies the date of redemption, repayment of principal and interest on specified dates.May or may not create a charge on the assets of the company.For Debentures issued with maturity period of more than 18 months, a DRR is created.

Term LoansAterm loanis a monetaryloanthat is repaid in regular payments over a set period of time.Term loans usually last between one and ten years, but may last as long as 30 years in some cases.A term loan usually involves an unfixedinterest ratethat will add additional balance to be repaid.Features of term loans:-CurrencySecurityInterest payment and principle paymentRestrictive CovenantsDeferred CreditsSuppliers of machinery provides deferred credits facility under which payment for machinery purchase is done for period of time.Deferred income (inaccrual accounting),is money received for goods or services which have not yet been delivered. According to therevenue recognitionprinciple, it is recorded as liability until delivery is made, after that it is converted into revenue.

Working Capital AdvanceWorking capital advance by commercial banks represents the most important source of financing current assets.Working Capital advance by commercial is generally provided in four different ways:-Cash Credits/Over craftsLoansPurchase/Discount of BillsLetter of creditsEffects of Financing on Your Balance SheetWhat are the economic consequences of using some form of financing for your business?Debt FinancingBorrowing money for a business increases its debt (liabilities). You must repay the loans or you risk losing the business.Equity FinancingWhen using equity financing, your owners equity changes. With equity financing, you give up some of your company and perhaps some control. Consider the consequences of using equity financing to obtain capital.EQUITY vs. DEBTEQUITYDEBTEquity financing involves bringing in investors or partners who provide capital in exchange for a share of ownership of the business.Refers to borrowing money in the form of a loan from a bank or other financial institutionDividend paid to shareholders is Non Tax DeductibleInterest Paid is Tax Deductible PaymentHave Indefinite LifeHave Fixed MaturityHave no such authority but enjoy the prerogative to control the affairs of the firmHave authority to impose certain restrictions to protect their interestDebt Equity RatioA measure of a company's financial leverage calculated by dividing its total liabilities by stockholders equity. It indicates what proportion of equity and debt of the company is using to finance its assets.If this is continued the firm will go bankruptcy, which would leavenothing for shareholdersFormulae used :-

Its SignificanceDebt-to-equity ratio measure of a company's ability to repay its obligations.A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.If a lot of debt is used to finance increased operations, the company could potentially generate more earnings and continued may lead to bankruptcy.Optimal debt-to-equity ratio is considered to be about 1, but the ratio may vary industry to industry.Key Factors To Determine D-E RatioCostNature of assetBusiness RiskNumber of LendersControl ConsiderationsMarket ConsiderationsWhen To Use WhatEQUITYDEBTTax rate applicable is negligibleTax rate applicable is highBusiness Risk exposure is highBusiness Risk exposure is lowAssets of the project are mostly intangibleAssets of the project are mostly tangibleThe project has many valuable growth optionsThe project has few growth optionsPROJECTS (planning analysis selection financing implementation and review) BY PRAKASH CHANDRA-tmc publications

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