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INSTITUTE OF INTERNATIONAL BUSINESS & RESEARCH

PRESENTATION ON
OWNED FUNDS Vs BORROWED FUNDS

Presented by:
Vikas Singh Rawat Vikas Shukla

Road map: WHAT IS FUNDS? TYPES OF FUNDS? WHAT IS OWNED FUNDS? WHAT IS BORROWED FUNDS? WHAT ARE THE DIFFERENCE BETWEEN OWNED

& BORROWED FUNDS?

FUNDS
Funds refers to all the financial

resource of the company. Funds has been understood as cash only. Funds is a working capital. Working capital is the excess of current assets over current liabilities.

STRUCTURE OF FUNDS
FUNDS
OWNED FUNDS
Equity share capital Preference share capital Share premium Retained earning

BORROWE D FUNDS
Term loans Debentures Deferred payment liabilities Other long-term debts

WHAT IS OWNED CAPITAL?


Owned funds represents the amount contributed by

the owners of a business which some times include shares with retain earning. Owned funds is the capital amount which is raised or contributed by the members of the company.

The owners of a business are known as shareholders. There are two types of shareholders- Preference shareholders & Equity shareholders

Advantages of Preference shareholders:The Preference Shares carry limited voting

right through they are a part of the capital, As an instrument of financing the cost of capital of preference shares is less than that of equity shares. The preference shares financing may also provides a hedge against inflation.

Limitation of Preference shareholders: The cost of capital of preference share is higher than

the cost of debt, The compulsory redemption of preference shares after 20 years will entail a substantial cash outflow from the company. If the company is not able to earn a return at least equal to the cost of preference share capital, then it may result in decrease in EPS for the equity shareholders.

Advantages of Equity Financing:


You can get underway without the burden of debt on

your back. prospectus for your investors. Depending on who your investors are, they may offer valuable business assistance.

Disadvantages of Equity Financing:


Investors do expect a share of the profits. Need to check with the Securities and Exchange

Commission to see the requirements before you make decisions for investments.

WHAT IS BORROWED FUNDS:


A borrowed funds can be defined as an amount owed

to a person or organization for funds borrowed. Borrowed can be represented by a bond, loan mortgage or other form stating repayment terms and, if applicable, interest requirements.

Advantages of investing in bonds: Bonds are predictable or well predetermined.


Bonds are more steady then stocks. The interest rates paid by bonds typically exceed those

paid by banks .

Disadvantages of bonds: Unlike stocks, bonds don't offer the possibility of high

long-term returns. Companies and municipalities can and do go bankrupt.

Advantages of Debt Financing: Debt financing allows you to have control of your own

destiny regarding your business. The interest you repay on your loan is tax-deductible. The lender(s) from whom you borrow money do not share in your profits. You can apply for a Small Business Administration loan.

Disadvantages of Debt Financing: If you dont make loan payments on time , you can ruin

your credit rating and make borrowing in the future difficult or impossible. For a new business, commercial banks may require your personal assets before sanction of loan. Any time you use debt financing, you are running the risk of bankruptcy.

Difference between owned Vs Borrowed funds


OWNED FUNDS BORROWED FUNDS

It is also known as

It is also known as debts.

equity. Investor received partial It involves borrowing money from lenders & ownership in the investor. company in exchange for their funds. It does The full amount which is not have to be repaid. borrowed will be repaid It involves money only in future usually with from owners. interest.

It provide dividend to It provide interest to the shareholder. the owners. Dividend payable are Interest payment is tax deductable. not tax deductable. Require regular interest No payment payments .Company requirement. It may must generate cash flow received dividend but to pay. only out of retained earning. It has little or no impact It requires shared of the company. control of the company and may imposed restriction.

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