Professional Documents
Culture Documents
Partnership
The general partners are decision-makers. The owners (the partners) divide income according to partnership agreement. Income is taxed once. Set up with ease Few government regulations Unlimited liability for each partner. A limited life of partnership. Limited access to additional funds.
Corporation
The separation of ownership and decision-making. Distinct legal entity Limited liability The business enterprise has a life in perpetuity Access to additional funds through the sale of new share of stock. Income is distributed according to proportionate ownership. Double taxation on income Regulated by Companies Act
Corporation
Private Company Public Company Minimum 7 persons Unlimited Shareholders Public subscription allowed Free transfer of shares
Minimum 2 persons Maximum Shareholders 50 Public subscription not allowed Restricted rights to transfer shares Promoters enjoy unchallenged control over the firm Firms ability to raise capital is limited
This form is suitable for small and medium enterprises, service providers, doctors, CAs, lawyers etc. to limit liability and yet have the flexibility of a partnership structure.
Retained Earnings
Retained earnings are profit after tax and dividend.
Internal Source of Finance
Debenture Capital
Debentures are instruments for raising long term debt capital Characteristics
Trustee Bank , Institution, Insurance Company
Appointed through a Deed
Security Secured by a charge on assets present and future assets Debenture Redemption Reserve Coupon Rate / Interest Rate - Fixed or floating Maturity Period fixed maturity period Convertible and Non convertible
Evaluation
Companys point of view Upside
Post tax cost of debentures is lower than shares No dilution of control
Downsides
Obligatory payment
Downside
Interest is Fully taxable in the hands of investors No right to vote
Equity Capital
Represents ownership capital Enjoys the rewards and bear the risks Some Terms Authorized capital is the amount of capital that a company can potentially issue, as per its memorandum. The amount offered by the company to the investors is called the Issued Capital. The part of issued capital which has been subscribed to by the investors represents the Subscribed Capital. The actual amount paid up by the investors is called the Paid-up Capital.
Equity Capital
Authorised Capital Say: 10,00,000 Equity Shares of Rs.10 each Say :5,00,000 Equity Shares of Rs.10 each Say :4,00,000 Equity Shares of Rs.10 each
Issued capital
Subscribed Capital
Paid up Capital
Par Value
Face value of the share The stated value on a stock certificate is called the par value. The par of equity shares is generally Rs. 10, or Rs. 100.
Issue Price
The issue price is the price at which the equity share is issued.
Generally par and issue price are same for new companies
When issue price exceeds the par value, the difference is referred as share premium Market Price is the price at which the share is traded in the stock market
Pradhan enterprises has 1,000,000 outstanding equity shares with a par value of Rs.10 and a market value of Rs.20 .The firm plans to issue 500,000 additional equity shares at a price of Rs.12 per share .The market value per share after this issue is expected to drop to Rs.17.33. Now if a shareholder has 100 shares, his financial situation with respect to Pradhans equity when he exercises the preemptive rights and when he does not exercise the preemptive rights would be as shown below:
No Pre-emptive Rights
Value of initial holding( 20 * 100
= 2000
= 2000
Additional Subscription = 0
Value of equity holding after the additional Issue (17.33 * 100) =1733
Negatives
Investors expect High rate of return/ high cost of capital
Dilution of control
Negatives
No say in Dividend matters Residual claim to income & assets Risky investment- wide fluctuations in price
Preference Capital
A hybrid form of financingand some features of Debentures It has some features of Equity
Preference over equity shareholders No voting power Convertible into equity Redeemability
Evaluation
Companys point of view Upside
No legal obligation to pay dividend No dilution of control Enhances creditworthiness No collateral security
Downside
Pay dividend Tax No tax advantage Skipping of dividend adversely affects corporate image
Downside
Can not enforce payment of dividend Modest returns
Term Loans
A source of Debt Finance
for a period more than a year For financing Fixed Assets and Working Capital
FeaturesSecurity- The borrowing is secured. The assets financed with the loan are termed as Prime Security and other assets of the firm may serve as Collateral securities.
Evaluation
Companys point of view
Upside Interest is tax deductible No dilution of control Down sides Obligatory payments