Page 47 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes After Independence, the institutional setup in India for the provision of medium and long-term
credit for industry has been broadened. The assistance sanctioned and disbursed by these
specialized institutions has increased impressively over the years. A number of specialized
institutions have been established all over the country.

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Caution The loans in many cases stipulate a number of conditions regarding the
management and certain other financial policies of the company.

3.2.7 Internal Accruals

This basically means what is being ploughed back in business i.e., retained earnings and the
depreciation charge. While depreciation is used for replacing an old machinery etc., retained
earnings can be used, for finding other long-term requirements of the business. The major
advantage of using this as a source of long-term finance are its easy availability, elimination of
issue expenses and avoiding the problem of dilution of control (with equity source of fund). The
disadvantage of this source is limited funds from this source, plus foregoing of dividends
receipts may lead to higher opportunity costs for the firm.

Task Which of the following do you think is costliest of long-term sources of finance?
Give reasons to support your answer.
(a) Preference Share Capital
(b) Retained Earnings
(c) Equity Share Capital
(d) Debentures
(e) Capital raised through private placement.

Self Assessment

Fill in the blanks:

3. Ordinary shareholders are owners of the company and they undertake the ……………….
inherent in business.
4. Long-term funds from preference shares can be raised through a ………………. of shares.
5. A Zero Coupon Convertible Note (ZCCN) converts into………………. .

3.3 Issue of Securities

A firm can raise capital from the primary market (both domestic and foreign) by using securities
in the following ways:
 Public issue
 Rights issue

 Private placement
 Bought out deals
 Euro issues

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