Page 21 - DMGT409Basic Financial Management

Basic Financial Management

Notes 2.2 Instruments of Raising Long-term Finance

In small organisations the long-term finances are generally provided by the owners but for large

organisations like joint stock companies there are various options available to raise the funds.
The following are the key instruments of long-term fi nance:

1. Issue of Shares
2. Issue of Debentures
3. Loans from fi nancial institutions
4. Public Deposits
5. Retention of Profi t

6. Term loans form Banks
7. Lease Financing

2.2.1 Issue of Shares

Share is the smallest unit into which the total capital of the company is divided.

Example: When a company decides to raise ` 50 crores of capital from the public by issuing

shares, then it can divide its capital into units of a definite value, say ` 10/- or ` 100/- each. These
individual units are called as its share.
These may be of two types:

1. Equity shares
2. Preference shares

Equity Shares

Equity means ‘equal’. Equity share is a share that gives equal right to holders. Equity shareholders
have to share the reward and risk associated with ownership of company.

Example: ABC Company has 10,000 equity shareholders and it has earned ` 10,000 profi t
last year and assumes it may earn a loss of ` 10,000 in the next year.
Here, the shareholder will get ` 1 as profit from last year and ` 1 loss in the coming year’s loss.

It is also called as ordinary share capital. Equity shareholders are the owners of the company, who
have control over the working of the company. They are paid dividend at the rate recommended
by Board of Directors (BoDs).
Features of Equity Shares

The following are the key features of equity shares:
1. Permanent Capital: An equity source is the main long-term or permanent source of fi nance.
They can be redeemed or refunded only at the time of liquidation that too from the residue
left after meeting all the obligations.
2. Residual Claim to Income: Equity shareholders have a residual claim to the income of a
company. Residual claim means the income leftover after paying all outsider claims.

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