Capital Market Efficiency

Chapter - 20 : 

Chapter - 20 Long Term Finance: Shares, Debentures and Term Loans

Ordinary Shares–Features : 

2 Financial Management, Ninth Edition © I M Pandey Vikas Publishing House Pvt. Ltd. Ordinary Shares–Features Claim on Income Claim on Assets Right to Control Voting Rights Pre-Emptive Rights Limited Liability

Ordinary Shares–Pros and Cons : 

3 Financial Management, Ninth Edition © I M Pandey Vikas Publishing House Pvt. Ltd. Ordinary Shares–Pros and Cons Advantages Permanent Capital Borrowing Base Dividend Payment Discretion Disadvantages Cost Risk Earnings Dilution Ownership Dilution

Right Issue of Equity Shares : 

4 Financial Management, Ninth Edition © I M Pandey Vikas Publishing House Pvt. Ltd. Right Issue of Equity Shares Selling of Ordinary Shares to the existing shareholders of the company. Value of Right

Right Shares – Pros and Cons : 

5 Financial Management, Ninth Edition © I M Pandey Vikas Publishing House Pvt. Ltd. Right Shares – Pros and Cons Advantages Control is maintained Less flotation cost Issue more likely to be successful Disadvantages Shareholders lose if fail to exercise their right If shareholding concentrated in hands of FI

Debentures–Features : 

6 Financial Management, Ninth Edition © I M Pandey Vikas Publishing House Pvt. Ltd. Debentures–Features Interest Rate Maturity Redemption Sinking Fund Buy-back (call) provisions Indenture Security Yield Claim on Assets and Income

Types of Debentures : 

7 Financial Management, Ninth Edition © I M Pandey Vikas Publishing House Pvt. Ltd. Types of Debentures Non – Convertible Debentures Fully – Convertible Debentures Partly – Convertible Debentures

Debentures–Pros and Cons : 

8 Financial Management, Ninth Edition © I M Pandey Vikas Publishing House Pvt. Ltd. Debentures–Pros and Cons Advantages Less Costly No ownership Dilution Fixed payment of interest Reduced real obligation Disadvantages Obligatory Payment Financial Risk Cash outflows Restricted Covenants

Preference Shares : 

9 Financial Management, Ninth Edition © I M Pandey Vikas Publishing House Pvt. Ltd. Preference Shares Similarity to Ordinary Shares: Non payment of dividends does not force company to insolvency. Dividends are not deductible for tax purposes. In some cases it has no fixed maturity dates. Similarity to Debentures: Dividend rate is fixed. Do not share in residual earnings. Usually do not have voting rights.

Preference Shares–Features : 

10 Financial Management, Ninth Edition © I M Pandey Vikas Publishing House Pvt. Ltd. Preference Shares–Features Claim on Income and Assets Fixed Dividend Cumulative Dividend Redemption Sinking Fund Call Feature Participation Feature Voting Rights Convertibility

Preference Shares–Pros and Cons : 

11 Financial Management, Ninth Edition © I M Pandey Vikas Publishing House Pvt. Ltd. Preference Shares–Pros and Cons Advantages Risk less Leverage advantage Dividend postponability Fixed dividend Limited Voting Rights Disadvantages Non-deductibility of Dividends Commitment to pay dividends

Term Loans–Features : 

12 Financial Management, Ninth Edition © I M Pandey Vikas Publishing House Pvt. Ltd. Term Loans–Features Maturity Direct Negotiations Security Restrictive Covenants Asset related covenants Liability related covenants Cash flow related covenants Control related covenants Convertibility Repayment Schedule