21. Sources Of Long Term Finance From Financial Management Subject

Summary

The video provides an in-depth overview of long-term finance, essential for students in finance-related courses. It covers different sources of finance: long-term, medium-term, and short-term, focusing primarily on long-term finance. Key sources discussed include the issuance of shares (equity and preference shares), retained earnings, debentures, and long-term loans. The instructor explains the characteristics, risks, and benefits of each source, emphasizing the importance of understanding these concepts for practical application in business. The session aims to equip students with knowledge of how companies accumulate and utilize funds for sustainable growth.

Takeaways

• 📊 The topic of the class is long-term finance and how companies accumulate and utilize funds for growth.
• 🏢 Different companies require various types of financing based on their size and needs: small, medium, or large organizations may need working capital or long-term finance.
• 💰 Sources of finance are divided into three types: long-term, medium-term (1-5 years), and short-term (below 1 year).
• 📈 Long-term sources of finance are needed for periods longer than 5 years and are typically used for large investments like fixed assets.
• 📑 The main long-term financing sources include equity shares, preference shares, retained earnings, debentures, and long-term loans.
• 📉 Equity shareholders bear both profits and losses of the company, while preference shareholders only share in profits and get priority in receiving dividends.
• 🔒 Preference shareholders are prioritized over equity shareholders for dividends but do not bear company losses.
• 📉 Debentures are another key source of long-term finance, functioning similarly to loans, where the holder receives interest regardless of the company's financial status.
• 💼 Retained earnings are the profits set aside by a company for future use, acting as a financial reserve for uncertainties.
• 🏛️ Long-term loans are taken from financial institutions or banks, mainly for purchasing fixed assets or large organizational investments.

Q & A

What are the three main types of finance sources?

The three main types of finance sources are long-term sources, medium-term sources, and short-term sources.

What defines long-term sources of finance?

Long-term sources of finance are those that extend for more than five years and are typically used to finance fixed assets or long-term investments.

What are some examples of medium-term sources of finance?

Medium-term sources of finance include public deposits, loans from commercial banks, and leasing finance, which are typically used for a period of one to five years.

How are short-term sources of finance defined?

Short-term sources of finance are for periods of less than one year and include options like bank credit, trade credit, installment credit, advances, and commercial papers.

What are the two main types of shares a company can issue?

A company can issue two main types of shares: equity shares and preference shares.

What are the key characteristics of equity shares?

Equity shares represent ownership in a company. Shareholders are eligible to share in the profits and losses of the company, and their dividends fluctuate based on company performance.

What are preference shares, and how do they differ from equity shares?

Preference shares provide shareholders with a fixed dividend and priority over equity shareholders when profits are distributed. However, preference shareholders do not share in company losses.

What are retained earnings, and how are they used?

Retained earnings refer to profits kept by the company for future uncertainties or investments. These funds provide financial stability and are used to support long-term financial needs.

How do debentures function as a source of long-term finance?

Debentures are a type of long-term loan where the company borrows funds from investors. Debenture holders receive a fixed interest, and they have a priority claim on company assets in case of liquidation.

What is the purpose of long-term loans in corporate finance?

Long-term loans are taken by companies to finance the purchase of fixed assets such as machinery, buildings, and equipment, or for renovation and expansion projects.