As the company has decided to purchase a fixed asset worth Rs. 50 crore, it requires long term finance.
The various sources of long term finance available for a company are
(a) Equity Shares: It is the most important source of long term finance. It represents owner’* funds. Equity shares do not get a fixed dividend. Its share holders are the primary risk bearers.
(b) Preferential Shares: The holders have preferential right to get dividend before equity dividend and repayment of capital before equity shareholders at the time of liquidation of company. They receive dividend at a fixed rate (depending upon profit) after the end of the accounting year. Preferential shareholders are like creditors of the company, they do not enjoy any voting rights.
(c) Debenture is a debt instrument carrying specified: rate of interest which is issued by an organization to raise borrowed funds. It is an acknowledgment that the company has borrowed a certain amount of money, which it promises to repay at a future date. Interest is paid every six months or one year.
(d) Retain earnings: It is the portion of company’* net profits after tax and preference dividend which is not distributed as equity dividend but is retained for reinvestment purpose. Retained earnings is also called source of self – financing or source of Internal financing or ploughing back of profits. It is a permanent source of fund which does not involve any interest or floatation costs.
(e) Loans from Financial Institutions: The central government and state government have established a number of specialized financial institutions all over the country to provide industrial finance to companies engaged in business. They are called Development Banks examples are IFCI, ICICI, LIC and IDBI. They provide both owned capital and loan capital for long and medium term requirements. They also provide marketing and technical assistance.
