SOURCES OF CORPORATE FINANCE | JAIIB FREE NOTES
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SOURCES OF CORPORATE FINANCE
Expansion is a key objective of a business and in order to do so companies are required to often raise their funding or capital. Business looks for new markets or locations to expand their markets, invest in research and development, tries to cut the competition. The companies do so by using the funds from the profit they earn from their ongoing business but most of the time they look for external lenders and investors to fund them. In this article, we’ll discuss the sources that can make funds available to all firms.
Share capital
Share capital is funds raised by selling equity shares and preference shares. Equity investment in a firm or share capital
may change over time with additional public offerings. Accepting a new offer of stock may be the best option for a company looking to increase its share capital on its balance sheet. The highest money a company is permitted to raise through a public offering is its authorized share capital.
A company’s capital is divided into minuscule, equal portions of a finite number. Each unit is referred to as a share. Simply explained, a share is a fraction of ownership in a company or a financial asset. Investors who own stock in a corporation are called shareholders.
For instance, if a firm has a market value of Rs. 10 lakhs and each share are valued at Rs. 10, then there will be 1 lakh shares issued.
| Refer to the explanatory YouTube lecture for a better understanding of the topic: https://youtu.be/lLPlTc2XwUE |
Types of share capital
Authorized share capital: The maximum number of shares a company is legally permitted to issue or offer based on its corporate charter. Some portion of authorized share capital is usually kept for future needs. It will not increase without the permission of the shareholder.
Issued shared capital: A small ownership is offered to the shareholders in exchange for the monetary investment. Issued share capital is the value of the shares that investors actually own.
Subscribed shared capital: Subscribed share capital is the number of shares that investors have agreed to buy when they are issued.
Paid-up capital: Fund raised from selling stock directly to investors. It’s usually received from the initial public offering and it’s only received in the primary market.
Reserve capital: It’s a part of subscribed uncalled shared capital that can be called up by a company only in the event of liquidation. It is created out of the authorized capital.
Equity shares: These are common shares. Those who hold these shares are the real owner of the company. Shareholders have voting rights and control over the functioning of the company. They receive a dividend on the shares and it depends upon the profit earned by the company. These shares are non-remediable permanent shares.
| Refer to the explanatory YouTube lecture for a better understanding of the topic: https://youtu.be/lLPlTc2XwUE |
Preference shares: They represent ownership in a company. Preferences over common shareholders on the assets and earnings are enjoyed by the preference shareholders and a fixed rate of dividend is paid to the preference shareholder. Preference shares are a good option for risk-averse investors because they can be called (the issuer can redeem them at any time).
Types of Preference shares
| Convertible preference shares | Convertible preferred stock, a form of preferred share, pays a dividend and, after a predetermined amount of time, permits conversion into common stock at a predetermined conversion ratio. Convertible preferred stock possesses both debt and equity features due to the dividend pay-out and conversion possibility. As a result, it qualifies as a hybrid investment.
When the common share trades above the conversion price, it may be advantageous for the preferred shareholders to convert their preferred stock to common shares. When preferred shareholders convert their shares into common shares, they forfeit their rights as preferred shareholders (no fixed dividend or higher claim on assets) (ability to vote and participate in share price appreciation). |
| Non-Convertible Preference shares | Non-convertible Preference Shares cannot be converted into common equity shares of the corporation. However, they still maintain preferred rights to the payment of capital over common shareholders in the case of the company’s liquidation. |
| Redeemable preference shares | Redeemable preference shares, which can be redeemed under previously agreed-upon conditions, may be issued by companies to shareholders. When a certain event occurs, the corporation may choose to repurchase shares, or it may choose to do so at the company’s or a shareholder’s discretion. |
| Irredeemable preference shares | These are the shares that cannot be redeemed at a later date.
While shares that are irredeemable can only be bought back at a company’s liquidation. Lessen the benefits you give the company while keeping it stable via irredeemable shares. Dividend components endure to permanency. |
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