StudentShare solutions
Triangle menu

Long-Term Sources of Finance - Essay Example

Extract of sample
Long-Term Sources of Finance

preference equity, common equity, debt and leasing. Long-term Finances A business needs funds for capital investments such as fixed assets like plant, machinery, land, building, furniture etc. These assets must be financed with long-term financing sources. The chief financial officer (CFO) is usually responsible for making suggestions to the senior management and board of directors related to financing issues. These suggestions and recommendations carefully analyze the advantages and disadvantages of each long-term financing option. After the decision is made by the senior management and the board, the CFO is responsible for obtaining the long-term finances. The common forms of long-term finances are preferred stock, common stock, long-term debt and leasing. A firm faces need of different types of finances through its various stages of development. A firm in its start-up generally avail funds from the banks for personal loans, government agencies and personal savings. During the rapid growth phase a firm uses internally generated funds or direct financing. The direct financing includes loans from insurance company, commercial banks or pension funds and financing by venture capitalists. The maturity phase is financed by issuing equity or debt in primary markets. The firm in its final stage finances from internal sources while making debt repayments or buying back the common stock (Weaver & Weston, 2004, p.311-312). Figure 1: Financing Sources Source: (Weaver & Weston, 2004, p.312) Sources of Long-term Finance Sources of long-term finance differ with the type and size of the firm. There are mainly two categories of financing-Equity and Debt. The equity financing consists of two types of equity instruments, one is preference stock and the second is common stock. The debt financing can take two forms, first long-term debt from financial institutions and second in the form of leasing. Each financing option is discussed as follows: Preferred Stock Preference capital is a distinctive type of long-term financing which combines the features of both debt and equity. As a hybrid security it has a fixed rate of dividend and ranks higher than the common equity in terms of claims over the firm’s earnings. The preference shareholders do not have voting rights as the common shareholders have. Advantages: The preference dividends can be omitted in case of low or zero earnings. This provides the firm greater flexibility and chance of surviving a downturn. However skipping a dividend may reflect dim view of the firm in investors’ community and may affect the share price as investors lose confidence and sell. Preference share capital is an additional source of capital which does not provide voting rights to the preference shareholders and therefore do not dilute the influence of ordinary shareholders. Fixed and limited preference dividends mean that the firms can retain or distribute common dividends in case of extra-ordinary earnings in a fiscal year. In case of limits on raising debts under the debt covenants, the preference share capital is a good alternative if a firm wants to expand raising external finance. Disadvantages: The high risk associated with capital and annual returns leads the preference shareholders to demand higher return than debt holders. The preference dividends are regarded as distribution of profits. Therefore they are not tax deductible. In comparison to this the lenders are not owners and so their interests are regarded as the expense ...Show more


Long-Term Sources of Finance Contents Contents 2 Introduction 3 Long-term Finances 3 Sources of Long-term Finance 4 Conclusion 11 References 13 Bibliography 13 Introduction This essay is a detailed analysis of a variety of long-term sources of finance along with their advantages and disadvantages…
Author : daryl44
Long-Term Sources of Finance essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Long-Term Sources of Finance"
with a personal 20% discount.
Grab the best paper

Check these samples - they also fit your topic

Short term finance sources
This research is being carried out to evaluate and present four most common short term sources of finance that a business uses to finance its expenses and they are: 1) Bank overdraft 2) Short term loans 3) Trade credit 4) Sale of unused assets They can be used to pay for the salaries of the employees and other administrative costs.
6 pages (1500 words) Essay
Finance Management
The company over the years has grown and developed its various divisions. The main aim of this paper is to analyse the company and to make a brief analysis of the company’s current position. The paper also focuses on the current role of the financial manager and based on the analysis a detailed discussion for improvements has been included.
18 pages (4500 words) Essay
External Sources of Finance
In any case, it has to be realized that building a Greenfield investment from scratch is usually more expensive than acquiring an already existing business. Financing decisions are normally very fundamental considerations to be made by any multinational corporation like Acme which seeks to venture into large scale operations.
4 pages (1000 words) Essay
Long Term Financing of Companies
Financing may be of short term or long term. Short term financing is necessary for meeting the need of working capital when long term financing is necessary for a company mainly for expansion of its.
6 pages (1500 words) Essay
Identify and Evaluate the Sources of Long-Term Finance Available to the Company
Secondly, the project appraisal techniques will be employed in order to study the feasibility of the MUTOs project. At this stage, sensitive analysis will be applied in order to investigate how changes of some key variables have an impact on the project outcome.
4 pages (1000 words) Essay
Financing of Working Capital and the Money Markets
In the end, the author presents the trade off between short term and long term finances for working capitals. In Croatia, banks form the primary source of financing for local businesses that are centrally regulated by the Croatian National Bank. Croatia possesses a short term liquidity market called Zagreb Money Market in which the banks and non-banks engage their liquidity surpluses to finance reliable entities to help them in their short term finance needs.
5 pages (1250 words) Essay
Long-term Sources of Finance
It is not desirable to use short term funds because of higher rate of interest and because of their limited availability. If the short term funds are diverted for long-term purposes, business will suffer for want of working capital required for inventory, bills receivable and operating expenses.
14 pages (3500 words) Essay
Finance and accounting
To this there will be a comprehensive answer to be provided for the study question, “Which are the similarities or differences between the long-term funding of Cadbury PLC and Standard Chartered
10 pages (2500 words) Essay
Financial Business
Business usually acquire loans from banks, commercial financial institutions, private investor groups, pension funds, saving schemes or from purchasing bonds at market (below or above) interest rate for a specified time period to support
6 pages (1500 words) Essay
Long term financing of companies
If the firm wants to expand its business area then they have to plan for a long term period, because the expansion of a company is not a matter of some days.
7 pages (1750 words) Essay
Hire a pro to write
a paper under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
Comments (0)
Click to create a comment
Contact Us