Summary
Summary SOURCES OF FUNDS OR FINANCE
- Course
- Institution
LONG TERM SOURCES OF FUNDS SHORT TERM SOURCES OF FUNDS INTERNAL SOURCES OF FUNDS EXTERNAL SOURCES OF FUNDS COMMON EQUITY CAPITAL
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KCAUNIVERSITY
SUMMARY NOTES PREPARED
BY DR.STEPHEN
TOPIC 2: SOURCES OF FINANCE
Sources from which a business organization may obtain funds for its operations
can be classified in four different ways as follows:
• Classification according to the duration
These sources are:
• Long term sources funds:
These funds are refundable after a long period of time.
• Short term funds
These funds are refundable after a short period of time: usually within two years.
• Permanent sources of funds
These funds are not refundable as long as the firm is a going concern.
2. Classification according to the origin
These sources are:
• Internal sources of funds:
These funds are generation from within the firm.
• External sources of funds
These funds are generated from outside the firm.
• Classification according to the provider of funds
, These sources are:
• Common equity capital:
This is the finance provided by the real owners of the firm (ordinary
shareholders). Common equity capital is the total of ordinary share capital and
all the reserves.
• Quasi Equity
These are funds provided by the preference shareholders.
• Debt Finance
This is the capital provided by the firm’s creditors.
Long-term Sources of Finance
These include;
• Ordinary share capital
• Long term debt/loan
• Bonds
• Debentures
• Preference share capital
• Retained earnings
• Venture capital
• Business angels
• Ordinary Share capital
Features
• Ordinary shares are variable income securities.
• Ordinary share dividend is not an allowable deduction for tax purposes.
• It is an external source of fund
, • Providers of this capital get ownership and voting rights
• It is a permanent source of funds.
• Ordinary shareholders are paid dividend after the income.
• Claims of other providers of capital have been satisfied.
• It is provided without conditions.
• It’s the most important single source of fund to the company.
• It lowers the firms gearing and financial risks.
• Providers of this capital participate in the supernormal earnings of the firm.
• It can only be raised by listed company’s i.e. companies to that have fulfilled
the gap market authority listing requirements.
• The company is not under any legal obligation to pay dividend.
• In the event of liquidation, ordinary shareholders have a residual claim on the
company’s assets.
Advantages of Ordinary Share Capital (From the COS. Point of view)
• It is a permanent source of funds.
It’s available for use by the company as long as the company is a going com.
• It is provided without condition
It’s therefore a flexible source of funds.
• It is not secured.
It can be raised even when the firm does not have sufficient assets to pledge
as collateral/security.
• The company is under no legal obligation to pay dividend.
Non-payment of the dividend cannot lead to liquidation of the company.
• It reduces the company’s gearing and financial risk.
It therefore enhances the company’s ability to raise more funds.
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