Shares, Debentures and Term Loans

Long-Term Finance:
Shares, Debentures
and Term loans
Presented by :
Ananthu bharat
Ritesh kumar
Muhammed sadathu
Anurag singh
Long-Term Finance
Long term financing means capital
requirements for a period of more than 5

years to 10, 15, 20 years or may be more
depending on other factors.
Capital expenditures in fixed assets like plant
and machinery, land and building etc of a
business are funded using long term sources
of finance.
Part of working capital which permanently
stays with the business is also financed with
long term sources of finance.
EQUITY SHARES
Equity shares also known as Ordinary shares.
Equity shares represent the ownership
position in a company. The shareholders of

equity shares are the legal owner of the
company.
Equity shares are the source of the
permanent capital since they do not have a
maturity date.
shareholders are entitled for dividend.
The amount or rate of dividend is not fixed:
the companys board of directors decides it.
An ordinary share is known as variable
income security
Authorized Share Capital represents the
maximum amount of capital, which a company

can raise from shareholders. The portion of the
authorized share capital, which has been
offered to shareholders, is called Issued Share
Capital.
Subscribed Share Capital represents that
part of the issued share capital, which has been
accepted by shareholders. The amount of
subscribed share capital actually paid up by
shareholders to the company is called Paid-Up
Share Capital.
The companys earnings, which have not been
distributed to shareholders and have been
RIGHT ISSUE OF EQUITY

SHARES
A rights issue is a way in which a company
cansell new sharesin order to raise capital.

The law in India requires that the new ordinary
shares must be first issued to the existing
share holder.
PREFERENCE SHARES
Preference shares are a long term source of
finance for a company.

They are neither completely similar to equity
nor equivalent to debt.
The law treats them as shares but they have
elements of both equity shares and debt.
For this reason, they are also called hybrid
financing instruments. These are also known
as preferred stock, preferred shares, or only
preferred in different part of the world.
Features of Preference Shares
1. Fixed Dividends
Preference shares have fixed dividends. Also
preference dividends are not tax deductible.

2. Preference over Equity
Preference share dividend has to be paid
before any dividend payment to ordinary
equity shares & at the time of liquidation also,
these shares would be paid before equity
shares.
3. No Share in Earnings
Preference shareholders can not claim on the
residual earnings and residual assets.
4. Fixed Maturity
Like debt, preference shares also have fixed
maturity date.
5. Cumulative dividend
It requires that all past unpaid preference
dividend be paid before any ordinary
dividends are paid.
6. Dividend from PAT
Preference share dividend is paid out of the
profits left after all expenses and even taxes.
DEBENTURES
A debenture or a bond
is long-term
promissory note for raising loan capital.

The firm promises to pay interest and
principal as stipulated.
The
purchaser of debenture is called
lender or debenture-holder.
Although
debentures
the
money
becomes
raised
by
the
part
of
the
Features of Debentures
1. Interest rate:
The interest rate on a debenture is fixed
and known.
Debenture interest is tax deductible.
2. Maturity:
Debentures are issued for a specific
period of time.
3. Redemption:
Debentures are mostly redeemable, they
are generally redeemed on maturity.
4. Sinking fund:
A sinking fund
is cash set aside

periodically for retiring debentures.
Periodic retirement of debt through sinking
fund reduces the amount required to
redeem the remaining debt at maturity.
5. Buy-back (call) provision:
Buy-back provisions enable the company
to redeem debenture at a specified price
before the maturity date.
Buy-back price may be more than par
value.
6. Indenture or debenture trust deed:

An indenture is a legal agreement between
the company issuing debentures and the
debenture trustee who represents the
debenture holders.
Trustee ensures that the company will fulfill
the contractual obligations.
7. Security:
Debentures
are
either
secured
or
unsecured.
A secured debenture is secured by a lien on
the companys specific assets.
8. Yield
The yield is related to its market price; Two
types of yield:
The current yield on a debenture is the
ratio of the annual interest payment to the
debentures market price.
The yield-to-maturity takes into account
the payments of interest and principal,
over the life of the debenture.
9. Claims on assets and income
Debenture holders have a claim on the
companys earning, prior to that of the
shareholders.
Types of Debentures
1. Non-convertible debentures (NCDs):

NCDs are pure debentures without a feature
of conversion. They are repayable on maturity.
The investor is entitled for interest and
repayment of principal.
2. Fully-convertible debentures (FCDs):
FCDs are converted into shares as per the
terms of the issue, with regard to the price
and time of conversion.
3. Partly-convertible debenture (PCDs):
The investor has advantages of both
convertible and non-convertible debenture
blended into single debenture.
Term Loans:
Term loans are obtained directly from the
banks and financial institutions for long

term debt.
They are obtained for financing large
expansion. Modernization or diversification

projects.
It has a maturity of more than one year.
Features:
1. Maturity:
Financial institutions provide loan for a period
of 6 to 10 years. This is the period during

which the company will not needs to make
any payment.
2. direct negotiation:
A firm negotiates term loans for project
finance directly with a bank or institutions.
3. security:
The assets acquired using term loan funds
secure them. This is called primary security.
If Current assets are secured then it is called
secondary security.
4. Restrictive covenants:
FI add a number of restrictive covenants
on loan from lenders.
The borrowing firm has generally to keep
the lender informed by furnishing financial
statements
and
other
information
periodically. The covenants may be
categorized as follows:
1. Asset-related covenants
2. Liability-related covenants
3. Cash flow-related covenants
4. Control-related covenants
5. Convertibility:
6.Repayment schedule:
It specifies the time schedule for paying
interest and principal.
It is also known as loan amortization
schedule.
It requires to repay the principal in equal
installment and pay interest on the unpaid
loan.
Thus, interest payment will decline over
the years and total loan payment will not
be equal in each period.
Long Term Investment

Long Term Investing refers to the fact that
investment is made for a period greater than

1 year.
The various factors to be considered are:Fixed asset turnover ratio
Return on Equity
Return on capital employed
Operating profit margin
Dividend yield ratio
Dividend payout ratio
Each of these factors has a role to play in the
selection of the company for investment.

However, the degrees to which they affect the
returns vary in response to the other factors as
well.
1)
Fixed-asset Turnover Ratio:
The fixed-asset turnover ratio measures a
company's ability to generate net sales from
fixedasset investments - specifically property,
plant and equipment (PP&E) - net of
depreciation.
What does FA Turnover ratio say?

A higher fixed-asset turnover ratio shows that the company has been more
effective in using the investment in fixed assets to generate revenues.
12
10
9.8
7.81
7.49
5.35
4.73
4.6
6.26
6.09
5.63
HUL
GCPL
4.18
0
2011
Trend analysis
2012
2013
2014
2015
The ratio is increasing for both the companies but for

GCPL, it is increasing at a higher rate as compared to HUL,
also, the absolute value for GCPL is higher than HUL. So,
GCPL is more efficient of the two
2)
Return on Equity
It is the amount of net income as a
percentage of shareholders equity.

Return on Equity = Net
Income/Shareholder's Equity
What does it say?
Return on equity measures a corporation's
profitability by revealing how much profit a
company generates with the money
shareholders have invested. So higher the
ROE, better is the performance of the
company .
Trend analysis
ROE for both the companies are decreasing but
for HUL the absolute value is much higher as

compared to GCPL. Hence, of the two, HUL is a
better option.
140.00 %
122.91 %
121.27 %
120.00 %
100.00 %
98.47 %
85.25 %
87.54 %
76.62 %
80.00 %
HUL
60.00 %
GCPL
40.00 %
30.08 %
29.98 %
28.36 %
23.94 %
20.00 %
0.00 %
2011
2012
2013
2014
2015
3)
ROCE
It is the ratio that indicates the efficiency and
profitability of a company's capital

investments.
ROCE = EBIT / (Total asset current
liabilities)
What does ROCE say?
ROCE measures a corporation's profitability
by revealing how much profit a company
generates with respect to the total investment
made. So higher the ROCE, better is the
performance of the company
Trend analysis
ROCE has been decreasing for both the
companies but the absolute value of ROCE for

HUL is more than 4 times than GCPL, which
shows that HUL is performing much better and
hence, it is a better option
160
140
138.72
120
118.59
106.78
100
102.47
93.08
HUL
80
GCPL
66.03
60
40
35.73
32.65
28.43
21.42
20
0
2011
2012
2013
2014
2015
4) Operating Profit
Margins
A ratio used to measure a company's pricing
strategy and operating efficiency.

Operating Profit Margin = Operating Income /
Net Sales
What does it say?
Operating margin gives analysts an idea of how
much a company makes (before interest and taxes)
on each dollar of sales. When looking at operating
margin to determine the quality of a company, it is
best to look at the change in operating margin over
time and to compare the company's yearly or
quarterly figures to those of its competitors. If a
company's margin is increasing, it is earning more
per dollar of sales. Higher the operating profit
Trend analysis
HUL is a better option as its operating margin is
high as well as it is increasing from the last year

which is not the case with GCPL
0.2
0.18
0.175
0.16
0.14
0.142
0.136
0.127
0.12
0.128
0.12
0.131
0.122
0.111
0.118
HUL
0.1
GCPL
0.08
0.06
0.04
0.02
0
2011
2012
2013
2014
2015
5) Dividend Yield
A financial ratio that shows how much a company
pays out in dividends each year relative to its share

price.
Dividend Yield = Annual Dividends per share /
price per share
What does it say?
Dividend yield is a way to measure how much cash
flow you are getting for each dollar invested in an
equity position - in other words, how much "bang
for your buck" you are getting from dividends.
Investors who require a minimum stream of cash
flow from their investment portfolio can secure this
cash flow by investing in stocks paying relatively
Trend analysis
HUL is better option since the absolute value
4.5
of Dividend yield is greater than GCPL but for

both the companies dividend yield is
decreasing.
4.2
4
3.5
3.2
3.1
3.01
2.7
2.5
HUL
2.2
2
1.8
1.62
1.5
1.23
1
0.99
0.5
0
2011
2012
2013
2014
2015
GCPL
6) Dividend Payout
Ratio
The percentage of earnings paid to
shareholders in dividends.
Dividend Payout Ratio = Dividends / Net
Income What does it say?

The payout ratio provides an idea of how well
earnings support the dividend payments. More
mature companies tend to have a higher
payout ratio. This is because they do not
retain the earnings for re investing in
business.
Trend analysis
HUL is a better option since it doesnt retain
much of its earnings for the purpose of

expansion as compared to GCPL
140
131.8
120
100
80
76.47
74.58
73.26
75.2
60
71.2
69.99
GCPL
59.34
45.19
40
30.11
20
0
2011
2012
2013
HUL
2014
2015
Overall Analysis
After considering all the parameters, we can
say that HUL is better for long term

investment since it provides better dividends
as compared to GCPL. Not only that, in terms
of ROE, ROCL and operating profit margin,
HUL is a better company to invest for the long
term.

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Long-Term Finance:

requirements for a period of more than 5

position in a company. The shareholders of

Authorized Share Capital represents the

maximum amount of capital, which a company

RIGHT ISSUE OF EQUITY

cansell new sharesin order to raise capital.

finance for a company.

Features of Preference Shares

preference dividends are not tax deductible.

promissory note for raising loan capital.

purchaser of debenture is called

is cash set aside

6. Indenture or debenture trust deed:

1. Non-convertible debentures (NCDs):

banks and financial institutions for long

expansion. Modernization or diversification

of 6 to 10 years. This is the period during

Long Term Investment

investment is made for a period greater than

Each of these factors has a role to play in the

selection of the company for investment.

What does FA Turnover ratio say?

The ratio is increasing for both the companies but for

It is the amount of net income as a

percentage of shareholders equity.

for HUL the absolute value is much higher as

It is the ratio that indicates the efficiency and

profitability of a company's capital

companies but the absolute value of ROCE for

strategy and operating efficiency.

high as well as it is increasing from the last year

pays out in dividends each year relative to its share

of Dividend yield is greater than GCPL but for

Income What does it say?

much of its earnings for the purpose of

say that HUL is better for long term

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