Description
It also explains the pros and cons of internal accruals and preference capital
Internal Accruals
? Consist of
Depreciation expense (Non-cash transaction)
+
Retained Earnings (Internal equity)
Internal Accruals
?Pros ?Readily available,no talking to outsiders ?Effectively additional equity capital, however no issue costs of loss due to under pricing ?No dilution of control ?No expansion in equity base, hence no dilution of EPS, BV per share etc.
? Cons ? Quantum very limited &
variable ? High Opportunity costs: dividends forgone by equity holders ? Requires careful attention to NPV of projects
Preference Capital
? Is a hybrid form of financing, payment after debt but before equity ? Equity features:
-preference dividend to be paid out of distributable profits -not an obligatory payment -dividends not tax deductible ? Debenture features: -dividend rate is fixed -claim is prior to equity -normally no right to vote ? Can have other features like cumulative, convertible, participating…..
Preference Capital
? ? ?
? ?
Pros No obligation to pay dividend, no bankruptcy or legal action for non payment Financial distress of redemption obligation not very high Part of net worth, hence increases its creditworthiness/ leverage capacity No dilution of control No pledging of assets required
? ?
? ?
Cons Expensive source since dividends are not tax deductible Though no legal consequences, liability to pay dividends stands, can spoil company’s image Can acquire voting rights in some cases Have claim prior to equity holders
doc_184959288.ppt
It also explains the pros and cons of internal accruals and preference capital
Internal Accruals
? Consist of
Depreciation expense (Non-cash transaction)
+
Retained Earnings (Internal equity)
Internal Accruals
?Pros ?Readily available,no talking to outsiders ?Effectively additional equity capital, however no issue costs of loss due to under pricing ?No dilution of control ?No expansion in equity base, hence no dilution of EPS, BV per share etc.
? Cons ? Quantum very limited &
variable ? High Opportunity costs: dividends forgone by equity holders ? Requires careful attention to NPV of projects
Preference Capital
? Is a hybrid form of financing, payment after debt but before equity ? Equity features:
-preference dividend to be paid out of distributable profits -not an obligatory payment -dividends not tax deductible ? Debenture features: -dividend rate is fixed -claim is prior to equity -normally no right to vote ? Can have other features like cumulative, convertible, participating…..
Preference Capital
? ? ?
? ?
Pros No obligation to pay dividend, no bankruptcy or legal action for non payment Financial distress of redemption obligation not very high Part of net worth, hence increases its creditworthiness/ leverage capacity No dilution of control No pledging of assets required
? ?
? ?
Cons Expensive source since dividends are not tax deductible Though no legal consequences, liability to pay dividends stands, can spoil company’s image Can acquire voting rights in some cases Have claim prior to equity holders
doc_184959288.ppt