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Sources of Business Finance. Owner’s Fund. - PowerPoint PPT Presentation
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Owner’s funds means funds that are provided by the owners of an enterprise, which may be a sole trader or partners or shareholders of a company. Apart from capital, it also includes profits reinvested in the business. The owner’s capital remains invested in the business for a longer duration and is not required to be refunded during the life period of the business.
Owner’s FundSources of Business
Finance
Owners Fund
Share CapitalOwner’s FundShare capital is the major source of finance for a company form of business organization. It is the amount collected from the public through the issue of different units of shares. The shareholder will become one of the owners of the company.
Share A Share
B
Share C Share
D
Share Capital
Share Capital
Equity Shares
Preference Shares
Share Capital
Owner’s Fund
Equity SharesOwner’s Fund
Equity shares are the ordinary share capital of a business. The Investors of the Equity shares are the owners of the company. They are the real risk takers of the business. Equity shares are considered to be long term internal source of business finance. Equity share holders are considered to be the owners of the business Remuneration/Dividend to the Equity share holders are not fixed High risk takers, but better rate of return in case of prosperity Enjoys Voting right and participation in the management Gets the dividend only after meeting the claims of other parties including creditors and govt.
Advantages of Equity Shares
Equity shares
Permanent capital
No charge on assets
No burden on the company
Higher returns
Control
Owner’s Fund
Advantages of Equity Shares
Equity shares
Permanent capital
No charge on assets
No burden on the company
Higher returns
Control
Equity capital is the permanent capital and is repaid only on the liquidation of the company.
Owner’s Fund
Advantages of Equity Shares
Equity shares
Permanent capital
No charge on assets
No burden on the company
Higher returns
Control
For raising the fund through the issue of equity shares the company does not need to mortgage its property to its equity share holders
Owner’s Fund
Advantages of Equity Shares
Equity shares
Permanent capital
No charge on assets
No burden on the company
Higher returns
Control
Better profit, that will be distributed among the equity share holders on the basis of the number of shares they held. Besides if there is any surplus in the company, the same will also be distributed to equity share holders.
The rate of return on equity shares is made on the basis of the profitability of the business. Hence when the business is having
Owner’s Fund
Advantages of Equity Shares
Equity shares
Permanent capital
No charge on assets
No burden on the company
Higher returns
Control
Payment of dividend to the equity will be on the basis of the companies profitability. Hence it is not mandatory to issue dividend to equity share holders at all times if there is no profit to the company. Therefore, the dividend on equity shares will not be a burden.
No Profit, No Dividend
Owner’s Fund
Advantages of Equity Shares
Equity shares
Permanent capital
No charge on assets
No burden on the company
Higher returns
Control
Equity share holders are having the right to participate in the meetings of the company and to vote. This enables the equity share holders to have a democratic control over management of the company.
Voting Right
Owner’s Fund
Preference SharesPreference shares are those shares which having the preferential right to accept the dividend at the time of declaration and for the repayment of capital on winding up of the business. They have no special rights and privileges in the company.Capital raised through the issue of preference sharesPreferential right to receive the dividend and for repayment of capital.Fixed rate of returnNo voting right and special privileges
Less risk and less rate of return as compared to equity share holders.
Owner’s Fund
Advantages of Preference Shares
Preference shares
Owner’s Fund
Preference shares
Steady Income
Low Risk
Preferential Rights
Absolute Control to Equity share holders
No Charge against property
Advantages of Preference Shares
Preference shares
Steady Income
Low Risk
Preferential Rights
Absolute Control to Equity share holders
No charge against property
Preference shares providereasonably steady income in theform of fixed rate of return andsafety of investment
Owner’s Fund
Advantages of Preference Shares
Preference shares
Preference shares are useful forthose investors who want fixedrate of return with comparatively low risk as it provides fixed return.
Owner’s Fund
Steady Income
Low Risk
Preferential Rights
Absolute Control to Equity share holders
No charge against property
Fixed and Stable Return
Advantages of Preference Shares
Preference shares
It does not affect the control ofequity shareholders over themanagement as preferenceshareholders don’t have votingRights.
Owner’s Fund
Steady Income
Low Risk
Preferential Rights
Absolute Control to Equity share holders
No charge against property
No Voting Right
Advantages of Preference Shares
Preference shares
Preference shareholders have aPreferential right of repaymentover equity shareholders in the event of liquidation of a company and for getting the dividend at the time of declaration.
Fixed DividendPriority in capital refund
Owner’s Fund
Steady Income
Low Risk
Preferential Rights
Absolute Control to Equity share holders
No charge against property
Advantages of Preference Shares
Preference shares
Preference capital does not createany sort of charge against the assets of a company. These shares can be repaid after a specified period of time.
Owner’s Fund
Steady Income
Low Risk
No Charge against Property
Absolute Control to Equity share holders
Preferential Rights
Global Depository Receipt(GDR)
Owner’s Fund The local currency shares of a company are delivered to the depository bank. The depository bank issues depository receipts against these shares. These receipts are called GDR. GDR is an instrument issued abroad by an Indian company to raise funds in some foreign currency and is listed and traded on a foreign stock exchange.
GDR is a negotiable instrument and can be traded freely like any other security.
A holder of GDR can at any time convert it into the number of shares it represents.
The holders of GDRs do not carry any voting rights
Negotiable instrument issued
by an Indian Company
abroad
American Depository Receipt(ADR)
Owner’s FundThe depository receipts issued by a company in the USA are known as American Depository Receipts. ADRs are bought and sold in American markets like regular stocks.
It is similar to a GDR except that it can be issued only to American citizens.
ADR can be listed and traded on a stock exchange of USA
The holders of GDRs do not carry any voting rights
Depository receipts by a U S Company
Retained EarningsOwner’s FundA company generally does not distribute all its earnings amongst the shareholders as dividends. A portion of the net earnings may be retained in the business for use in the future. This is known as retained earnings.
It is a source of internal financing or self financing or ‘ploughing back of profits’.
Retained earnings is a permanent source of funds available to an organisation
As the funds are generated internally, there is a greater degree of operational freedom and flexibility
It does not involve any explicit cost in the form of interest, dividend or floatation cost
R E = Net Profit – Dividend