What are Long term financial requirements or fixed capital requirement in finance?

Finance ManagementAccountingAcademic Content

Long term financial requirement is also called as fixed capital requirement. It is the capital required to purchase fixed assets like building, furniture, land, plant and machinery etc. These are also called as long term financial requirements of a firm. Repayable period in long term is more than five years. Long term financial sources include the following −

Equity shares

  • Equity share represents ownership interest in a company. In this, no compulsion to pay dividend and it does not have any maturity. Capital provided by these funds is more or less on permanent basis. It also creates base for debt and loan capacity of a firm.

Advantages

  • Firm can retain shares through buy back (as per guidelines of SEBI).
  • It does not involve any mandatory payments to shareholders.
  • It increases corporate flexibility in capital structure planning.

Disadvantages

  • New issue of equity capital may reduce EPS.
  • Excessive issue of equity capital may dilute ownership.
  • These are not tax deductible.

Preference shares

  • Preference share is also called as owner’s capital with maturity period. Preference with respect to payment of dividend and preference with reference to repayment of capital in case of liquidation of a company are the two references in preference shares.

  • Preference shareholders have right to receive dividends prior to equity shareholders.

Advantages

  • Cost of capital in preference shares is less.

  • Company does not face any legal proceedings, if it fails to pay the preference dividends.

  • Preference share may also provide hedge against inflation.

Disadvantage

  • Cost of capital is high.
  • Non-payment of dividends may adversely affect the market price.
  • No voting right.

Debenture

  • It is a document issued by the company. Debentures includes debenture stock, bonds or any other securities of a company.

  • Debentures are classified as Unsecured debentures, secured debentures, redeemable debentures, irredeemable debentures, convertible debentures and other types.

Advantages

  • Fixed rate of interest.
  • Income tax deduction.
  • A company can trade on equity by adding debentures in its capital structure.

Disadvantage

  • High risk.
  • Fixed rate of interest.
  • No voting right.

Long term loans

  • Different financial institutions will provide financial assistance in long term loans.

raja
Published on 11-Aug-2020 15:08:27
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