Long Term Financing of Companies Essay Example | Topics and Well Written Essays - 1500 words

Long Term Financing of Companies - Essay Example Financing is necessary for a company to continue its business or improve the business. Mainly financing is necessary for the operations, continuing the day to day activities or expansion of a company. Financing may be of short term or long term. Short term financing is necessary for meeting the need of working capital when long term financing is necessary for a company mainly for expansion of its. If the firm wants to expand its business area then they have to plan for a long term period, because the expansion of a company is not a matter of some days. Then the company needs the long term financing. Usually a company obtains various sources for getting long term financing as there are various sources available in the market for long term financing. The cost of capital is different for the different sources. A company when obtain for different sources of financing then they found for the most suitable sources for financing from the available bunch. This paper is an attempt for analyzi ng the various sources of long term financing and find the type of long term financing is obtain by different sectors. Long Term Financing Sources and its Advantages and Disadvantages Long term sources of financing are needed for a company for getting the needed finance for generally over a year. Long term financing is necessary for expansion of the business.... But the opportunity cost of the source is much as the factor of paying the dividends to the shareholders is there. The retained earnings are also fluctuating as it depend on the company’s profit after tax, so a company can’t depend only on this source for long term financing. All types of companies use this source of financing. Depreciation Charges: The depreciation charges of a company is charged on the assets, but there is no cash outflow for the company but depreciation charge is calculated for the calculation of a company’s profit. As the depreciation save the tax charge on income so the tax savings can be invested again by the company for generating return (Shim and Siegel, 1999, p.198). The cost of capital of the source depreciation charged is minimal which is an advantage for the company but the amount generated for reinvestment is not so much, it is even less than the retained earnings generally. Al types of companies use this internal source of financing . Equity Shares: The equity shares issued by a company in the stock exchange are a large source of investing. The companies issue shares through an underwriter to the market. The investors who invest in the company are thereby become the owner of the company (Hamer and Hamer, 2008, p.4). The company management can generate finance by issuing the stock as an Initial Public Offering (IPO) and Follow on Private Offering (FPO). The advantages to going public and generating the capital from the market is that the cost of capital is not much for using the sources (Draho, 2004, p.3). The companies have to pay dividend to the shareholders of the company when the shares are ordinary or in the form of preference shares. The companies have to provide dividends