Question

3. LMN Pty Ltd is a new company with an interesting new service that shows great potential. However, the company needs more long-term finance to grow. Its founder, Harpreet, is an expert in her area but she knows very little about business. She is currently the only shareholder of the company and has no family or friends that could provide further financing. You have been asked to meet her on a video call to explain sources of long-term financing. You have decided to keep it simple and explain the difference between debt and equity, and provide an example of each that would apply to a start-up business such as LMN. Due to technical problems at Harpreet's end, the video call has to be cancelled. Instead, you record a maximum 5 minute video on your phone to send to her, following your earlier plan on the content to cover. (15 marks) Instructions for part 3: For this part, you must upload a video file to the A4 Video submission link. You must also include a written version of your presentation in your word document submission. This need not be exactly what you say in the video but should be a reasonably faithful representation of what you cover and in the order which you cover it.

Require a written script for the presentation

Require only a written script for the video

Answer 1

Sources of long term finance:

1. Issue of shares: Harpreet can issue further number of shares to the public

1. Equity shares: The shareholders will have a right to participate and vote in the decisions of the Company.
2. Preference shares: It carries a preferential right in respect of payment of dividend and also carries preferential right in regard to repayment of capital.

2. Debentures: It is defined as an instrument acknowledging a debt by a company to some person or persons.

3. Public deposits: Deposits are a kind of borrowing made by the companies. It may be noted that deposits may be secured or unsecured borrowings.

4. Bonds: Bonds are normally unsecured. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. Bonds may be of different kinds as follows

• Zero Coupon Bond
• Deep discount Bond
• Convertible Bond
• Stepped coupon bond
• Commodity bond
• Capital Indexed Bond
• Disaster Bond

DEBT VS EQUITY

1. Debt providers do not have controlling interest in the company whereas the equity shareholders are treated as owners and participates in the decision making.

2. The cost of raising debt is lower than cost of raising owned capital for a company

3. Equity shareholders cannot compel the management to declare a dividend whereas the company is obliged to pay interest or principal promised at the stipulated period.