(^56) Financial Management
While the debt and preference share owners do not have any voting rights (except
in special conditions). For this reason, debt is preferred over additional equity
financing. Equity financing is often avoided by small companies, whose owner
managers are not willing to share control.
- The use of debt enables the firm to acquire funds at a fixed cost, whereas the
use of equity shares means that more shareholders will share in the firm's net
profits. - The costs of underwriting and selling equity shares are usually higher than the
costs of underwriting and selling preferred shares or debt, which puts additional
burden on the companies raising resources. But the life and permanency of
the equity shares more than compensates for the additional expenses in initial
floatation.
Share Capital
Figure 2.2 shows the Schedule 'A' of the Cosco India balance sheet.Figure 2.2: Share Capital
The first heading is 'Authorised', which means authorised share capital. Authorised
share capital is the total amount of shares that a company is authorised to sell.
'Memorandum and Articles of Association' of the company provides the information
about the number of shares that the company is authorised to sell and their par value.
Par Value is the value per share established at the time of authorisation. Par value of
the share establishes the minimum legal capital for the company and the shareholder
must invest assets equal to that amount (whether in cash or by transferring the assets
to the company). Par value multiplied by the number of authorised shares form the
authorised capital.
Cosco India Ltd is authorised to sell 10,000,000 equity shares (10 million or 1 crore
shares) of Rs 10 each. Here the par value is Rs 10 per share and the total number of
shares that the company can sell is 1 crore. Therefore the total authorised capital is Rs
10 crore.
The authorised capital is not fixed forever and can be changed depending upon the
requirements. To change the authorised capital, first the company has to take permission