The most widely used source of long term external funding is the issue of binds and debentures by companies in the financial market. The principal advantage of bonds over other sources and in particular the issue of equity is that it is deficiently much cheaper. However, when a firm takes an in principle decision to issue bonds in the market; it acknowledges the increasing financial risk because of the involvement of a fixed interest costs over the period of bonds life. These interest charges must be paid irrespective of the company’s profitability and without fail. However, what works in favour of this source is that the interest payments would be allowed to be deducted as operating expenses form the earnings of the firm .
Equity share capital is the most reliable long term source of capital for many companies in the financial market. As shareholders and other perspective investors would be willing to invest in new shares of a company which has a decent to good profitable performance in the recent past, new shares can be issued at a premium in the open market. Further, this source has no fixed interest cost liability and dividends are paid when the form has profitable operations. All the profits are not needed to be distributed as dividend and a major portion of the current profit is retained for investment purpose. So this source can be a preferred source for many companies including Fairfield, if the current shareholders do not resent new issue of shares as they can dilute the shareholding ratios .
To issue bonds in the financial market a company is needed to fulfil regulatory procedures and wait for a long period of time before the issue can be opened. This consumes lot of tome. However, taking a bank loan would be sometimes less procedural than issue of bonds. However, like the bonds these loans also once with a prepared rate of interest rate and interests are payable in general twice year. The interests are also payable with the option of tax deductibility and the same makes bank term loans more attractive. Companies with good performance in the recent fiscal periods would have the option of getting long term loans at a cheaper rate as well.
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