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Ingredients of Equity Contributions - Assignment Example

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The paper 'Ingredients of Equity Contributions' presents equity and debt which are the two broad sources of long term finance. A contractual set of cash outflow is required to serve the debt financing, where equity providers have a claim on residual cash flows of the firm…
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Ingredients of Equity Contributions
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Download file to see previous pages There is no legal compulsion to pay dividends unless those are cumulative preference capital. Normally preference capital does not have any voting rights, hence no dilution of control. Assets are not pledged on the issuance of preference capital. However preference capital has a higher cost of issuance. Another limitation is that preference capital has a prior claim on assets and earnings of the company than equity holders.
Interest on borrowings is an expense for calculating the income of the company. Debt funding does not dilute the control of equity holders. The issue costs of debts are significantly lower than those on equities and preference capital. The burden of servicing debts is generally fixed in nominal terms.
Failure to meet fixed interest and principal repayment obligations can cause a great deal of financial embarrassment and even lead to bankruptcy. Some time debt contracts impose restrictions that limit the company’s financial and operational flexibility. Under inflation, the real cost of debts is greater than expected.
As per IAS 1, the objective of financial statements is to ensure comparability with the entity’s previous year transactions and with the financial statements of other entities. Accordingly, the structure of the Trading & Profit and Loss Account and the Balance sheet should bring this attribute of possibility of comparison as per the requirement of standards. Secondly, the structure of these statements should present fairly the financial performance of the entity during the accounting period, and its financial position as on the date of the balance sheet. The statements are required to be prepared on the mercantile basis of accountancy, i.e, accrual basis and on the assumption of the entity as a going concern. The material items in the financial statement should be presented separately, whereas dissimilar items may be aggregated if those are not material to the business. The common form of presentation is a vertical presentation. However, the entities may also use T form provided above-stated requirements that are complied with. ...Download file to see next pagesRead More
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