Evaluation of financial sources 2

Issuing shares
Shares are issued by the limited companies as the main source of capital. The capital of the company will be divided into number of small units and will be sold the ownership of the company to the persons who purchase the shares.
Shares issued by a company can be classified into two broad categories such as
ordinary shares and preference shares.
Ordinary shares
Ordinary shares are issued without specifying a particular dividend payout percentage. Dividends will be declared based on the annual operational profit of the company. Ordinary share capital is a form of long term capital. (equity share capital)
Preference shares
Preference shares are issued specifying the dividend payout percentage. As a source of finance, the issue of ordinary shares will give the following benefits to the business.

• The ability to raise more funds

            Limited liability companies can invite the general public to subscribe for share
            issues and thereby raise higher amount of capital.

• Long term nature of the capital

            Share capital can be retained until the liquidation of the company as it is paid out at last.

•  No interest is paid

           Interest is not paid for capital raised by issuing ordinary shares. Although
          dividend is paid, it is subject to the operational performances of the company.
          Therefore, there is no committed cost of capital as other loans.

• Enhances the transparency of business operations

          It is legally required to publish financial information of the limited liability
          companies as at stipulated period of time by different statutes. Since the financial
          information is published periodically and they are subject to audit, the investor
          awareness of these companies is comparatively higher than other companies.

Accordingly, by evaluating different financial sources, it is possible to identify the most appropriate and economical source of financing for the company.