Financial Management Essay Example | Topics and Well Written Essays - 2500 words - 1

Financial Management - Essay Example The financing policy should be designed in a way that it maximizes the wealth of the shareholders while minimizing the overall cost of capital. Equity The equity shares are also referred to as ‘ordinary shares’. The equity shareholders also referred to as ‘ordinary shareholders’ who share the risk as well as reward associated with the corporate ownership. Unlike preference shares the equity shares do not carry any preference with respect to redemption and income. As the equity shareholders are exposed to greater risks and do not enjoy any specified preferential rights, the equity holders are entitled to a higher share in the business profits in the form of high dividends as compared to the payments made to the preferential shareholders. However, the declaration of dividend is at the discretion of the directors’. Types of equity shares The equity shares are of the following types- With voting rights Without voting rights With differential voting rights with respect to dividend payments or voting, as per any prescribed rules and conditions. The shares with the feature of â€Å"differential voting rights† cannot be more than 25% of the company’s Total Issued Share Capital. The corporate can raise additional funds, without diluting the ownership interest of the existing shareholders through the issue of â€Å"non-voting equity shares†. ... In the event of dividend failure, the non-voting class of shares will automatically get pro-rata voting rights until there is resumption in dividend payments (Guruswamy, p.51). Merits & demerits of equity An important benefit arising from the issue of equity is that it does not create any fixed obligations. The dividends paid on the equity shares are at the discretion of the management and therefore it does not create any legal bindings. In the initial stages, the company may not be in a position to withstand fixed contractual obligations. For this reason, the equity issue is the most preferred route of issuing funds as it does not create any financial burden on the company. However, a high level of equity can dilute the ‘ownership’. It is argued that the equity shareholders interfere in the business affairs thereby delaying crucial business decisions. Moreover, the managers have to seek approval of the majority shareholders at the time of making important business decis ions. This leads to excessive delays. Benefits & Risks of voting & non-voting equity The main advantage of non-voting shares is that it overcomes the problem of dilution of ownership as these classes of shares do not have any voting rights. This class of shares tackles the problems related with other class of shares such as the ordinary shares or voting shares. The latter class of shareholders seeks high returns on their invested funds both in the form of high dividends and capital appreciation. Due to this, the non-voting shares are said to have a popular and ready market. In fact, this class of shares is similar to preference shares in terms of absence of voting rights but unlike preference