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SQE2 - Business Organisations > 1.8 Business - Finance > Flashcards

1.8 Business - Finance Flashcards

1
Q

What is debt financing?

A

Lender > £ > Co

Co > Repayment > Lender

  • Collateral/Personal guarantee
  • Fixed interest rate
  • Predetermined maturity date (must pay back before date)
  • Lender’s right to demand repayment under specific conditions
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2
Q

What is equity financing?

A

Investor > £ > Co

Co > Interest in Co > Investir

  • Shares + Dividends
  • Increase/Decrease in value based on Co’s value (NOT fixed > More risk)
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3
Q

What are secured loans?

A

Co > Collateral (Co’s asset) > Lender

  • NO existing charge on asset
  • Fixed/Floating charge
  • Lender to sell asset to recoup repayment
  • Lower interest rate, higher borrowing limits, longer repayment terms
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4
Q

What is a debenture?

A

Co > Repayment (NO security) > Lender

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5
Q

What is a mortgage?

A

Lender > £ > Co

  • General finance
  • Working capital

Co > Repayment > Lender

  • Charge > Co’s asset (title) > Lender
  • Lender > Title > Co (Co’s repayment - Equity of redemption)
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6
Q

What are the two types of mortgages?

A

Legal mortgage

  • Legally owned asset
  • Title > Lender
  • Co can NOT sell asset while subject to mortgage

Equitable mortgage

  • Failed legal mortgage/Equitable interest
  • Beneficial interest > Lender
  • Title > Co
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7
Q

What is a fixed charge?

A

Equitable

Co’s asset (Definite)

Title > Co

Lender’s consent > Co cannot deal with asset

Lender > Immediate right over asset (specific circumstances)
- Unlike mortgage > Proprietary interest

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8
Q

What is a floating charge?

A

Equitable

Co’s asset (NOT definite)

  • Present/Future
  • Stock/Bank accounts/Book debts

Title > Co

Co can deal with asset (until future step taken by Lender)

Floating charge > Crystallisation > Fixed charge
- Receiver appt/WU/Specific event in debenture

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9
Q

What is required for registering charges?

A

1) Registration within 21 days
- Court can extend due to non-registration (accidental, inadvertence, just and equitable, other sufficient cause, NOT prejudicial to creditors/SHs)

2) Docs to Registrar
- Statement of particulars re charge (Form MR01)
- Certified copy of original instrument creating charge
- Reg fee (£10/£13 depending on registration method)

3) Registrar’s consequences
- Keep register of charge (MR01, instrument creating charge)
- Give certificate of registration (12-digit reference code) > Registering person

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10
Q

What happens if the charge is not registered?

A

Before WU >
Lender can still enforce charge vs Co

After WU > Lender loses priority

  • Preferential secured creditors have priority
  • Lender/Administrator/Liquidator loses priority
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11
Q

What searches can lenders make?

A

Free of charge online

Deemed to know contents of register

Charges register (at CH)

Registrable charges (at reg office)

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12
Q

What are debenture holders’ remedies?

A

Sue Co as creditor

Petition for WU

Debenture > Deed

  • Power to sell
  • Appoint receiver (interest 2 months in arrears/Principal not paid 3 months since due)

Debenture > NOT deed

  • Should include express powers allowing receiver appt
  • Liquidation commenced/Co in arrears/Lender’s security in jeopardy > Apply to court > Appoint Receiver

Receiver’s role

  • Co > Assets > Receiver
  • Realise amount owed + repay > Creditor
  • Pay surplus > Co

Administrative receiver’s role

  • Co > custody > Receiver
  • Receiver > Decisions in Creditor’s best interests (asset sale)
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13
Q

How may profits be used?

A

Dividends > SHs

Retain in Co

  • Increase Co’s capital value + shares
  • Contingency > Call upon in future
  • Reinvest for Co’s expansion
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14
Q

What is a buyback?

A

SH sells shares to Co before exiting

Redeemable shares > Cancelled

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15
Q

What must be checked before buybacks?

A

Comply/Waive/Amend

  • Articles > restrictions (Co’s financial assistance rights)
  • SH agreement > Pre-emption provisions, similar restrictions
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16
Q

How may Co finance buybacks?

A

Co’s capital
- De minimis cash exemption > Lower of £15k/Nominal value of 5% fully paid share capital at beginning of financial year

Profits

Fresh issued share proceeds for buyback

17
Q

What is required for approval of share buybacks?

A

a) OR

GM

  • Sole SH buyback
  • Contract > Reg office (inspection > +15 days ending with date of GM)

Written resolution

  • Contract > SHs
  • Member selling share > NO vote

b) SR (Articles)
- SR > CH
- Form SH03 (notice of purchase) (within 28 days) (shares > £1,000) > CH
- Form SH03 (shares < £1,000) > HMRC
- Form SH06 (cancelled shares) > CH

=> Can purchase shares any time after resolution passed

18
Q

How may shares be redeemed?

A

1) Co must have NON-redeemable shares
2) Co/SH must exercise option

3) Co must pay in full
- Predetermined price for future payment

4) Governed by AA, CA06 Chapter 5, D’s terms

5) Form SH02 > CH
- Notice of redemption
- Statement of capital
- Within 1 month

19
Q

What is the difference between issuing and allotting shares?

A

Issuance
- Ownership of shares > SH

Allotment

  • Allotting particular shares > Particular SHs
  • By Ds (must be allowed under s 550-551 CA06)
  • Incorporation > Raise capital, ownership
  • Lifetime > Raise finance, new SHs
20
Q

How may shares be allotted?

A

Single class of shares (s. 550)

  • D has free power to authorise
  • Shares must have uniform rights
  • Max. shares allotment to be specified
  • Period for allotment to be specified
  • Allotment < 5 years

Multiple class of shares (s. 551)

  • Public/Private Co
  • AA/OR/SR
  • Max. shares allotment to be specified
  • Allotment < 5 years

Ds must check type of shares first > Otherwise fined

  • If D knowingly/allowed contravention
  • BUT validity of allotment not affected
21
Q

What is the procedure for registering allotment of shares?

A

1) Register > Register of Members
- Within 2 months
- Then Co to provide share certificates (newly allocated shares) within 2 months > Registrar

2) Return of allotment notice (Form SH01) > Registrar
- Including statement of capital
- Within 1 month
- Changes to shares (Form SH10)

3) Resolutions > Registrar
- Within 15 days

4) SH acquires unconditional right on Register => Deemed allotted

22
Q

What are pre-emption rights?

A

Ordinary shares issued

1) SHs must have right of first refusal > At least 14 days’ notice > Same proportion as % held in Co
- Authorised by AA UNLESS Co disapplies via SR/SH waiver letter > Excludes right wholly/partly
2) TPs can then purchase

Bonus/Non-cash consideration/Shares held under employees’ share scheme > TPs

23
Q

What is required in adequate accounting records?

A

Explain Co’s deals

Disclose financial position w reasonable accuracy

Allow Ds to ensure accounts comply w CA

Daily entries > Sums received and expended

Assets and liabilities

Statement of stock (goods)

24
Q

What are companies’ accounting requirements?

A

Small-sized Co > Less submission of accounting > More privacy + audit exemptions
(2/3 satisfied)
- Average employees < 50
- Balance sheet < £5.1m
- Turnover (before deducting expenses) < £10.2m

Medium-sized Co > Less submission of accounting > Less private than small-sized co
(2/3 satisfied)
- Average employees < 250
- Balance sheet < £18m
- Turnover (before deducting expenses) < £36m

25
Q

What is Profit & Loss account?

A

Co’s trading performance

  • Sales
  • Costs, expenses
  • P&L
  • Tax

Income profit

12-month period

  • Any date
  • Usually 1 April-31 March
26
Q

What is a balance sheet?

A

Assets

  • Property
  • Equipment

Liabilities
- Monies owed to suppliers/banks/lenders/Co on WU

Final day of accounting period

27
Q

What are net assets?

A

Capital (double entry system)

  • Account A (consideration for shares > asset)
  • Account B (Co’s share capital of same amount > Liability owed to SH)
28
Q

What is solvency and profitability?

A

Solvency > Co’s ability to pay debts when due

  • Making losses
  • Trading by calling cash reserves

Profitability > Co’s ability to make profits

  • Debtors not paid Co yet
  • Co to repay Creditors

Ratios determine these

29
Q

What is current ratio?

A

Co’s ability to pay short-term obligations

Current assets / Current liabilities =

  • Above 1 > Healthy
  • Below 1 > NOT healthy
30
Q

What is acid test?

A

Co’s ability to pay short-term obligations using short-term assets (NOT stock)

Current assets (excluding stock) / Current liabilities =

  • Above 1 > Healthy
  • Below 1 > Highly dependent on stock
31
Q

What is the return on capital employed (ROCE) ratio?

A

Co’s efficiency in generating profit from capital

  • Shows investors Co’s profitability
  • Compare w previous ROCEs or competing Cos

Net operating profit (before tax, dividends, interest) / Capital

  • Above 1 > Profit
  • Below 1 > Loss
32
Q

What is the earnings per share (EPS) ratio?

A

Co’s profitability

Net profit (after tax) / No. shares

  • High ratio > Significant dividends/Invest profits back into Co
  • Low ratio > NO dividends
33
Q

What is the procedure for submitting accounts?

A

Public Co

1) Accounts > SHs (21 days before meeting)
2) Accounts > Accounts meeting
3) Accounts > Registrar (within 6 months after acc period)

Limited Co

1) Ds > Approve + Sign (balance sheet)
2) Accounts > SHs
3) Accounts > Registrar (9 months after acc period)

If NOT submitted to Registrar on time

  • Civil penalty (depends on length of delay, Public > Private)
  • Criminal offence > Ds’ disqualification

SQE2 - Business Organisations (16 decks)

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