1.8 Business - Finance Flashcards
What is debt financing?
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
What is equity financing?
Investor > £ > Co
Co > Interest in Co > Investir
- Shares + Dividends
- Increase/Decrease in value based on Co’s value (NOT fixed > More risk)
What are secured loans?
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
What is a debenture?
Co > Repayment (NO security) > Lender
What is a mortgage?
Lender > £ > Co
- General finance
- Working capital
Co > Repayment > Lender
- Charge > Co’s asset (title) > Lender
- Lender > Title > Co (Co’s repayment - Equity of redemption)
What are the two types of mortgages?
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
What is a fixed charge?
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
What is a floating charge?
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
What is required for registering charges?
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
What happens if the charge is not registered?
Before WU >
Lender can still enforce charge vs Co
After WU > Lender loses priority
- Preferential secured creditors have priority
- Lender/Administrator/Liquidator loses priority
What searches can lenders make?
Free of charge online
Deemed to know contents of register
Charges register (at CH)
Registrable charges (at reg office)
What are debenture holders’ remedies?
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)
How may profits be used?
Dividends > SHs
Retain in Co
- Increase Co’s capital value + shares
- Contingency > Call upon in future
- Reinvest for Co’s expansion
What is a buyback?
SH sells shares to Co before exiting
Redeemable shares > Cancelled
What must be checked before buybacks?
Comply/Waive/Amend
- Articles > restrictions (Co’s financial assistance rights)
- SH agreement > Pre-emption provisions, similar restrictions
How may Co finance buybacks?
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
What is required for approval of share buybacks?
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
How may shares be redeemed?
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
What is the difference between issuing and allotting shares?
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
How may shares be allotted?
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
What is the procedure for registering allotment of shares?
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
What are pre-emption rights?
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
What is required in adequate accounting records?
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)
What are companies’ accounting requirements?
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
What is Profit & Loss account?
Co’s trading performance
- Sales
- Costs, expenses
- P&L
- Tax
Income profit
12-month period
- Any date
- Usually 1 April-31 March
What is a balance sheet?
Assets
- Property
- Equipment
Liabilities
- Monies owed to suppliers/banks/lenders/Co on WU
Final day of accounting period
What are net assets?
Capital (double entry system)
- Account A (consideration for shares > asset)
- Account B (Co’s share capital of same amount > Liability owed to SH)
What is solvency and profitability?
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
What is current ratio?
Co’s ability to pay short-term obligations
Current assets / Current liabilities =
- Above 1 > Healthy
- Below 1 > NOT healthy
What is acid test?
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
What is the return on capital employed (ROCE) ratio?
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
What is the earnings per share (EPS) ratio?
Co’s profitability
Net profit (after tax) / No. shares
- High ratio > Significant dividends/Invest profits back into Co
- Low ratio > NO dividends
What is the procedure for submitting accounts?
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
