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Business, Finance, Technology > 7: Business Finance > Flashcards

7: Business Finance Flashcards

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1
Q

What are the two types of business finance?

A

Equity (shares)
- invested by shareholders and proprietors
- want dividends in return
- higher risk and higher returns

Debt (money)
- borrowed by the business from lenders
- want interest in return
- lower risk and lower returns

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2
Q

What is the treasury trade off?

A

Liquidity - being able to pay debts as they fall due

Profitability - minimising the holding of cash - an idle asset

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3
Q

What are the four reasons for holding cash?

A

Transaction motive
- to meet daily financial obligations

Precautionary motive
- to cushion against unplanned expenditure

Investment motive
- to take advantage of oppurtuntiies

Finance motive
- to cover major transactions

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4
Q

Benefits and negatives of shorter and longer term finance?

A

Shorter
- cheaper
- flexible
- renewal and interest rate risk

Longer
- expensive
- predictable and assured
- higher level of uncertainty

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5
Q

What are the three approaches to short/long term finance?

A

Aggressive
- uses short term finance
- greater profitability, higher risk

Defensive
- uses long term finance
- less risk, more expensive

Average
- balance between the two

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6
Q

What are banks?

A

Financial intermediaries!

Bring together investors/lenders with borrowers/users of money

Provide a risk-free lending environment and easily accessible funds

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7
Q

What are the 5 roles of the financial intermediary?

A

Risk diversification

Aggregation

Maturity transformation

Making a market

Advice

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8
Q

What are the three kinds of bank?

A

Retail banks
- day to day money transmission

Commercial and investment banks
- tailored advice to large commercial clients

Bank of England
- bank to the banks

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9
Q

What are the two main roles of the Bank of England?

A

Carrying out monetary policy

  • lends money at base rate which is set by Monetary Policy Committee
  • banks then lend among themselves at Sterling overnight index average

Financial stability

  • BoE’s Financial Policy Committee is responsible for taking action to remove systemic risks
  • Prudential Regulation Authority responsible for prudential regulation and supervision of banks

Anyone not supervised by PRA is regulated by Financial Conduct Authority, independent

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10
Q

8 types of cash transmission:

A

Faster payments scheme

Electronic Funds transfer (EFT)

Bank automated clearing system (BACS)

Clearing House Automated Payments System (CHAPS)

SWIFT - international

Payment gateways

Digital commerce platforms - ie. paypal

General clearing - like cheques

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11
Q

What are the four contractual relationships between bank and customer?

A

Mortgagor
- right to assets

Principal/agent
- transactions and payments

Bailor
- safeguarding property

Receivable/payable
- contractually owe each other, overdrawn or credit

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12
Q

What are the two types of market and summarise?

A

Money market
- buying/selling money or marketable securities
- short terms borrowing and investing (under a year)

Capital market
- obtaining finance for short term and long term plans
- national and international
- longer term financing, normally on a Stock Exchange

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13
Q

What are the 6 types of money market financial instruments?

A

Treasury Bills
- BoE, up to £500,000, max. 12 months

Deposits
- up to 5 years

Certificates of Deposit
- £50,000 or more fixed term

Gilts

Bonds

Commercial papers

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14
Q

What are the 6 types of capital market financial instruments?

A

National Stock Market
- primary (new shares)
- secondary (existing shares)

Banking systems
- retail market
- wholesale market

Bond markets
- very large orgs only

Leasing

Debt factoring
- small businesses

International markets

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15
Q

3 types of key capital market instruments?

A

Equity

Preference shares

Loan stocks and debentures

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16
Q

What are the three ways of raising equity finance?

A

Retained earnings
- profits paid out in dividends or reinvested

Rights issue
- existing shareholders have first rights of refusal (pre-emption rights)
- maintain their existing percentage
- can be waived by selling them

New issue
- only done if company is listed, or listing for the first time

17
Q

What are the two forms of new shares?

A

Placings
- issuing house places shares to clients
- lower cost but offers to a narrow pool

Public offers
- on sale to the general public
- via an issuing house (offer for sale) or not (direct offer/offer for subscription)

18
Q

What are the two ways the pricing of new share issues can be managed?

A

Underwriting
- an institution agreeing to purchase any securities not subscribed for in exchange for a fixed fee

Offer for sale by tender
- investing public offer shares at at least a minimum price
- all tenders are received then shares are issued at one price

19
Q

Advantages and disadvantages to preference shares?

A

No voting rights
No right to share in excess profits

Good: avoid additional debt
Bad: fixed rate of dividend, expensive

20
Q

What is ‘going public’?

A

A company deciding to go on the stock exchange

Plus:
- access large sources of finance
- increasing marketability
- raise profile

Minus:
- expensive
- dilution of control
- trading 3 years min
- can get taken over
- greater scrutiny

21
Q

What advisors are involved in going public?

A

Company

Sponsor

Corporate broker
Public
Solicitors
Registrars
Accountant

22
Q

What are the five types of debt finance?

A

Overdraft
- short term cash deficits
- interest charged day to day

Debt factoring
- business receives loan finance and insurance so that the business does not have to repay the loan if they customer does not pay

Term loan
- repayment date is set
- small arrangement fees, fixed against assets
- schedules are flexible

Loan stock
- loan repaid at par or premium
- interest rate (coupon rate x nom value)

Leasing

23
Q

What is leasing?

A

Finance lease
- transfers substantially all the risks and rewards if the ownership of an asset
- long term, majority of assets life
- ownership basically passes to lessee
- cannot be cancelled

Operating lease
- short term rental
- lease is less than assets life
- ownership still with OG party
- can be cancelled

24
Q

What are the four routes of finance for a growing business?

A

Business angels
- wealthy people getting invested early in start-ups

Crowdfunding
- raising a specific sum of money, from the internet
- can pre-buy
- peer to peer lending and equity based are regulated
- the rest is unregulated!

Venture Capitalists
- risk bearing capital
- high risk, high return
- investor provides advice and can influence management
- exit route is tricky, can be flotation

Alternative Investment Market
- available to companies with a value of under £1mil
- less stringent regulations

25
Q

Two types of financing export?

A

Bills of exchange
- bank accepts the obligation to pay the bill by signing it

Letters of credit
- arrangement which takes place before the export sale
- exported receives immediate payment
- buyer can get period of credit

26
Q

Ways to mitigate financial exporting risks?

A

Export Credits Guarantee Department (ECGD) provides long-term guarentees to banks

Export credit insurance - against non payment

27
Q

What are green bonds?

A

Where the proceeds will be exclusively applied to eligible green projects

And aligned with the four components of the GBP

Also the Green Finance Institute

28
Q

What are the four green bond principles?

A
  • projects with clear environmental benefits
  • defined process for project selection
  • proceeds in separate account
  • use of proceeds must be reported
29
Q

Examples of short term and long term finance?

A

Short term:
- debt factoring (up to one year)

Long term:
- bank loans
- mortgages
- share capital

30
Q

What is an example of institutional investor?

A

A unit trust

Also: pension funds and insurance companies

Regulators: BoR, FRC, FCA

31
Q

What do Venture Capitalists invest in?

A

Management buyouts

Business start ups

Rapidly growing companies

NOT anything to do with existing companies or renovations

32
Q

What kind of shares are underwritten?

A

A rights issue!!

Not: introduction, offer for sale, or a placing

33
Q

What is a function of financial regulators?

A

Prudential control of financial investors

Anything else may be financial intermediaries….

34
Q

Examples of all the lengths of finance?

A

Immediate: wages and day to day expenses

Short-term: goods and services bought on credits/payables

Medium-term: increase in inventory, pay tax on credits

Long-term: non-current assets

35
Q

Low risk and low return finance?

A

Long term bank loans

Business, Finance, Technology (14 decks)

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