9 - International Financing and Capital Markets

Question 1

Corporate sources and uses of funds (3)

Answer 1

1. Internally-generated cash
2. Short-term external funds
3. Long-term external funds
   Forms of external finance/securitisation:
   -Equity: don’t have to pay back, BUT dilution expenses
   -Debt: tax incentives BUT financial distress costs

Question 2

Raising equity globally; (1) IPO

Answer 2

• Underwriting and publishing of prospectus
• SEO
• Public float
• Investment bank (underwriting) design the securities, purchases them and distributes them to the public. IB earns a spread

Question 3

Raising equity globally; (2) Equity Listing

Answer 3

• Firm chooses one or more stock markets to list its shares

- Cross listing: listing of shares in a different country market

Question 4

Raising equity globally; (3) Private placement

Answer 4

-Sale of securities to a small set of institutional buyers such as insurance companies, pension funds etc.

Question 5

Debt Instruments

Answer 5

1. Commercial bank loans

2. Bonds (publicly issued, or privately issued - direct sale to institutional buyers)

Question 6

Financial Intermediaries

Answer 6

• Information problem: adverse selection, moral hazard, and agency costs
• Financial intermediation and delegated monitoring: banks doe the screening work

Question 7

Financial Markets and securitisation

Answer 7

• Securitisation is the process of matching up borrowers and savers by way of the financial markets. By contrast, financial intermediation involves the use of financial institutions such as banks to bring together borrowers and savers
• Securitisation largely reflects a reduction in the cost of using financial markets

Question 8

Corporate Governance

Answer 8

• The manner in which organisations (limited companies) are managed and the nature of accountability of the managers to the owners
• Differences exists between countries in terms of corporate governance: Anglo-Saxon model (market oriented) and Continental European and Japanese (CEJ) (bank-oriented)

Question 9

Anglo-Saxon model of corporate governance

Answer 9

1. Institutional investors are important part of the financial system
2. Equity finance is prominent
3. Shareholders exert a great deal of corporate control: CEO/board preoccupied with SH interests - encourages risk-taking and R/D (higher returns than CEJ)

Question 10

CEJ-type system of corporate governance

Answer 10

1. Banks dominate the picture, bank finance is prominent
2. Individual shareholders have little voice in corporate decision making
3. Less emphasis on share holder value
4. Low returns on capital
   (management more concerned about bank’s needs - covenants)

Question 11

Principal functions of a financial market

Answer 11

• Mobilise savings and allocate those funds among potential users
• Transfer risk (from company to investors) and reduce risks (diversification)
• Help monitor managers by gathering information on performance (based on stock price)
• Exert corporate control
• Supply liquidity to investors