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BTF > Business Finance > Flashcards

Business Finance Flashcards

1
Q

What are businesses financed with?

A
  1. Equity
  2. Debt
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2
Q

Equity (companies) definition

A

Money given by owners who want a dividend in return

Ordinary shares in the business

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3
Q

Influences on the level of cash balances

A
  1. Transaction motive
  2. Precautionary motive
  3. Investment motive
  4. Finance motive
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4
Q

Transaction motive

A

Meeting day to day financial obligations

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5
Q

Finance motive

A

To cover major transactions

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6
Q

Disadvantage of short term financing

A
  1. Renewal risk
  2. Interest rate risk
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7
Q

Renewal risk

A

E.g. overdraft may be recalled on demand at lender’s discretion

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8
Q

Interest rate risk

A

Short term interest rates can fluctuate

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9
Q

Long term finance risk

A

Lower operational risk, more expensive

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10
Q

Long term finance examples

A
  1. Equity
  2. Debt finance
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11
Q

Equity finance

A

Shareholders

Expect high returns due to risk of business failure

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12
Q

Debt finance

A

Money lent from banks

More expensive for long term loans due to greater risk exposure

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13
Q

Aggressive approach to financing

A

More short term finance over debt and equity

More profitable
Cheaper
Riskier

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14
Q

Defensive approach to finance

A

Portion of long term finance for short term needs

Less risk
More expensive

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15
Q

Average finance position

A

Reasonable balance

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16
Q

What is a bank a type of?

A

Financial intermediary

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17
Q

What do financial intermediaries do?

A

Bring together investors/lenders with borrowers/users of funds
Mirror real world by providing relatively risk free lending environment and easily accessible funds for borrowing

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18
Q

Roles of the financial intermediary

A
  1. Risk diversification
  2. Aggregation
  3. Maturity transformation
  4. Making a market
  5. Advice
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19
Q

Risk diversification e.g.

A

1 lender not lending all money to 1 borrower

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20
Q

Aggregation

A

Pooling deposits to get better returns

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21
Q

Maturity transformation

A

Loans and deposits mature at different times

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22
Q

Making a market

A

Putting lenders and borrowers in touch

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23
Q

Market Advice e.g.

A

Best rates available

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24
Q

Three types of UK bank

A
  1. Retail
  2. Commercial + investment
  3. Bank of England
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25
Q

Retail banks

A

Day to day money transmission

E.g. NatWest, Barclays, Lloyds

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26
Q

Commercial and investment banks

A

Offer tailored advice to large commercial clients usually in raising considerable finds

E.g. merchant banks e.g. LCF Rothschild

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27
Q

Bank of England 2 activities

A

Acts as a banker to the banks

Lending money through its financial market operations

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28
Q

2 roles of the bank of Engländ

A
  1. Carrying out monetary policy
  2. Ensuring financial stability
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29
Q

BOE Monetary policy process

A
  1. Lends money to banks at base rate
  2. Banks lend/borrow internally at other rates
  3. Partly affects rates offered to customers
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30
Q

Example of an inter-bank rate

A

SONIA

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31
Q

SONIA

A

Sterling overnight index average

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32
Q

BOE: Financial stability sectors

A
  1. Financial policy committee (FPC)
  2. Prudential regulation authority (PRA)
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33
Q

FPC responsible for

A

Removing systemic risks in UK financial system as a whole

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34
Q

PRA responsible for

A

Prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms

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35
Q

Who are financial service firms not supervised by the PRA supervised by?

A

The FCA

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36
Q

FCA

A
  1. INDEPENDENT body (Not BOE)
  2. Promotes effective COMPETITION
  3. Ensures relevant markets FUNCTION well
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37
Q

8 Cash transmission mechanisms

A
  1. Faster payments scheme
  2. Electronic find transfers (EFT)
  3. Bank automated clearing system (BACS)
  4. Clearing house automated payments system (CHAPS)
  5. Society for worldwide interbank financial telecommunication (SWIFT)
  6. Payment gateways
  7. Digital commerce platforms
  8. General clearing
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38
Q

Faster payments scheme

A

Same day clearing of amounts up to £250k

For some customers of some banks
Using phone or internet

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39
Q

EFT

A

Any computer-based system that transfers money electronically
E.g. EFTPOS in shops

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40
Q

BACS

A

A type of EFT that deals with salaries and direct debits.

Same day clearing

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41
Q

CHAPS

A

A bank to bank system that provides same day clearing in the uk in GBP

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42
Q

SWIFT

A

Similar to CHAPS but for international transfers

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43
Q

Payment gateways

A

A system for payment authorisation when using credit cards online

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44
Q

Digital commerce platforms

A

E.g. PayPal

Payments made using just email address

Very cheap

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45
Q

General clearing

A

Mainly cheques

Short delay to clear funds

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46
Q

Relationship between bank and customer

A

Fiduciary duty

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47
Q

4 contractual arrangements between bank and customer

A
  1. Mortgagor/mortgagee
  2. Principal/agent
  3. Bailor/bailee
  4. Receivable/payable
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48
Q

Mortgagor/mortgagee relationship

A

Bank has right to assets if customer defaults on loan

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49
Q

Principal/agent relationship

A

Bank acts as agent for customer

E.g. paying 3P sums owed on customer cheque

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50
Q

Bailor/bailee relationship

A

To safeguard property

E.g. Title deeds collateral on mortgage

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51
Q

Receivable/payable relationship

A

Contractually owe each other depending on if withdrawn or in credit

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52
Q

Types of financial market

A
  1. Money markets
  2. Capital markets
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53
Q

Money market

A

Buying and selling different forms of money and marketable securities

Short term borrowing and investment to companies, banks and public sector (less than one year)

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54
Q

Capital market

A

The national + international market where a business can obtain money for short and long term plans

Longer term borrowing and investing, usually via a stock exchange

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55
Q

UK stock exchanges

A
  1. London stock exchange
  2. Alternative investment market (AIM)
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56
Q

Marketable securities

A

Short term highly liquid investments readily convertible into cash

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57
Q

Money market financial instruments

A
  1. Treasury bills
  2. Deposits
  3. Certificates of deposit (CD)
  4. Gilts
  5. Bonds
  6. Commercial papers
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58
Q

Treasury bills

A

Issued by the BOE on behalf of the government

Minimum investment is £500k

Last up to 12m

Very secure but low returns

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59
Q

Deposits

A

Placed in bank accounts

Overnight - 5y

Typically higher yield than treasury bills

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60
Q

Certificates of deposit

A

Offered for deposits of more than 50k for a fixed term

Can be traded in the CD market

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61
Q

Gilts

A

Offer range of maturities and rates based on money market rates

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62
Q

Bonds

A

Debentures and loan stock of companies quoted on the stock exchange

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63
Q

Commercial papers

A

IOUs issued by large companies which can be held to maturity or sold to 3Ps beforehand

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64
Q

Ways businesses can access finance

A
  1. National stock markets
  2. The banking system
  3. Bond markets
  4. Leasing
  5. Debt factoring
  6. International markets
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65
Q

Two ways national stock markets can act

A
  1. Primary markets
  2. Secondary markets
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66
Q

Primary markets

A

I.e. source of new finance via share issues

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67
Q

Secondary markets

A

For securities such as shares that are already in issue

68
Q

The banking system can be split between

A
  1. Retail market (for individuals/small businesses)
  2. Wholesale market (for large companies)
69
Q

Bond markets usually for

A

Very large organisations to raise very large sums

70
Q

International markets

A

Allow finance to be raised in different currencies

Usually very large amounts

Usually for larger companies

71
Q

What does raising new long-term finance invariably involve?

A

Issuing securities in the form of shares (equity) or bonds (debts)

72
Q

Key capital market instruments

A
  1. Equity
  2. Preference shares
  3. Loan stocks and debentures
73
Q

Equity

A

Ordinary shares in the business

74
Q

Sources of money for equity finance

A
  1. Retained earnings
  2. Rights issue of shares
  3. New issue of shares
75
Q

Retained earnings

A

Internally generated funds

Easy

Profits can be paid out (dividends) or reinvested in the business

76
Q

What may reinvested retained earnings lead to?

A

Business growth so share price increase

77
Q

Law regarding rights issue

A

Must be made before new issue to the public, unless shareholders agree otherwise

78
Q

Factors to consider when making rights issues

A
  1. Issue costs
  2. Shareholders’ reactions
  3. Control
  4. Unlisted companies
79
Q

Rights issue costs

A

About 4% on £2m raised

But mainly fixed costs

80
Q

Rights issue shareholders’ reactions

A

May be unfavourable as forced to either buy more or sell them

May sell shares driving down market price

81
Q

Rights issue control issues

A

Unless many existing shareholders sell their rights to new shareholders there is little control impact

82
Q

Rights issue unlisted companies issues

A

Unlisted companies find them difficult because shareholders may not have funds but can’t sell them

83
Q

New issue of shares usually only done when?

A

Company listed on stock exchange or listing for the first time

Expensive
Time consuming

84
Q

Two forms of a new share issue

A
  1. Placings
  2. Public offerings
85
Q

Placings progress

A
  1. Shares sold to an issuing house
  2. Issuing house places (sells) the shares with its clients (institutional investors)

Most common way for C coming into the market

86
Q

Placings benefit

A

Lower transaction costs than public offers
E.g. advertising, admin

87
Q

Placings drawback

A

Reduces efficiency if the market in the shares because only offered to small pool of institutional investors

88
Q

Public offers 2 methods

A
  1. Offer for sale
  2. Direct offer/offer for subscription
89
Q

Public offer: Offer for sale process

A
  1. Shares sold to ISSUING HOUSE (investment bank)
  2. Issuing house offers shares to general public

The most common public offer method

90
Q

Public offer: Direct offer/Offer for subscription process

A

Shares sold directly to public

91
Q

What is the issue of public offer methods likely to be?

A

Underwritten

92
Q

How much capital can be raised by public offer?

A

Unrestricted

93
Q

New issues priced too high?

A

Issue fails

94
Q

New issues prices too low?

A

Too many shares issued

95
Q

2 ways pricing of new shares can be managed

A
  1. Underwriting
  2. Using an offer for sale by tender
96
Q

Underwriting an issue

A

An Institution/group of institutions agreeing to purchase any securities not subscribed for by the public in exchange for a fixed fee.
(Usually 1-2% of the total finance raised)

97
Q

Underwriting disadvantage

A

The cost is still payable even if the underwriter doesn’t have to invest

98
Q

Offer for sale by tender definition

A

Investing public invited to tender (offer) for shares at the price it’s willing to pay.
Minimum set by issuer

99
Q

Offer for sale by tender process

A
  1. Receive all tenders
  2. Shares issued at one price
    Investors who tendered at higher prices pay less than the amount tendered
100
Q

Does an offer for sale by tender normally need to be underwritten?

A

No because the tender process should ensure that all shares are sold

101
Q

Going public/floating definition

A

Go onto the official list of the stock exchange

102
Q

Advantages to going public

A
  1. Large source of finance
  2. Improved marketability of shares
    So the value of the company
  3. Raises profile of company
103
Q

Disadvantages to going public

A
  1. Cost
  2. Dilution of control
    At least 25% of company must be in public hands
  3. Need to have traded for 3 years
  4. Have to answer to other investors
    Often professional institutional investors
  5. Greater scrutiny of company and director actions
  6. Listing may not be successful if business worth less than £50m
  7. Possibility of being taken over
  8. Extra costs of control and reporting systems to follow listing rules
104
Q

Going public: Company’s actions

A

Sells shares to raise capital

105
Q

Going public: Sponsor’s actions

A

(Usually an investment bank (or stockbroker, accountant…))

  1. Assesses whether floatation is appropriate
  2. Helps draft prospectus
  3. Coordinates all other advisors
  4. Prices and underwrites the issue
106
Q

Going public: Corporate broker’s actions

A

(Can be same organisation as sponsor)

  1. Advises on market conditions and likely demand
  2. Generates investor interest
  3. Helps with issue method and pricing
  4. May organise sub-underwriting
107
Q

Going public: accountant’s actions

A

Involved in long-form report
(E.g. financial controls, track record, financing, forecasting…)

108
Q

Going public: Registrar’s actions

A

Record ownership of shares

109
Q

Going public: Advisors necessary

A
  1. Sponsor
  2. Corporate broker
  3. Accountant
  4. Solicitor
  5. Registrar
110
Q

Sources of debt finance

A
  1. Debt factoring
  2. Overdraft
  3. Term loans
  4. Loan stock
  5. Leasing
111
Q

How is overdraft interest charged?

A

On a day to day basis at a variable rate

112
Q

Overdraft disadvantage

A

Control

Bank may require security on assets of the business

113
Q

Debt factoring

A

Receiving loan financing and insurance (aka non-recourse factoring) so that the business doesn’t have to repay the loan if the customer doesn’t pay

114
Q

3 services typically offered by a debt factor

A
  1. Financing customer credit
  2. Insuring receivables
  3. Managing running of receivables ledger
115
Q

Term loans

A

Repayment date set at time of borrowing

Often bank loans

116
Q

Term loans interest rates can be either

A

Fixed or variable

117
Q

Term loans arrangement fees are

A

Low

118
Q

How are term loans usually made safer for lender?

A

Secured against assets

119
Q

Term loan repayment schedules are

A

Flexible

Interest holidays of you to 2y can be negotiated to allow new ventures to become established before repayments are made

120
Q

Loan stock

A

Debt capital (aka bonds or debentures)

Securities issued by companies, gov and local authorities

121
Q

Key loan stock considerations:

A
  1. Coupon (interest) rate
  2. Redemption value
  3. Redemption date
  4. Recipient
122
Q

Loan stock coupon rate

A

Annual interest = coupon rate x stock NV

Can be fixed or variable

123
Q

The 3 ways loan stock redemption value can be repaid…

A

At par
At a premium (with more)
At a discount (with less)

124
Q

Investors’ opinions of loan stock with redemption value at a premium

A

More attractive, so happier to accept a low or zero coupon rate
Which eases the C’s cash flow

125
Q

Loan stock redemption date

A
  1. Normally medium to long term
  2. Some bonds are undated (aka perpetual/irredeemable)
126
Q

How to get capital back on undated bonds

A

Must sell the loan stock

127
Q

Loan stock: Recipient

A
  1. With UK domestic bonds issued on the stock exchange, the bond holder’s name is recorded on a register (like with shares)
  2. Some bonds e.g. Eurobonds are ‘bearer’ bonds - the holder of the bond will receive payments due
128
Q

What is a finance lease

A

A lease that transfers substantially all the risks and rewards of ownership of an asset from the lessor to the lessee

129
Q

Normal finance lessor

A

A finance company or bank

130
Q

Normal finance lessee

A

The business

131
Q

Types of lease

A
  1. Finance lease
  2. Operating lease
132
Q

Operating lease definition

A

Any other lease to a finance lease

133
Q

Finance lease duration

A

Long term

A purchase of the asset by the lesee
Financed by a loan from the lessor

134
Q

Operating lease duration

A

Short term rental (of an asset)

135
Q

Finance lease period

A

For the majority of the asset’s useful life

136
Q

Operating lease period

A

Less than the asset’s useful life

137
Q

Finance lease passing of ownership

A

Either to lessee at end of term

Or any secondary lease period is at a very low rent

138
Q

Operating lease passing of ownership

A

Remains with the lessor

139
Q

Finance lease responsibility

A

Lessee takes on risks and rewards of ownership
E.g. risk of downtime

140
Q

Operating lease responsibility

A

Lessor usually responsible for repairs + maintenance

141
Q

Finance lease possibility of cancellation of lease agreement

A

Cannot be cancelled
Or early cancellation charges mean the lessee effectively has liability for all payments

142
Q

Operating lease possibility of cancellation

A

Can sometimes be cancelled at short notice

143
Q

Ways of financing a growing business

A
  1. Business angels
  2. Crowdfunding
144
Q

Ways crowd-funders contribute money

A
  1. Loans
  2. Equity
  3. Donations
145
Q

Two largest sectors of crowdfunding

A
  1. Equity-based investment
  2. Peer-to-Peer lending

Both regulated by FCA
The rest largely unregulated

146
Q

Venture capital definition

A

Provision of risk-bearing capital
Usually in form of equity
To companies with high growth potential

147
Q

Venture capital duration

A

Medium term

148
Q

Much of VC gains if in the form of

A

Capital gains
After 3-5y

149
Q

VC key issue

A

The VC’s exit route

150
Q

Three key VC exit routes

A
  1. Trade sale
  2. Floatation
  3. Buy-back of shares on refinancing
151
Q

Trade sale

A

VC’s shares, or whole company, sold to another company

152
Q

AIM 2 key points

A
  1. Less stringent regulations
  2. Available for companies valued over £1m
153
Q

Financing exports: Trading risks

A

{CaPTL}

  1. Capital
  2. Physical risk
  3. Trade risk
  4. Liquidity ris
154
Q

Financing exports: physical risk

A

Goods lost or stolen in transit

155
Q

Financing exports: trade risk

A

Customer refusing to accept goods on delivery (due to substandard/inappropriate goods)
Calculation of order in transit

156
Q

Financing exports: credit risk

A

Default by customer

157
Q

Financing exports: liquidity risk

A

Inability to finance credit given to customers

158
Q

People who can help reduce trading risks

A
  1. Banks
  2. Insurance companies
  3. Credit reference agencies
  4. Government agencies (e.g. UK’s export credits guarantee dept. (ECGD))
159
Q

Financing exports: Bills of exchange

A

Document drawn up by exporter (seller) sent to overseas buyer’s bank

Guarantees payment because bank accepts obligation to pay bill by signing it

Seller can sell (‘discount’) bill to 3P for cash now

160
Q

Financing exports: Letters of credit

A
  1. Arrangement between exporter, buyer and participating banks takes place before export sale takes place
  2. Buyer has period of credit for paying for imports
  3. Risk free method of international trade
161
Q

Letters of credit disadvantages

A
  1. Slow to arrange
  2. Cumbersome admin
162
Q

Financing exports: Export credit insurance

A

Insurance against the risk of non-payment by foreign customers for export debts

163
Q

Who provides export credit insurance?

A
  1. Some private companies provide insurance for short-term export credit businesses
  2. The UK gov Export Credits Guarantee Dept (ECGD) provides long term guarantees to banks on behalf of exporters
164
Q

Green finance definition

A

Financing things with environmental benefits

165
Q

Green finance includes

A
  1. Green bonds
  2. Green loans
  3. Green grants
  4. Green VC funds
166
Q

Green bonds

A

Proceeds exclusively applied to eligible Green projects and which are aligned with the core components of the Green bond principles

167
Q

Green bond principles

A
  1. Proceeds must only be used for projects with clear environmental benefits
  2. Must be a defined process for project evaluation and selection
  3. Proceeds must be kept in separate account (or tracks by issuer)
  4. Use of proceeds reported

BTF (14 decks)

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