Chapter 1 Flashcards
What is equity finance?
Shares
Ordinary Shares
Preference Shares
What is placing?
Shares places with certain investors on a pre-arranged basis
What is the method of issuing shares?
IPO or floatation
Placing
Right Issue
What are sources of long term finance?
Capital markets
Banks & finance houses
Gov and similar
What is a rights issue?
New shares offered for sale only to existing shareholders
What are the advantages of a stock market listing?
Provide accurate valuation
Creates a mechanism to buy and sell
Raises increased capital for future investment
Employee share schemes more accessible
What is primary function of capital market?
Enable companies to raise finance
What is secondary function of capital market?
Enable investors to sell their investments
What are the disadvantages of a listing on capital market?
Costly
May dilute control of ordinary owners
Reporting requirements more onerous
What is an IPO?
Occurs when a company seeks to be listed on a stock market.
Offer could be made:
Fixed Price
Tender Offer
What happens to market price after issue?
Share price fall
Falls due to uncertainty about consequence of issue, future profits and dividends
After actual issue:
More shares in issue
New shares issued at discount
What are characteristics of preference shares?
No voting rights
Dividends guaranteed
Above ordinary but below creditors upon liquidation
What are characteristics of ordinary shares?
Voting rights
Dividends discretionary
Last to be paid upon liquidation
What are the characteristics of debt financing?
Interest paid out of pre-tax profits
Significant risk of withdrawal
Debt finance can be issued at price lower than nominal value
What is security of debt?
Fixed charge: debt secured against specific asset
Floating charge: underlying assets that are subject to change in value or quantity
