Chapter 10 Flashcards
Withholding tax
Tax deducted from a payment and remitted to the IRD on behalf of a recipient who receives the after-tax payment
Tax credit
A deduction from taxes payable
Floating debenture
Medium-term or long-term debt funds secured by a charge over all otherwise unsecured assets
Financial lease
A lease contract whereby the lessee acquires the use of an asset over a period approximately equal to the useful life of the asset
Lease interest
A contractual relationship between a tenant (lessee) and a property owner (lessor), where the tenant has the right to use the land for the period specified in the lease agreement in return for rental payments and other obligations
Operating lease
A short-term, cancellable lease where the lessee gains the use of an asset without ever buying the asset
Crowdfunding
Crowdfunding is a means of raising relatively small amounts of funds from the public to finance a business venture or project
Venture capital
Funds (usually equity) provided to relatively new businesses by public companies or government-sponsored enterprises
Retained earnings
Profits retained and reinvested in assets of the firm. Represents an internal source of equity finance
Private placement
A placement of shares or debt offered only to selected investors
Unpledged assets
Assets that have not been used as security for a loan
Line of credit
An informal arrangement with a bank to allow a firm to borrow up to a maximum specified amount over a set period of time
Revolving credit facility
A legal commitment by a bank to provide credit to a borrower up to a maximum specified amount when requested. Similar to a line of credit
Pledge
To put up assets as security for a loan
Collateral
Assets, such as inventory, that are pledged as security for a loan
Factoring
The discounted sale of accounts receivable to a factoring company or financial institution in return for immediate receipt of funds. Credit and collection activities are undertaken by the factor
Non-resource basis
With respect to the sale of accounts receivable, when the factor takes on the risk of bad debts
Invoice discounting
The discounted sale of accounts receivable to a factoring company or financial institution in return for immediate receipt of funds. Unlike factoring, credit and collection activities are retained by the seller of the accounts
Commercial bills
Unsecured short-term marketable securities issued either by companies or by banks
Unsecured
When no collateral is offered as security against a loan
Syndicate
A group of lending institutions which pool funds on a one-off basis to lend to a very large borrower. Limits risk exposure for any one given lender
Public offering
Issue of securities by a company to the public
Underwriting
The agreement by an investment bank to purchase any securities that are not subscribed by the public in a new issue
Subscribe
To agree to purchase a security, often shares
Convertible securities
Securities that begin their life in one form (usually debt) and that may be converted to another form (usually equity) at a later date. Includes convertible notes, capital notes and convertible preference shares
Offshore finance
Capital raised overseas
Euromarket
An international financial market that facilitates the trading of debt and equity securities outside the country of origin
Eurocurrency loans
Loans issued by an international bank, denominated in a major currency other than the legal currency of the country in which it is issued
Foreign bonds
Bonds issued in a foreign country, denominated in the currency of that foreign country
Eurobonds
Bonds issued outside the country of the currency in which they are denominated
Euroequities
Equity funds issued in offshore centres to achieve a wider distribution of ownership and greater capital than would otherwise be possible
Subsidiary
A company owned and controlled by another company
Parent company
A company that owns and controls another company
Consolidated
The combined financial accounts of a group of companies, composed of a parent and its subsidiaries
Dividend policy
A strategic policy that considers the need for profits to be retained within the firm for reinvestment and the preferences of shareholders for the amount and consistency of dividends
Debt ratio
A measure of the proportion of debt relative to total financing; or, alternatively, the proportion of assets financed by debt
Debt-equity ratio
A measure of the proportion of long-term debt relative to shareholders’ equity
Cost of capital
The cost of raising and using funds
Optimal capital structure
The best mix of debt and equity that minimises the cost of capital and maximises the value of the firm
Capital structure
The proportionate mix of debt and equity used to finance a firm
Cost of debt
The cost of financing with debt. Composed of interest and issue costs, less any interest tax shield
Issue costs
Administration, selling and underwriting costs associated with the issue of a new security
Interest tax shield
The savings a business makes due to the tax-deductibility of interest payments
Cost of equity
The cost of financing with equity. Composed of dividends and issue costs
Weighted average cost of capital (WACC)
The overall cost to a firm of all long term sources of finance
