Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

FM - Financial Management > Chapter 15 - Sources of Finance > Flashcards

Chapter 15 - Sources of Finance Flashcards

1
Q

Why do firms need finance?

A

to provide working capital
to invest in non-current assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the criterial for choosing a source of finance?

A
  • cost
  • duration
  • term structure of interest rates
  • Gearing
  • accessibility
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is risk?

A

the variability of potential returns

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Investment risk arises because of what?

A

returns are variable and uncertain

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

An increase in the risk taken on by an investor generally requires what?

A

an increase in returns provided by the investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

shareholders provide what to the business?

A

provide equity funding to the business

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

lenders provide what to a business?

A

provide debt finance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Lenders lend money in return for what?

A

interest receipts and capital repayment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Is debt or equity more protected when lending to companies in risk industries?

A

debt providers will be more protected than equity providers. This provides therefore take on less risk on their investment than shareholders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is one principle of raising finance in regards to the duration?

A

duration of the funding should match the duration of the need for it

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the some negatives and positives of bank overdrafts?

A
  • flexible and only used when needed
  • bank can call them in at any time, making them risky to use in the long-term
  • interest rates high
  • if used intermittently only when needed can be cheaper than arranging a loan
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are bank loans?

A
  • can be arranged quickly and put in place for a number of years
  • may not always be available and company may need to provide security
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

IN the short term a company can aim to?

A
  • collect their receipts in faster
  • delay payments to suppliers
  • have a more efficient inventory system in place
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Who are equity shareholders?

A

Ordinary shareholders - the owners of the business and exercise ultimate control through their voting rights

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is equity finance?

A

the investment in a company by the ordinary shareholder, represented by the issued ordinary share capital plus reserves

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are preference shares?

A

their characteristics bear more resemblance to debt finance and so far for the purposes of such calculations as gearing they are considered part of debt than equity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

How can we raise finance?

A
  • internally generated funds
  • rights issues
  • new external share issues
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

what are internally generated funds?

A

retained earnings not already paid out as dividends or used for prior investment. Quick and cheap source of finance if available

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

what are rights issues?

A

the issue of new shares to existing shareholders in proportion to their existing shareholdings at a discount to the current market value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What are new external share issues?

A

placings, offers for sale etc

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

what would happen to the share price after a rights issue?

A

expected to fall

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is the formula for the theoretical ex-rights price (TERP)?

A

(Market value of shares already in issue + proceeds from new share issue) / no. of shares in issue after the rights issue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is another reason for the affect in TERP value?

A

if funds raised from the rights issue are being used to undertake a positive NPV project, the value of that NPV with be theoretically added to the value of the company and therefore would increase the TERP

24
Q

What is the value of a right calculation?

A

TERP - issue (subscription) price

25
Q

What is the value of a right per existing share price?

A

(TERP-issue price) / no. of shares needed to obtain a right

26
Q

What are the different shareholder options in regards to a rights issue?

A
  • take up the rights by buying the specified proportion of shares at the price offered
  • renounce the rights and sell them in the market
  • renounce part of the rights and take up the remainder
  • do nothing
27
Q

What are the characteristics of new external share issues?

A
  • expensive and may fail if investors cannot be found to purchase enough shares to raise the required total cash
28
Q

What is underwriting?

A

when company chooses to have the issue insured

29
Q

Some companies do what to raise enough cash for new external share issues?

A

may require business to become quoted - stringent criteria to adhere to

30
Q

What is a bond/ loan note?

A

a written acknowledgment of a debt by a company, normally containing provisions as to payment of interest and the terms of repayment of the principal

31
Q

What are features of long term finance?

A
  • traded on the stock market
  • usually denominated in blocks of $100 nominal value
  • interest (coupon) paid as percentage of nominal value
  • secured or unsecured
  • may be redeemable or irredeemable
32
Q

What are the advantages for an investor for long-term debt?

A

low risk, low return

33
Q

What are the advantages for a company for long-term debt?

A

cheap, predictable, doesn’t dilute control

34
Q

What are the dis-advantages for an investor for long-term debt?

A

No voting rights (no control) - debt investors do not have equity shares they cannot influence the direction of the company

35
Q

What are the dis-advantages for a company for long-term debt?

A

inflexible, increase risk at high levels of gearing, must be repaid

36
Q

What are examples of other types of loan notes?

A

Deep discount loan notes
Zero coupon loan notes
Hybrid loan notes - convertibles
Hybrid loan notes - with warrants

37
Q

What are deep discount loan notes?

A

issued at a discount to nominal value and redeemable at nominal value and above

38
Q

What are zero coupon loan notes?

A

like deep discount but zero interest is paid whilst in issue. Investors entire return is in the form of a capital gain from the difference between the issue and redemption prices

39
Q

What are hybrid loan notes - convertibles?

A

these give the loan note holder the right to convert (if they choose at the time) the debt into other securities, normally ordinary shares, at a future date

40
Q

What are hybrid loan notes - with warrants?

A

these give the loan note holder the right to subscribe at a fixed future date for a certain number of ordinary shares at a predetermined price

41
Q

Long term lease arrangements would be used when?

A

as debt finance for assets that have a useful life over the mdeium to long-term period

42
Q

What are characteristics of leasing?

A
  • The lease generally covers the whole useful life of the asset.
  • The lessor does not usually deal directly in this type of asset.
  • The risks and rewards of ownership are generally passed to the lessee.
  • The lease agreement cannot be cancelled.
43
Q

What are venture capital investors?

A

take up shares in small, fast growing companies that have significant growth potential

44
Q

What do venture capital investors provide?

A

the funds to help the business grow, and often take an active role in advising the company too

45
Q

Venture capitalists usually aim to do what?

A

grow the company to the point at which it can be floated on the stock market. This allows them to sell their shares, all being well at a huge profit on their original stake

46
Q

SMEs tend to be unquoted and can have difficulty raising finance due to what?

A
  • small number of owners with limited capital available between them
  • lack of business history or proven track record
  • lower level of public scrutiny over accounts and records
  • lack of internal controls and governance over owner-manager decisions
  • lack of tangible assets to use as security for lending.
47
Q

What is the funding gap?

A

the gap between the finance that SMEs could product

48
Q

What are the different options for an SME to raise finance from different sources?

A
  • seed capital
  • high street bank
  • government grant
  • business angel
  • venture capitalist
49
Q

What is the maturity gap?

A

SME find easier to obtain long-term finance compared to small to medium term.

50
Q

Islamic finance operates in accordance to what principles of sharia law?

A
  • sharing of profits and losses
  • no interest (riba) allowed
  • restricted to islamically acceptable transactions, i.e., no investment in alcohol, gambling etc
51
Q

What is Murabaha?

A

Trade credit, similar to equity finance.

52
Q

What is Ijara?

A

Lease finance. The investor owns the asset and makes it available for use by the borrower in return for rental/purchase payments

53
Q

What is Sukuk?

A

similar to debt finance. Instead of owning a bond, the investor owns a share of an asset that the sukuk is linked to

54
Q

What is Mudaraba?

A

Provision of finance (by the rab ul mal) and management of the venture (by the mudarib) are separate.

55
Q

What is musharaka?

A

The investor and investee contribute capital to a joint venture. Both may be involved in management of the venture.

FM - Financial Management (20 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions