Chapter 4 Flashcards
Why do debt holders face lower risk (4)
Debt generally secured
Returns received by debt holders usually more certain (interest vs divs)
Debt may be redeemable
Debt holders paid before shareholders should business fail
How does the voting rights/ control vary between the different types of issues capital
Debt: no voting rights but can exercise influence through covenants
Pref shares: rights to vote at general meetings only if dividend is in arrears
Ordinary shares: voting rights at general meetings
What are the 3 ways to raise equity finance
Retentions
Rights issues
New issues to public
What is the formula for a TERP
TERP = (market cap pre rights issue + rights proceeds + project NPV) / total number of shares after the rights issue
What is the formula for the value of one right
Value of one right = TERP - subscription price
Where subscription price is the price they have been offered in the rights issue
What are the 5 factors to consider when making a rights issues
Issue costs
Issuance price
Shareholder reactions
Control
Unlisted companies
What are the 3 ways to issue new shares
Placing - one or two institutional investors
Offer for sale - offer to anyone via an intermediary
Offer for subscription - offer to anyone
What are 3 advantages of crowdfunding
What are 3 disadvantages of crowdfunding
Advantages:
Available to start ups who struggle to secure more regular sources of finance
Helps to attract costumer and build awareness of company
Can be a quick process eg 30 days
Disadvantages
Fee is payable to crowdfunding site
Legal/advisory costs
Admin costs of dealing with investor requests for more information
How does an ICO differ from an IPO
Investor receives a token
Payment is made in a cryptocurrency
What are 5 benefits of the issuing company of convertible loans
Obtaining funds at a lower rate of interest
Encouraging investors with prospect of future profits
Introducing element of short term gearing
Avoiding redemption problems
Being able to issue equity cheaply
What are the 3 advantages of P2P lending compared to traditional bank lending
Usually come with lower rates of interest due to greater competition between lenders
Can be quicker to arrange
Provides a more accessible source of funding for borrowers with a low credit rating
What factors are relevant to choosing between borrowing on the international markets or through the domestic system (3)
Eurocurrency loans generally require no security
International bonds are more attractive to investors than domestic (more liquidity)
Easier to raise large sums quickly on intl’ markets
What are the 4 methods of ‘financing green’
Green loans - to help finance green projects
Sustainability linked loans - for any purpose but loan cheaper if borrower achieves certain sustainability targets
Green bonds - type of fixed interest bond used to raise money for climate and environmental projects
Green funds - stock markets produce index of firms that satisfy social and environmental criteria for investors to target
What are the 4 green loan principles
Use of proceeds
Process for project evaluation and selection
Management of proceeds
Reporting
What are the 5 assumptions of the EMH
Share prices are fair (no arbitrage)
No individual dominates the market
Transaction costs are not significant
Share prices follow a random walk
Share prices change quickly to reflect information
