Chapter 4

Question 1

Considerations when deciding to use equity or debt finance

Answer 1

Annual cost of the different sources of finance
Issue costs of finance
Duration
Lending restrictions
Gearing
Liquidity implications
Currency of cash flows associated with new project
Tax rates
Availability

Question 2

What are the two types of shares?

Answer 2

Ordinary
Preference

Question 3

What are ordinary shares?

Answer 3

Owners of the company, attend meetings and vote on important matters

Question 4

What are preference shares?

Answer 4

Pays a fixed dividend, paid before ordinary dividends

Subordinate to debt holders and creditors

Question 5

What is an alternative investment market?

Answer 5

Stock exchange for smaller companies

Question 6

Rankings of price

Answer 6

Ex rights price > cum rights price > issue price

Question 7

What are the advantages of a stock market listing?

Answer 7

Marketability of shares
Easier for shareholders to realise their investment
Easier to obtain new finance
Enhance reputation

Question 8

What are the disadvantages of a stock market listing?

Answer 8

More regulations and legislation
More public scrutiny
High initial cost of listing plus ongoing expenses
Wider range of shareholders with differing views and needs may create conflict