Chapter 4 - Financing: Equity finance Flashcards
What should we consider when deciding whether to use equity or debt finance?
Annual cost of the different sources of finance
Issue cost of the different sources of finance
Duration
Lending restrictions
Gearing level
Liquidity implications
Currency of the cash flows associated with the new project
Impact of different financing options on the financial statements and financial stakeholders of the entity
Tax rates
Availability
What are ordinary shares?
Owners of the company, attend meetings and vote on any important matters
What are preference shares?
Form of equity that pays a fixed dividend, paid before ordinary share dividends
What are rights issues of shares?
New shares are issued to existing shareholders in proportion to their existing shareholdings
What are new issues of shares?
Only a quoted company can issue shares to ‘the market’.
What is a stock market?
Place where LARGE companies can become ‘listed’ or ‘quoted’.
New shares can be issued into the market, and existing shares can be traded.
What is an alternative investment market?
Stock exchange for smaller companies
More straightforward admission requirements than the main stock exchange.
AIM listed companies have fewer reporting obligations and less strict regulations compared to companies on the main stock market
What are the advantages of a stock market listing?
Marketability of shares
Easier for shareholders to realise their investment
Easier to obtain new finance
Enhanced reputation
What are the disadvantages of a stock market listing?
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
What is the alternative formula to calculate TERP?
(Total value of shares before issue + cash raised + NPV of project)/Total number of shares after the issue
