Chapter 5 - Equity Finance Flashcards
1
Q
Money/Capital Markets
A
- Money markets - short term (<12 months)
- Capital markets - long term e.g stock/corporate bond market
2
Q
Functions of stock market
A
- Raise new finance
- Sell investments
- Aid takeovers
- Float private compant
3
Q
Functions of corporate bond market
A
- Disintermediate - deal direct, no middle man
- Raise new debt finance
- Sell debt
- Aid takeovers
4
Q
Factors affecting share price
A
- Economic
- Industry
- Company
5
Q
Methods of issuing shares
A
- Rights issue - existing can purchase additional
- Offer for sale - to public, underwritten
- Public issue - to public, not underwritten
- Placing - issued to select group instituional investors
6
Q
Capital Asses Pricing Model (CAPM)
A
ke = Rf + [Rm - Rf] B
Rf = risk free rate
Rm = return on markets as a whole
B = beta factor
Rm - Rf = market risk premium
7
Q
Advantages of CAPM
A
- Directly links risk and return
- Can be used to calculate ke when dividends not growing constantly
8
Q
Disadvantages of CAPM
A
- Can only be used when investors diversified
- Assumes all components remain constant
- Assumes investors can invest/borrow at risk free rate
- Assumes capital markets perfect i.e. no transactions costs / tax
