Chapters 9-10 Flashcards
4 types of short term finance
overdraft
short term loan
trade credit
short term lease
what is a loan covenant
a condition that the borrower must comply with. if the borrower does not act in accordance with the covenant, the bank can demand payment
whats a positive covenant
maintaining certain financial ratios
whats a negative covenant
limiting a borrowers behaviour, such as borrowing from an another lender or disposing of a key asset
what are loan notes
fixed rate IOUs that are sold on the stock market
4 features of a loan note
coupon note
marketable
redeemable
secured
what is the coupon rate
its fixed at the time of issue, and will be set on the credit rating of the company
what does marketable mean
the ability to sell the debt can mean investors accept a lower rate of return
how do you calculate conversion premium
current market value of loan note - current conversion value of shares
what are the adv’s of pref shares compared to debt
more flexible than debt finance - if losses are made dividends are paid
what are the adv’s of pref shares compared to ordinary shares
no dilution of control as preference shares hold no voting rights
what are the disadv’s of pref shares compared to debt
no tax relief
what are the adv’s of pref shares compared to ordinary shareholders
creates extra risk for ordinary shareholders as the preference get paid dividends before them
what is venture capital
risk capital, normally provided by a venture capital firm or individual venture capitalist in return for a equity stake
what do companies have to do first when raising equity finance
issue a rights issue
what do companies do when raising equity finance, after issuing a rights issue
a placing - this is shares issued at a fixed price to institutional investors
a public offer
what are the options for shareholders, when a company offers a rights issue
buy them or sell there right to buy them. They can do a mix of these things
what is TERP
theoretical ex -rights price issue - the theoretical price after the rights issue
how can the value of a right be calculated
TERP-issue price
what is placing
cheapest and quickest way of raising equity from new investors is to sell large blocks of shares at a fixed price to a small group
what does islamic finance have to comply with
sharia law
5 types of islamic instruments
murabaha
musharaka
mudaraba
Ijara
Sukuk
what is murabaha
trade credit
seller of the assets delivers goods immediately and the buyer pays later
what is musharaka
venture capital - losses must be shared to according to capital contribution
what is mudaraba
equity
profits are shared in a pre agreed contract and losses are solely attributable to the investor
what is ijara
leasing
lessor owns assets but lessee takes care of day to day wear and tear
what is sukuk
bonds
similar to traditional bonds but there is an underlying tangible asset
main advantage of internal finance
it is immediately available and you do not need to pay issue costs
main disadvantage of internal finance
using internal finance is cash that couldve been paid out as a dividend
what are the 3 types of dividend policy
constant payout ratio
stable growth
residual policy
what is the constant payout ratio
payment of a constant % of profit as a dividend
can create volatile dividend payments
what is stable growth
dividends are increased at a level the directors think is sustainable
what is residual policy
a dividend is paid only if all NPV + have been funded
what kind of company usually follows a residual policys
young companies
what kid of companies usually follows a stable growth or constant payout
mature
why is dividends irrelevant if a company pays less / no dividends
the company is likely to be investing and therefore share price will go up so shareholders can sell shares to make money
why is dividends irrelevant if a company pays more dividends
the company is likely to issue more shares to fund investments so share price will go down
assumptions of dividend irrelevancy theory
no taxes exist
capital markets are efficient
no transaction costs
information is freely available to SH’s
what is a scrip dividend
a dividend paid by the issue of additional company shares, rather than by cash
advantages of scrip dividends
it will conserve cash
an increase in issued shares could lead to a decrease in gearing
disadvantage of scrip dividends
if dividend per share is maintained or increased the future total cash payment will increase
due to an increase in supply of shares, the price of an individual share may fall
