Core Activity C: Recommend Financing Strategies Flashcards
What are the three types of debt?
Bank finance
Capital markets (bonds)
International debt finance
What is the criteria for selecting debt instruments?
Liquidity
Timescale
Cost
What are some sources of finance?
Retained earnings/existing cash balances
Sale and leaseback
Grants
Debt with warrants attached
Convertible debt
Venture Capital
Business Angels
Government Assistance
Lease V Buy considerations
Compare cost of leasing to borrowing and buying
Discount both at post-tax cost of borrowing
Ignore operating cash flows arising from the use of the asset
For the borrow and buy option, always ignore cash flows to/from the bank
What is M&M’s dividend irrelevancy theory?
The pattern of dividend payout should be irrelevant.
As long as companies continue to invest in positive NPV projects, the wealth of the shareholders should increase whether or not the company makes a dividend payment each year
What are some key considerations in terms of dividend policy?
M&M dividend irrelevancy argument
Interest of shareholders
Signalling effect or information content of dividends
Cash needs of the entity
What are some practical dividend policies?
Stable dividend policy
Constant payout ratio
Zero dividend policy
Residual approach to dividends
What are some other key considerations?
Scrip dividends
Share repurchase
One-off large dividend
What is the impact on ratios of a change in dividend policy?
Dividend cover and dividend yield are immediately affected by a change in dividend policy
Look out for other impacts too
What are the impacts of a scrip dividend?
No change in total shareholder’s equity
No change to gearing ratio
What is the impact of a share repurchase?
Impact on shareholder wealth is the same as the impact of a cash dividend being paid, BUT
Impact on ratios is different - after a share repurchase there will be fewer shares in issue, so EPS will increase
What is an asset based valuation method?
What is the dividend valuation model?
How do we calculate PV of future free cash flow to equity
What does Beta measure?
Beta - Equity Beta
Measures Systematic Risk
What is a weak efficient market hypothesis?
Prices follow a random walk
What is a semi strong efficient market hypothesis?
Prices take into account public information
What is a strong efficient market hypothesis?
Prices take into account all information whether publicly known or not
