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Y2 Financial economics > Corporate financing > Flashcards

Corporate financing Flashcards

1
Q

What are two ways companies fund investment?

A
  • Internal funds

- External funds

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2
Q

What are forms of internal funds

A
  • Profits

- Depreciation

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3
Q

What are forms of external funds?

A
  • New equity

- Borrowing

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4
Q

What proportion of corporate financing in the UK is taken up by internal funding?

A

2/3

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5
Q

Why is internal funding more convenient than external funding?

A
  • Avoids costs of issuing new securities
  • Avoids cost of negotiating debt
  • Shareholders happy if dividends are used to increase stock value
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6
Q

When do managers usually rely too much on internal funds?

A

When they are averse to external funding and risk

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7
Q

What is the debt ratio?

A

Proportion of debt relative to the firm value

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8
Q

What is the formula for debt ratio?

A

Value of debt / (value of debt +Value of shares)

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9
Q

What is the calculation for the value of debt?

A

Current liabilities + Long term liabilities

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10
Q

What is book value?

A

Tells us how much capital the firm has raised from shareholders in the past

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11
Q

What is market value?

A

The value that shareholders place on those shares today

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12
Q

The market value of equity is often much larger than:

A

The book value of equity

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13
Q

The market debt ratio is often much lower than:

A

The book debt ratio

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14
Q

A corporation is owned by:

A

Its common stockholders

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15
Q

Corporations can raise new cash by issuing:

A

New stock

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16
Q

Stocks/shares held by investors are called:

A

Issued and outstanding

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17
Q

Stocks/shares that are bought back from investors are called:

A

Issued but not outstanding

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18
Q

What is the difference between stocks and shares?

A

Shares refer to ownership of one company, stocks refers to any company or more than one company

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19
Q

What type of rights do shareholders have?

A

Cash flow rights

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20
Q

Who do the privileged rights of shareholders go to?

A

Lenders of the firm

21
Q

What types of the firm’s actions do shareholders have control over?

A
  • Investment decisions
  • Recruitment policy
  • Decision to merge
22
Q

Stockholders exercise their control rights by:

A

Voting

23
Q

What type of vote do most decisions require to be approved?

A

Simple majority

24
Q

What kind of vote result do some big decisions require?

A

Supermajority (75%)

25
Q

Some shares can have the same cash flow rights, but different:

A

Control rights

26
Q

Stocks with superior voting power sell at a:

A

Premium

27
Q

What are the benefits of greater control rights?

A
  • Prevent challenge to a position
  • Extra bargaining power
  • Business advantage
  • Toss out bad management
28
Q

The dividend rate on preferred stocks is fixed:

A

At the time of their issue

29
Q

Preferred stock gives priority over common stock when:

A

Receiving dividends

30
Q

When companies borrow money, their liability is:

A

Limited

31
Q

Borrowers can walk away from debt obligations in exchange for:

A

Assets of the company

32
Q

Borrowers are usually only willing to exchange assets in return for freedom of debt if:

A

Asset value < Debt value

33
Q

What is the default risk?

A

Likelihood that a firm will walk away from its debt obligation

34
Q

Bond ratings are issued on debt instruments to help investors assess the:

A

Default risk of a firm

35
Q

Debt offers no control rights unless:

A

The firm defaults

36
Q

Debt can be disguised as a:

A

Tax subsidy

37
Q

Interest is paid on:

A

Pre tax income

38
Q

Dividends are paid on:

A

After tax income

39
Q

What is secured debt?

A

Debt that has first claim on specified collateral in the event of default

40
Q

What is senior debt?

A

Debt a company must repay 1st if it goes out of business

41
Q

What is subordinated debt?

A

Debt that must be paid in bankruptcy after senior debt is repaid

42
Q

What classifies as Investment grade debt?

A

Bonds rated Baa or above by Moody’s or BBB or above by S&P

43
Q

What’s a junk bond?

A

Bonds with a rating below Baa or BBB

44
Q

What is a Callable bond?

A

Bonds that may be repurchased by the firm before maturity at a specified call price

45
Q

What are convertible bonds?

A

Bonds that give its owner the option to exchange for shares

46
Q

What do financial intermediaries do?

A
  • Raise money from investors

- Provide financing for companies

47
Q

What are the roles of financial markets?

A
  • Payment mechanism
  • Borrowing/lending
  • Pooling risk
  • Information
48
Q

Debt ration measures the reliance on:

A

Debt vs Equity financing

Y2 Financial economics (20 decks)

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