Equity Finance Flashcards
What is the main internal source of finance?
Retained earnings
How can internal finance be generated?
By increasing working capital management efficiency
Why is retained cash the source of finance?
A company may have substantial retained earnings in its statement of financial position but no cash in the bank
What has no issue costs?
Retained cash, as it does not affect shareholdings
What is pecking order theory?
Companies should follow an established pecking order to raise finance in the simplest and most efficient manner
Why is retained earnings the cheapest source of new finance?
As it is the cheapest form of new finance. It is equity
The 2nd cheapest source of new finance?
A bond issue or bank loan. It is debt
The most expensive source of new finance?
A fresh equity issue
Benefit of using retained earnings?
It does not have to spend any time persuading outside investors
What takes less time, a debt or share issue/
A debt issue
What is an unexpected increase in dividends?
A sign of management’s increased confidence in the company’s future prospects which will typically increase the share price
What is usually the case for start-ups?
Use equity finance, as tehy have no accumulated profits and can’t borrow
What happens when that startup grows?
Companies will seek debt in preference to new equity as it is cheaper, quicker and easier to issue
As the startup is established and stable?
Stable companies can finance their expansion with retained earnings
Why does creating accounting profits not guarantee the availability of internal equity finance?
As the company must also be converting the profits into positive cash flows
