Equity Vs Debt

Question 1

Characteristics of an Angel Investor

Answer 1

• seek start ups
• personal wealth for company share
• position on board
• provides guidance

Question 2

Characteristics of Venture Capitalist

Answer 2

• Typically a firm of investors
• Seek established businesses
• Seek position on board
• Will look to sell at higher price
• More visible than Angel Investors

Question 3

Characteristics of Private Equity

Answer 3

• Long Term as seek to improve company performance
• Will buy out the shareholders of established companies
• Not the same as new finance
• Existing management replaced by industry experts
• PE firms funded by private investors
• Realise the investment via sale to competitor or IPO

Question 4

What must shareholders do before a company can go public?

Answer 4

Disapply Pre-Emption rights (allows for dilution)

Question 5

3 Types of share issue

Answer 5

Public Offer - already established and offering new shares

IPO - first time offer - risky as price untested

Rights Issue - issue to existing owners, what isn’t taken is taken by underwriter (investment Bank

Question 6

Debt vs Equity: Why is Debt more attractive

Answer 6

Retention of ownership

Tax advantage - interest is deductible

Cash flow certainty - fixed payments

Cost - generally cheaper due to security taken

Question 7

Trouble with Gearing

Answer 7

Gearing: debt to equity

Too much debt = insolvency

Question 8

Types of Debt Finance

Answer 8

-Fixed term loans
-Bonds
-Convertible bonds

Question 9

Bond, Convertible Bond

Answer 9

Bond

• issued by company
• holder receives interest
• will receive principal at maturation
• can be bought/sold as price varies

Convertible

• Can be converted to equity shares in company and will benefit from share price increase

Question 10

What are covenants

Answer 10

Agreed performance metrics that a borrower must adhere to