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Strategic Case Study > F3 - 4/5. Equity and Debt Finance > Flashcards

F3 - 4/5. Equity and Debt Finance Flashcards

1
Q

What are the 3 main short term sources of debt finance? (<1 year)

A
  1. Overdrafts
  2. Short term bank loans
  3. Commercial papers
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2
Q

What are the 3 main medium term sources of debt finance? (1-5 years)

A
  1. Med-term bank loans
  2. Medium term notes/floating rate notes
  3. Sale and lease back
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3
Q

What are the 3 main long term sources of debt finance? (>5 years)

A
  1. Bonds
  2. Convertible bonds
  3. Bonds with warrants
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4
Q

What are the 3 main sources of equity finance?

A
  1. Ordinary shares
  2. Preference shares
  3. Retained cash
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5
Q

What are 2 other possible sources of finance?

A
  1. Venture capital
  2. Government assistance
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6
Q

What does the share price represent in an efficient market?

A

The PV of future cash flows generated and returned to shareholders

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7
Q

What are 3 driving factors of share price movements, other than financial performance?

A
  1. Economic
  2. Industry
  3. Company announcements/changes
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8
Q

What is a rights issue?

A

Inviting existing shareholders to purchase shares in proportion to their existing shareholding, at a discount

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9
Q

What are the 3 options of shareholders when a rights issue is offered?

A
  1. Do nothing (value and % shareholding will fall)
  2. Sell rights (receive cash by % falls)
  3. Subscribe rights (maintain existing % shareholding)
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10
Q

What is the theoretical ex rights price?

A

The price at which the shares will theoretically settle immediately after the rights issue has been made

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11
Q

What impact does raising new shares for a project have on existing shareholders?

A

The issue price of new shares will determine how much of the gain from the new project goes to existing shareholders

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12
Q

What model can we use to estimate our cost of equity?

A

Dividend valuation model

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13
Q

How can growth in dividends be estimated? (2)

A

ROCE x proportion of funds reinvested into the business
OR
Historic growth

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14
Q

What is business risk?

A

The variability of profits before interest and tax

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15
Q

What are the 2 elements of business risk?

A

Systematic (macro economic) and specific (company specific)

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16
Q

How can specific risk be reduced?

A

Diversifying investments

17
Q

What 2 things most impact systematic risk?

A
  1. Business sector
  2. Operational gearing
18
Q

What does the B factor measure?

A

A company’s exposure to systematic business risk (the relative riskiness of the company compared to the market at a whole)

19
Q

What is the capital asset pricing model?

A

The equation that links cost of equity, investors required return (considers risk free rate of return and market rate as a whole) and company’s risk Beta

20
Q

When borrowing debt finance, what are the 5 key considerations for a company?

A
  1. Timescale (match to usage)
  2. Cost (interest)
  3. Liquidity (timing of repayments)
  4. Currency
  5. Interest type (variable or fixed)
21
Q

When offering debt finance, what are the 6 key considerations for a lender?

A
  1. Security offered
  2. Timeframe (longer term = higher interest)
  3. Repayment profile (regular = lower interest)
  4. Amount requested
  5. Purpose
  6. Credit rating of borrower
22
Q

What are the 2 types of security offered against debt?

A
  1. Fixed (particular assets)
  2. Floating (any assets up to set value)
23
Q

What is a covenant?

A

Conditions against a loan that require the borrower to fulfil certain conditions, or perhaps restrit certain activities

24
Q

What 3 things might happen if a covenant is breached?

A
  1. Terminate debt agreement
  2. Impose penalty payment
  3. Increase interest charges
25
Q

What is the post tax cost of debt to a company?

A

The effect interest rate paid after tax saving

26
Q

Why is debt cheaper than equity?

A
  1. Security = less risk, so lower return required
  2. Interest on debt is tax deductible
  3. No share issue costs
27
Q

What are the 2 main benefits of leasing?

A
  1. Avoids need to obtain financing
  2. Can acquire assets if traditional funding is not available
28
Q

What are 3 purchasing costs that must be considered when making a lease vs buy decision?

A
  1. Initial capital cost
  2. Tax saved on capital allowances through ownership
  3. Disposal proceeds

Strategic Case Study (27 decks)

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