FI 14 Sources of financing

Question 1

What are some reasons for requiring capital?

Answer 1

• ongoing operations
• capex: building and maintaining plant and equipment
• M&A
• investment in w.c.
• refinancing
• recpaitalization
• reserves

Question 2

What is the financing life cycle (same as business) and common sources of financing?

Answer 2

Development - seed capital, family and friends
Commercialization - venture capital
Growth - equity, debt
Maturity - debt, equity
Decline - debt

Question 3

What are some features of financing alternatives that should be analysed?

Answer 3

Amount
Cost, before and after taxes - interest tax deductible on debt, so should be done on after-tax basis
Term (maturity)
Obligatory payments
Conditions
Financial reporting impact

Question 4

What are some stakeholder objectives considerations?

Answer 4

Entity financing strategy
Existing owners preferences including dilution of shares and proportional ownership
Conflicts: entity vs existing owners
Impact on other stakeholders

Question 5

Difference on recording security as liability vs equity

Answer 5

Liability incurs expenses for interest, whereas equity goes via retained earnings

Question 6

Relevant stakeholders - who are generally the most important?

Answer 6

Existing owners most important usually

Others include : managers, local community, employees

Question 7

Questions to ask when assessing viability of financing

Answer 7

0 does entity have access to funds?

• cost of the source?
• are cash flows adequate to meet obligatory payments?
• does entity have collateral if needed?
• are existing owners likely to approve?

Question 8

3 factors to consider if there are multiple financing sources

Answer 8

• effect on WACC
• impact on financial flexibility - higher debt level, less flexibility
• needs of existing owners

Question 9

What is short-term financing generally used for?

Answer 9

Operating expenses such as inventory and receivables.

Question 10

Examples of short-term financing

Answer 10

Supplier credit
Advance deposits
Line of credit
Factoring - selling of A/R to firms that pay the AR on behalf of another firm. If recourse, treat as a loan and reduce when AR is paid to the factor. fee amortized over life of agreement.
Asset-based financing - usually using a/r and inventory

Question 11

What is a margin limit?

Answer 11

Bank provides up to a certain percentage of an account (80% of AR or 75% of inventory)

Question 12

Common types of long-term financing

Answer 12

Long-term loans
Securitization - bundling of AR and selling them for cash. AR still managed by the selling company, which arte then paid to the securitization company. funds may be transferred back to the selling company. 
Government assistance
Leasing
Sale-leaseback

Question 13

Accounting for securitization

Answer 13

• recognized as a sale of rec

- recognized as a loan (depends on recourse)

Question 14

Redeemable/retractable/call provisions/sinking fund

Answer 14

• can pay back before term
• can demand payment before term
• allow issuer to repurchase bonds earlier than maturity
• requires payee to deposit funds in a trust account

Question 15

Common types of equity financing

Answer 15

Common shares

Preferred shares - cost lower than common shares due to ranking ahead of common shares upon liquidation

Question 16

Features of common shares

Answer 16

• voting or non-voting rights to elect the board of directors
• right to receive dividends when declared
• residual claim to income and assets (after all other financial stakeholders)

Question 17

Fatures of preferred shares

Answer 17

• voting rights or non-voting
• fixed dividends (when declared)
• cumulative or non-cumulative
  0 retractable
  -redeemeable

Question 18

Sources of equity financing

Answer 18

Angel investors - typically friends or family who believe in the idea
Venture capital - look for 30% annual return. they participate in planning and management of business
Private equity
Public offerings
Rights offerings

Question 19

Typical three ways venture capitalists exit

Answer 19

• sale to strategic buyer
• sale to private equity
• taking company public

Question 20

3 situations where private equity may be desirable

Answer 20

• high growth companies
• leveraged buyouts
• turnaround situations

Question 21

Typical three ways private investors exit

Answer 21

• sell to strategic buyer
• take company public
• introduce more debt into capital structure, which repurchases shares, allowing private equity to reduce investment in business

Question 22

What is a reverse takeover

Answer 22

When a private company acquires a shell company already listed on the sotck exchange, then carries on the business inside the shell company.

Question 23

reasons for IPO

Answer 23

• enabling founders to monetize value of their shares
• accessing large pools of capital
• elevating profile of the comapny

Question 24

characteristics for successful IPO

Answer 24

• history of operational success
• experience management team
• compelling growth prospects
• profitable ops

Question 25

what is a rights offering

Answer 25

secondary offering of common shares made initially to existing shareholders so they can maintain their proportionate ownership

Question 26

+/- of rights offerings

Answer 26

+ allows company to raise funds with lower flotation costs
+ gives existing shareholders an opportunity to maintain their proportionate ownership
- rights are only exercised if share price is above value of riths plus subscriptions price
- signal sent to market if existing shareholders sell that they are not confident about future of the company

Question 27

warrant definition

Answer 27

ability to purchase shares at a given price

Question 28

debenture definition

Answer 28

type of loan that can be converted into common shares at a predetermined rate