FI 14 Sources of financing Flashcards
What are some reasons for requiring capital?
- ongoing operations
- capex: building and maintaining plant and equipment
- M&A
- investment in w.c.
- refinancing
- recpaitalization
- reserves
What is the financing life cycle (same as business) and common sources of financing?
Development - seed capital, family and friends Commercialization - venture capital Growth - equity, debt Maturity - debt, equity Decline - debt
What are some features of financing alternatives that should be analysed?
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
What are some stakeholder objectives considerations?
Entity financing strategy
Existing owners preferences including dilution of shares and proportional ownership
Conflicts: entity vs existing owners
Impact on other stakeholders
Difference on recording security as liability vs equity
Liability incurs expenses for interest, whereas equity goes via retained earnings
Relevant stakeholders - who are generally the most important?
Existing owners most important usually
Others include : managers, local community, employees
Questions to ask when assessing viability of financing
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?
3 factors to consider if there are multiple financing sources
- effect on WACC
- impact on financial flexibility - higher debt level, less flexibility
- needs of existing owners
What is short-term financing generally used for?
Operating expenses such as inventory and receivables.
Examples of short-term financing
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
What is a margin limit?
Bank provides up to a certain percentage of an account (80% of AR or 75% of inventory)
Common types of long-term financing
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
Accounting for securitization
- recognized as a sale of rec
- recognized as a loan (depends on recourse)
Redeemable/retractable/call provisions/sinking fund
- 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
Common types of equity financing
Common shares
Preferred shares - cost lower than common shares due to ranking ahead of common shares upon liquidation
Features of common shares
- 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)
Fatures of preferred shares
- voting rights or non-voting
- fixed dividends (when declared)
- cumulative or non-cumulative
0 retractable
-redeemeable
Sources of equity financing
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
Typical three ways venture capitalists exit
- sale to strategic buyer
- sale to private equity
- taking company public
3 situations where private equity may be desirable
- high growth companies
- leveraged buyouts
- turnaround situations
Typical three ways private investors exit
- sell to strategic buyer
- take company public
- introduce more debt into capital structure, which repurchases shares, allowing private equity to reduce investment in business
What is a reverse takeover
When a private company acquires a shell company already listed on the sotck exchange, then carries on the business inside the shell company.
reasons for IPO
- enabling founders to monetize value of their shares
- accessing large pools of capital
- elevating profile of the comapny
characteristics for successful IPO
- history of operational success
- experience management team
- compelling growth prospects
- profitable ops
what is a rights offering
secondary offering of common shares made initially to existing shareholders so they can maintain their proportionate ownership
+/- of rights offerings
+ 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
warrant definition
ability to purchase shares at a given price
debenture definition
type of loan that can be converted into common shares at a predetermined rate
