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Year 1 - Accounting and Finance > finance lec 10 - sources of finance > Flashcards

finance lec 10 - sources of finance Flashcards

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1
Q

financing decision relate to how to

A

raise appropriate finance

at the right time required

for the lowest cost
(As maxes vaye of firm)

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2
Q

whar are internal sources of finance

A

ertained earnin

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3
Q

what ar external sources of finance

A

equity/debt

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4
Q

finacial instuments are not the same as

A

assets

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5
Q

what is diffrence between financial instruwment and finccial asset

A

assets are more general

in return for what you oay you keep recieveign something for it

???????

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6
Q

finacial instryments are

A

asssets that are regulat traded

check if it is are or aren’t

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7
Q

whar are 3 finacnial instruments

A

shares

bond/debt

loans

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8
Q

example of bond/debt

A

gilt treasury, bills?

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9
Q

what are loans in terms of finaicalinstrument/asset

A

assets but not regulary traded no liquid mkt but at same time we have a debt collection business where whoole premse is they buy loans

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10
Q

retained earnigns

A

cash available to company to invest in real assets generated from operations

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11
Q

retained earnigns are available to do what 2 things

A

distribute/retain

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12
Q

retained earnigns are a rimary source of finance for new investments in whic 4 coutnies

A

US UK GERMANY JAPAN

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13
Q

Who has full control over retained earnings

A

managers and directors

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14
Q

what we dont pay to sh we

A

reinvest in retained earnigns

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15
Q

more div = what to things / what thing and then what happens as a result

A

less retained earnings (+ less retained for investment)

more reliant on external finance

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16
Q

what descisions do we make

-how much
- is it best

A

how much will we pay out to S

is it best source

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17
Q

how much will we pay out to SH

-the more paid out

  • some ompanies do what instead of issuin dividends
  • where can we get the rest of finance from
A

the more paid out ass dividen the less retained for reinvestment

some companies buy back shares instead of issiuin dividends

get the rest from debt and equity to make i ? LOL CHECK THIS ON

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18
Q

is it best source (retained earnings)what 3 things do we consider

A

is it avaiable

no issuing costs therfore don’t incur costs to use retained earnings

easy to access

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19
Q

as long as you got retained earnign what dont you need to explain

A

anything to anyone else

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20
Q

as long as got retained earnings dont need to explain anything to anyone else but

what does this avoid and why
what position may you end up in
what do managers avoid

A

aviods market discipline as if you dont got to justify or persuade this is a foos incestment

may end up in a position where you take on bad invesment doe selfish descsion

managers avoud having to explain and promo a project of raise funds exterrnally

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21
Q

debt is

A

borrowing or issuing boonds

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22
Q

borrowing from a bank is

A

a contract between a copmay and bank

setting out terms and afreement

oat interst annual the repay the principal

generally not tradebale

may be secured on assets

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23
Q

in debt the interst can be

A

fixed/fotaing

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24
Q

expand on a fixed/floatinginterest rate

A

prespescified payment is areed

LIBOR - cost of funding

diff commercial banks agreed when borrow from each other

5.3% + preimium on otp

change over time based on base rate

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25
Q

how does bank protect its position

A

by mposing covenants - restritions on waht the company can do

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26
Q

what can’t a copmany do in terms of imposed restrictios, we talking about

  • dividends
  • debt
  • assets
A

pay dividends - till paid off loan

issue new debt - dont want to dilute securiteis

can’t sell asset on wcich loans are secrured

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27
Q

who are restrictoins especially imposed on

A

small firm

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28
Q

restrictions are imposed as it minimses

A

chances of company failing to pau loan back

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29
Q

in terms of teh ratio to ratio thing that the ank may imposed what’s the poitn

A

they dont care whats borrowed as long as it is below threshold

i

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30
Q

what happens if you go above the threshold

A

breached covenant

got right to call in loan for it to be paid earlier

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31
Q

bank loan is used as st borrowing what is the period of year

A

3-5 years

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32
Q

long term debt finance

what are the 2 types

A

fixed interest securities

debenture

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33
Q

what are fixed interst securities

A

borrow money and in echange secure/use a number of ordinary shares as collateral

if they fail to pau they seize stocks and get moeny

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34
Q

give example of fixed interst securtieis

A

loan stock

debentures

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35
Q

bulle tpoitns for fixed interest securities

A

may be conertible

pat value in uk typically £100

market value - depends on D and S in bond mkt

repaid b4 SH in event of liquidation

less risky than shares - so lower return required by debt hilders

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36
Q

what is debentrue

A

secured corporate bond - UK

unsecured - US

written acknowldegement of indebtness

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37
Q

debeentures are secured agaisnt

A

corporate assets

  • fixed charge on speciifed asets

assets can’t be disposed of whilst debt is outstanding

if don’t got NCA mmay impose flotaing charge on WC items such as inventory (floating charge on a class of asset)

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38
Q

are debentures ore or less risky and why

A

less risky than unsecured debt

as all you can do in this situation is take company into liquidation and then get moeny that is leftover(unsecured debt)

(secured debt) usually secured against asset that is mor valuable than actual value fo debt

can be engineered to suit needs of company and investors - coupon , issue price, redemption price

warrants , convertible debt

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39
Q

restrictive covenants

A

conditions attached to loan/bond

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40
Q

restrictive conventans used to

A

ptotect debt holder

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41
Q

RC restricy

A

managments ower

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42
Q

examples of coventnats

A

limit amount of other debt to anyone

have a target for gearing/current ratio

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43
Q

what is intention of RC

A

Prevent risk profile of company being changed

safeguard against any unexpected change to company risk profile

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44
Q

what do we mena when we say change company risk profile

A

dont borrow from anayoe les/above cetain threshold - cause if you do you no longer the copany that borrowed money in 1st place

don’t increase div payout bby certian rate otherwise you deviate from circumnstances/situation you went in intially when you borrowed money

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45
Q

what haooens in breahc of contract / not being able ti pay

A

BOC - lead to forced early repayment

if dont got £ - take emminto liquidation (game over for SH , wealth wiped out dont get anytgubg

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46
Q

bond rting is a key feature of

A

bond / debenture

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47
Q

bond rating is measure of

A

investment risk

  • how liekly company will pay interst
  • how liekly is it cop will repay principla
48
Q

bond rating is rated by

A

commerial organisations e.g. Moodys

49
Q

bond ratings are basedon

A

company’s finaical perfomance

economic environment

50
Q

ubvesmtent risk an limit investments in bonds to

A

‘investment grade’

51
Q

a dowgrading of a bond rating can trigger

A

a reuiremtn to sell

causing a fall in the bond once and an increase in its yield

52
Q

our 2 types of risk

A

interst

default

53
Q

what are the number bond ratin

A

AAA - prime , best quality, high risk

all the way to
D = default

54
Q

anything below what is thought of as non ivnestment grade

A

BBB

55
Q

THERE AER LEGAL REQUIREMTNS ESPECIALLY IF - bruh idk what this links to

A

you are a institutional investor

56
Q

BBB doesnt necessarily mean .. and expand (what does it take)

A

low quality investents

all it takes is for a company to over leverafe meaing they theri bond rating falls

sum - anythig below triple be is non inesmtnet grad ebut dont mean low quality investment

57
Q

new issues of ond finance

A

issued via an IB in new issue

lead bank will sell blocks of debentures to clients prior to isse#ue fate

book building - ms wants to raise 10m in bonds so they hire IB who find investoes for ya
- attractive bonds may be oversubscribed
-companies can increase the bonds on offer if t lots od demand

58
Q

where are new issues of bond finance done

A

in primary market

59
Q

equity finace is

A

extenal lon term finace

= ownerhsip = ordinary shares

60
Q

holders of equit finance are

A

owener sof the copnay

61
Q

equity finacne can be

A

listed/unlisted

we mostly consider isted here

62
Q

equity finance holders have a right to

A

residual cash factors

63
Q

for a company to be a copany it needs to have

A

equity base and shareholders

  • residual claimants of assets of the firm
64
Q

what are optional elements of capital

A

debt

preference shares

bank loan

65
Q

ordinary shrea

A

issued by copmany

hekd by inesotrs /sh

shareholders on london stock exchange
- used to be primary uk priv industry

now mainly financial institutions and international investors e.g. pension funds

66
Q

sh

whi are they

what is control limited to

where can they attend and vote

A

owners of company

control limited to entitlement vote

can attend and vote at AGM - in person/proxy and many do not vote

67
Q

waht can sh vote on

A

appointmentof directos

appointment/remuneratino and removal of audotrs

approval of the dividend declared by directors

68
Q

what do SH recieve

A

annual report

dividends if declared and approved

a share of residual assets on winding up ? - huh

69
Q

what di sh participate in

A

new issue of share

have pre emption rights

70
Q

sh generally do not run company what does this give scope for

A

principal agent risk

71
Q

sh ahe a riht to claim

A

residual assets of copamny

72
Q

voting is the only powet they have they dnt get to nominate direcorss but

they dont get to vote on dividends but

A

can pick whos beeing nominated

can vote on proposal of dividend

73
Q

although retained not maangemnts money why do they have full control over it

A

casue SH dont have a say on how copany uses resours

74
Q

pre emptio rights ar erelated to

A

a rights issue

75
Q

what are pre empritio rights

A

got to offer new shares to eisting sh first

offered on pro rata basis

cheaper than public offering

mans there is not a diultion of control - still have chance to keep the % of control they had before

usually offerd at discount to encourage ivnesmtnet

76
Q

in terms of pre eption rights - only if you decline you can go to … and why

A

public

if own 10%must be five opp to retain 10% ‘

77
Q

directors are a key part of

A

corporate goernance

78
Q

maangmetn act as wha for SH

A

agnetw

79
Q

who represents SH

A

independent directors

80
Q

direcotrs are appointed for

A

fixed terms

81
Q

what dpecifc requirements does the UK corporate goernance coode give

A

annyal reappointment for FTSE 350 companies

for others every 3 years

82
Q

teh most teffective channl for magment to keep SH in check is and through and expand

A

independent directoes

represent interst of aSH in a company

83
Q

preference share soffer

A

a series of fixed patent to investors

84
Q

company can choose not to

A

pay prpeference divided

85
Q

if opany dot pay prefernce dividend it cant

A

pay orfinaty dividend

86
Q

if preference dividedn not pad prefernce share hold may gain

A

votign rights

87
Q

preference shares may be

A

cumulative

88
Q

what do you ahev to do befre orfinary div can be paid

A

cleat all past dividends

89
Q

preference shares cna only get div if

A

moeny is abaiable

90
Q

prefernce shar sdont get

A

voting rights

but if not paid cna exxchange prefernce shares for voting rights

91
Q

when faced w liquidation if voluntary there is a chance sh may end up with xxx but

A

suttin

bt sh rwealth wied out

92
Q

lay out the order of entitlement in event of liquidatio

A

secured debt holders i.e loans, debentures bonds paid 1st
then nsecured ebt holders

unsecured creditors paid e.g suppliers

prefernce SH

only aftereveryonebeen paid ordinary SH get paid wgat left

signi

93
Q

in terms of order of settlemt in liquidation there is a significant risk

A

OS get paid nothing

94
Q

secuured creditoes fet paid 1st htereofre they are hte least rriskiest invetsment so

A

rend to have lowest ror

95
Q

riskand return on equity

A
96
Q

who bears residual risk

and what otehr risk

A

OS

+ RISK FROM INSUDSTY company operates in

breat dinaicla risk arising form how compan finced

97
Q

as OS got the greates risk they expect

A

biggest retunr

98
Q

return required by SH is

A

cost of equity for copmany

99
Q

cost of equity highe rhtna cost of waht 2 thing

A

cost of rpefernce shares

csot of debt

100
Q

sh take all risk arising from invesmtent as hgihest ROR os TEND TO AHEV

A

Highest cost of capital for company

101
Q

how does a company decided(on what pls) - guessng sof

A

amount of finance required

period finance required for

cash flow avaiable to repay

alternative use of internal resourdes

cost of raising finance - ussue cost s, arrangemnt fees etc

availablity of finnce

cost of finance

dividend policy

102
Q

pros of being lsited via IPOS

A

exit route for current owners

access t fince

use share sto acquire other copanies

increased and iporved opmany profile

103
Q

cons of listing via IPOS

A

Cost of listing

SH expectations

short termism

public scrutiny

open to takeover bids

104
Q

explain acces to fiace

A

lets sya i want 10 m for new investment as a priv firm me cyant do tha but id puublic an big not oo hrd

105
Q

explain increased and improvevd compettive profile

A

exposed to pbulic so reputation increases

106
Q

explain use dshares to acquire otehr companies

A

being lsited qcuires you t enable/emere or be involed in acquisiton o fother comp by buying and offering stocks

107
Q

explain exit route for current owners

A

if sh want to get out jsut need to get shares ot market and sell tehm

but if in a priv company got to negotiate with other investors and owners and sell shre of asets which can get ugly q

108
Q

explain short termisnis

A

if lsited sh may expect yu to anoucne good earnings every 6 m mky lead to M taking bad investment decisions just to satisfy and meet SH expectation

ST decision may not be in line w LT benefits of company or overall strat of copm in otfer to avoid disappointemnt to sh

109
Q

explain pblic scrutiny

A

everyone may know everything about finances - issue for exectuvive level officers cause if get 10k in bonys dont want eveyone to know

110
Q

explain costs of lisitng

A

big cost pay anuual fees also

111
Q

open to take voer bids - expalin

A

maangment can loose jobs

112
Q

equity v debt

A
113
Q

equity

A

controls company

has a vote

owns retained profit

reciees dividends

dividends paid from profit afte tax

114
Q

debt

A

conotract w compnay

recives interst

reccievers erpayment of principal

interst is a bsuiness cost and is tax deductible

115
Q

equity is last to receieve x but what gets proirty

A

payment

dividend gets priority

116
Q

equity beenfoits from profitablity but no amtter who profitbale ….

A

debt is capped

Year 1 - Accounting and Finance (49 decks)

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