Financing a business and investment apprasial Flashcards
Where are the two places of sources of finance
Internal
External
What are the long term sources of finance internally
Retained profit
What are the short term sources of finance internally
- reducing inventory levels
- Tighter credit control (case consumers)
- Delaying payment to suppliers
What are the short term sources of finance externally
- Bank overdraft
- Debt factoring
- Invoice discounting (incentive to pay quicker)
What are the medium term sources of finance externally
- Leasing
- Hire purchase
- Medium-term loans
What are the long term sources of finance externally
- Shares
- Debentures
- Long term bank loads
- Grants
What are the long term finance typical for limited companies
- SHare issue
- Retained earnings
- Long- term borrowing
What are the types of debt financing?
- Preference shares
- Loans
- Debentures
What are preference shares
- Right to receive dividen before ordinary shareholder
Non current liability in SoFP
What are debentures?
Instead of buying shares, companies can make loan agreements in writing, which are less risky as consistent rate of return
What is cost of capital
Cost incurred when company finances itself through equity and/or capital
What is the cost of equity
The Rate of return expected from shareholders. Their expectations for dividens and increased investment value
What is the cost of debt
Cost the company incurrs through debt financing
- rate of interest being charged
How to work out the cost of capital
cost of debt + cost of equity
Why is it important to know the cost of capital?
- decision making
- shows the minimum return a company needs to achieve in order to justify the cost of capital
e.g buying property, cost of capital is 10%, this return from property should be atleats 10% per year
