FINANCING A BUSINESS & INVESTMENT APPRAISAL

Question 1

source of finance

Answer 1

internal finance (profit, delaying supplier payment)
external finance (shares, loans, leasing, bank overdraft)

Question 2

preference shares

Answer 2

non current liability
right to receive dividend before ordinary shareholders
fixed percentage each year if the company chooses to offer it

Question 3

debentures

Answer 3

offered by companies to potential investors
security in exchange for funding that are documents setting out terms of a loan, can be transferable
more consistent rate of return than shares

Question 4

cost of capital

Answer 4

cost of equity (rate of return expected from shareholders) and cost of debt ( rate of interest charged on debt)

Question 5

weighted average cost of capital

Answer 5

how companies work out their cost of capital if financed with both debt & equity, weighted depending on how much of each
(market value of equity/equity+ debt x cost of equity) + (debt/debt+ equity xcost od debt x (1-corporate tax rate)

Question 6

investment appraisal

Answer 6

analysing whether an investment project if worthwhile

Question 7

methods to evaluate investment opportunities

Answer 7

accounting rate return
payback period
internal rate of return
net present value

Question 8

net present value

Answer 8

difference between present value of cash inflows and present values of cash outflows

Question 9

discount factor

Answer 9

shows change in value of company
1/(1+discount rate)^n
discount rate=cost of capital
multiply this by present value to find future value