Funding Sources - F2

Question 1

What is equity finance?

Answer 1

1. Ordinary shares
2. Preference shares – redeemable, irredeemable, cumulative, non-cumulative, participating, convertible

Question 1

What are the sources of long term finance?

Answer 1

1. The capital markets – new share issues, rights issues, issues of marketable debt
2. Bankers and finance houses – borrowings such as loans, including short-term bank facilities
3. Government and similar sources – government and charitable grants

Question 2

What is the primary function of the capital markets?

Answer 2

Enable companies to raise new finance

Question 3

What is the secondary function of capital markets?

Answer 3

Enable investors to sell their investments to other investors

Question 4

What are three methods of issuing new shares?

Answer 4

• IPO (Initial public offering) or floatation – Shares are offered for sale to investors. Offer could be made at a fixed price or via a tender offer
• Placing – Placed directly with certain investors on a pre-arranged basis
• Rights issues – New shares are offered for sale only to existing shareholders

Question 5

What are the characteristics of debt financing?

Answer 5

• Interest is paid out of pre-tax profits as an expense
• Carries significant risk of withdrawal of finance if payments are not met
• Nominal values for debt can be attributable to debt finance
• Market value of debt represents cash received when raising finance through debt

Question 6

What are the security charges against debt?

Answer 6

1. Fixed charge – debt secured against specific asset
2. Floating charge – debt is charged against underlying assets that are subject to change in quantity or value

Question 7

What are covenants?

Answer 7

Specific requirements or limitations laid down as a condition of taking on debt financing

Question 8

What does covenants include?

Answer 8

1. Dividend restrictions – limitations on the level of dividends a company is permitted to pay
2. Financial ratios – specified levels below which certain ratios may not fall
3. Financial reports
4. Issue of further debt

Question 9

What are some other sources of finance?

Answer 9

1. Retained earnings/existing cash balances
2. Sale and leaseback
3. Grants
4. Debt with warrants attached
5. Convertible debt
6. Venture capital
7. Business angels