IFM - long term borrowing and new equity Flashcards
long term borrowing
o Borrowing relates to funds borrowed for periods longer than 12 months
o It is used to finance real estate, plant (factory/office) and equipment – that is non-current/long term assets
o Long term borrowing includes mortgages, debentures and leasing.
mortgage
o Loan that the borrower uses to purchase real estate such as a premises, factory or office.
o The borrower agrees to pay back the mortgage over time, with interest, in a series of regular payments. The property serves as collateral to secure the loan
debentures
o A debenture is a promise made by the business to repay money that has been lent to it
o An investor (person or another business) lends money to a business, the business issues a debenture with a promise to make regular interest payments for a defined term and then repay the loan
o Companies issue debentures as a way to raise funds from investors, as opposed to financial institutions
unsecured note
o A loan from investors for a set period of time.
o Unsecured notes are not secured against the businesses assets and therefore present the most risk to the investors (the lender)
o For this reason it attracts a higher rate of interest than a secured note/loan
o Companies sell unsecured notes to generate money for their initiatives, such as share repurchases and acquisitions.
leasing
o Involves the payment of money for the use of equipment that is owned by another party
o Leasing enables an enterprise to borrow funds and use the equipment without the large capital outlay required
o The leases uses the equipment and the lessor owns and lease the equipment for an agreed period of time
o The costs of establishing leases may be lower than other methods of financing and does not affect control of ownership
o Most repayments of the lease are fixed for a period so cash flow can be monitored easily and all lease payments are a tax deduction. The regular lease payment usually includes maintenance, insurance and finance costs
o Any interest charges may be higher than other forms of borrowing
new equity financing
o New equity is an external source of funds which raises funds for a business through inviting new owners.
o For public companies this can be done by issuing shares through the Australian securities exchange (ASX)
o This issuing of shares can also be privately negotiated for pty ltd
ordinary shares
o When shareholders purchase ordinary shares in a company, they are providing a source of finance (equity) for that business
o Shareholders get proportional voting right as well as bonus payments, called dividends, as returns
ways ordinary shares issued
o The following terms refer to variations in the type or issue of ordinary shares:
- New issue
- Rights issue
- Placements
- Share purchase plans
new issue
o Also known as an initial public offering (IPO), new issues involve a company issuing shares to the public for the first time
o Companies are required to issue a prospectus, which is a document that contains relevant details about the company so that investors can make informed decisions
rights issue
o A rights issue occurs after the IPO and provides existing shareholders with the opportunity to purchase more shares (often at a discounted rate).
o Current shareholders will have the right to purchase new shares in proportion to the number of shares they currently own
placements
o When additional shares are offered at a discount to special institutions or investors
o This discount is intended to persuade specific investors to invest in the company
share purchase plan
o An offer to existing shareholders to purchase more shares without brokerage fees and at a discounted price
o This allows companies to issue new shares without issuing prospectus
o However they can only issue a maximum of $15 000 in new shares to each shareholder
private equity
o Consist of money that is invested in businesses not listed publicly by individual or groups of investors
o It is composed of funds and investors that directly invest in private companies
