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Business > Influences > Flashcards

Influences Flashcards

1
Q

Define Sources of finnance

A

Def - The consideration of how much finance a BUS requires and where to get it from (the source)
Must consider short and long term needs

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2
Q

Internal Sources

A

Def: Come from within BUS, recorded under OE for balance sheet
Retained Profits - profits that are not distributed but kept within the BUS to finance future activities
OE = owners funds

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3
Q

External Sources Types:

A

Debt - (Any borrowed money) owed to external sources. Includes interest (tax deductible), risk/return, increased gearing
Equity (can be internal as well) - Low risk, low gearing, does not have to be paid, dilution of ownership, bad for shareholders.

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4
Q

Short Term Debt

A

COF

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5
Q

Overdraft

A

Bank allows business to overdraw its account to an agreed limit (negative cash)
Used for short term liquidity problems (low sales in the month)
ADV: 1. Helps with short term liquidity 2. Allows negative value in account 3. Convenient/flexible
DIS: 1. Relatively high interest (10%) 2. Fees with set up 3. Interest must be paid regardless of profitability

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6
Q

Commercial bills

A

Issued by financial institutions
Usually amounts for $100,000 or more, 30-180 days for the loan
If Higher risk more interest but generally 3-4%
ADV: 1. Borrow sig funds 2. Receive money immediately 3. Cheapest form of finance
DIS: 1. Repaid + interest 2. Interest 3. 3. Interest must be paid regardless of profitability

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7
Q

Factoring

A

Bus sells ACC REC to a firm who specialises in collecting ACC REC
Used to improve cash flow, BUS does not get all of acc rec some goes to other firm
ADV: 1. Immediate access to funds (cash flow increase) 2. Cost effective way of sourcing 3. Factoring company takes over management of ACC REC and collection of it
DIS: 1. Don’t get a full amount (greater risk = higher fee) 2. Impacts possible customer relations with ACC REC 3. Impact on the brand reputation

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8
Q

Long Term debt finance

A

Greater than 2 years, used for real estate, factory/office/equipment (MUDL)

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9
Q

Mortgage

A

Used for purchasing a premises, factory or office
Agreed time (e.g 15 years)
ADV: 1. Access to significant funds 2. Predictable monthly payments 3. Lower IR since secured asset
DIS: 1. Interest must be paid regardless of profit 2. Poss increase in IR 3. Fall in value of property poss

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10
Q

Unsecured Notes/Bonds

A

No asset involved as security therefore high IR
Loan for a set period of time
Used for generating funds for acquisition/expansion etc.
ADV: 1. Access to SIG fund 2. No Asset on the line 3. Does Not dilute control of existing owners
DIS: 1. Funds must be paid on date 2. Increased Gearing 3. Higher IR

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11
Q

Debentures

A

Issued for a fixed rate and fixed time, security used in the form of an asset
Regular Interest payments then pay loan on a future date
Prospectus (outline the purpose for the capital) must be lodged with ASIC before use
ADV: 1. Significant funds for expansion 2. Fixed IR 3. Debenture holder doesn’t get vote rights
DIS: 1. Must have prospectus 2. Increase level of gearing 3. Must be paid on an allocated date

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12
Q

Leasing

A

Payment for equipment, property owned by another party - Maintenance, insurance and other costs
Used to borrow funds to use a facility etc without purchasing
ADV: 1. Using an asset without buying 2. Don’t affect gearing (not on balance sheet) 3. Tax deductible
DIS: 1. Higher IR 2. Higher overall costs 3. Don’t own the asset.

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13
Q

Equity - Ordinary Shares

A

Ordinary Shares issued by public companies on ASX, Shareholders are part owners of a business
Shareholders get voting rights and dividends in proportion to the amount of shares they own.

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14
Q

New Issue

A

First time issue of a share on the ASX, (primary shares or new offering)
Prospectus issued by a stockbroker (prospectus is a document outlining how investors money will be used.
ADV: 1. Significant funds 2. Not relying on debt so less risk 3. Bus chooses how much and when in terms of dividends
DIS: 1. Loss of control as dilution of ownership 2. Process of issuing shares expensive 3. Under Subscription poss (not enough interest)

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15
Q

Rights Issue

A

Offered to current shareholders to buy new shares in the same company in proportion to the share in order to raise funds.
ADV: 1. Easier to obtain finance from shareholders who are familiar with BUS 2. No shareholder approval required if it is less than 15% capital of what the value of BUS is. 3. Can be more than $30k
DIS: 1.Prospectus may be needed 2. Value of each share diluted because of an increased amount of shares 3. Share price may decline as a result

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16
Q

Placements

A

Offer shares to specific institutions/investors
Done to expand the BUS activities (acquisition and growth)
ADV: 1. Don’t need prospectus 2. Don’t need shareholder approval 3. Prevent hostile takeover bids occurring
DIS: 1. Bad for shareholders (value of 1 share goes down) 2. Share price may need to be discounted for the Investor 3. May be coerced into a deal due to cult of personality

17
Q

Share Purchase Plan

A

Offer existing shareholders more shares without brokerage fee
Can’t be more than 30k worth of shares per investor (the diff between SPP and Right issue)
ADV: 1. Don’t need prospectus 2. Shareholders already used to BUS 3. Easy/inexpensive
DIS: 1. Protection for investors (30k) 2. May not raise as much as rights issue 3. BUS incurs brokerage cost

18
Q

Equity - Private Equity

A

Only PTY LTD (private company)
Aim to raise capital to expand the business
New issues of shares which are not publicly listed
Dilution of ownership = DIS
Investors may only be in it for medium term to make profit (2-5 years) DIS

19
Q

Financial Institutions

A

B(banks) U(Unit trusts) S(superannuation) F(finance companies) A(ASX) I(investment banks L(life insurance)

20
Q

Banks

A

Provide long term and short term finance
Provides services such as loans, credit cards and deposit accounts to households and businesses
Examples: The big 4: ANZ, CBA, NAB, Westpac

21
Q

Finance Companies

A

Non bank financial intermediaries that specialise in smaller commercial finance and don’t accept deposits.
They raise their money through share issues (debentures)
Provide medium and short term loans to businesses through: Consumer-hire purchase loans, personal loans and secured loans
Some finance companies specialise in factoring or cash flow financing
Provides quick access to funds although usually higher IR

22
Q

Life Insurance

A

Provide loans to the private sector through the receipts of insurance premiums which fund the investment.
Provide both equity and loans to businesses
Interest higher than bank loans

23
Q

Investment Banks

A

Specialist banks that provide financial services for large businesses and deal mostly with international finance.
Provide services in borrowing and lending primarily to the business sector
E.G: Macquarie Bank and Goldman Sachs which apple works with

24
Q

Superannuation Funds

A

Collect 9.5% of income
Companies offer businesses loans as a way of investing some of their funds
Invest in shares, government and company debt

25
Q

Unit Trusts

A

Take funds from a large number of small investors and invest in specific types of financial assets e.g shares
Trustee controls it
Main types: Property trusts, fixed interest, equity and mortgage trusts

26
Q

The ASX

A

Acts as a primary and secondary market for investors and corporations to come together It also enables the trading of: * Futures * Shares * Exchange, Primary Markets: companies raise capital through issuing shares to investors, share prices are determined through supply and demand Secondary Markets: Once issued, shares can be traded on the secondary market where shareholders buy and sell shared previously already owned by other shareholders.

27
Q

Influence of the Government

A

ASIC and Company Tax

28
Q

ASIC

A

An independent body that is accountable for to the commonwealth parliament
Why: Regulates corporations, markets and provision of financial services.
Enforces and administers the corporations act 2001
It protects consumers in the areas of investment, life, general insurance and banking

29
Q

Company TAX

A

A levy on profits
Why: Tax is an influence as governments need to try and encourage investment and improve Australia’s competitiveness - Drive in economic growth.
Implications: - Levied at 30% of profits for businesses with over $10m turnover pa.
Must be paid before distribution to shareholders.
Differing countries = differing tax rates
Companies can minimise tax by relocating funds to overseas where there are lower rates.
Diverted profits tax: - Targets multinationals avoiding tax, Aim is to get multi nationals to pay
Imposes 40% tax on diverted profits

30
Q

Global Market Influences

A

IGA

31
Q

IR

A

the cost of borrowing money/the price of money if investing
Traditionally Aus IR have been higher but not recently
Many firms would be attracted to borrow funds from nations with lower rates (taking into account the exchange rate)

32
Q

Global Economic outlook

A

the projected changes to the level of economic growth throughout the world and how this may impact the local economy.
Pos projection: - Consumer confidence up, investment up, demand for g’s and s up, production and expansion occurs, revenue and profitability up, spending up, labour and capital
Neg projection: All the opposite of above
Variation between regions remain in terms of economic growth
Global economy weak rn

33
Q

Availability of Funds

A

The ease of a business to getting access of funds on the international markets.
Higher availability of funds in international money markets = Easier to get access to funds generally at lower IR. Businesses may be able to take advantage of periods like this for expansion/other objectives in terms of borrowing if it makes sense: What is gearing/risk?
2009 GFC had a great impact on the availability of funds.

Business (17 decks)

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