Influences on Financial Management Flashcards
What are the three internal sources of finance?
Owner’s Equity Or Capital
The owner’s cash deposited into a business’s bank account when it starts
This capital represents the owners’ financial claim on the assets of the business
Retained Profit
Net profit that is reinvested into the business
Added to equity because it increases the owner’s claim on the assets of a business
In 2019, McDonald’s made a profit of US$6 billion - $3.5 billion was given to shareholders via dividends and the other $2.5 billion re-invested in the business
Sales of an Unwanted/Unproductive Asset
Funds from the sale are paid to the business and are thus available for its use
In this case there is no interest or repayment necessary, and no loss of control
What are the three types of short-term debt + McDonald’s examples
Overdraft - a loan arrangement with the bank to draw more money than is in an account; interest is charged daily and can be claimed as a tax deduction
In 2020, McDonald’s drew a US$1 billion overdraft (remaining facility of $3.5 billion)
Commercial Bills - a written order for a loan amount guaranteed by the business’s bank, they are for hundreds of thousands of dollars and used to finance expenses
McDonald’s has a global medium-term notes facility (borrowing and returning fixed interest)
In 2020, McDonald’s issued a further US$5.5. billion in medium-term notes
Factoring - a business sells its accounts receivable in order to create cash inflow, improving liquidity at the expense of some of its working capital in the short-term
When is short-term debt useful?
Repaid within 12 months, short-term debt is most useful for businesses experiencing cash flow shortages
What are the three types of long-term debt + McDonald’s examples
Mortgage - used by entrepreneurs to purchase non-current assets, which then become the security for the repayment of the loan
McDonald’s franchisees may take out a chattel mortgage for specific assets (equipment and machinery) whereby the lender keeps a legal right to the financed asset whilst money is owed
Debenture - finance companies and other large firms are invited to invest in the business by lending them large amounts of money, which are used to buy buildings and equipment; loans are for a fixed amount, a fixed time period and at a fixed interest rate
Unsecured Note (Bond) - usually issued by finance companies to gain funds, they are not secured and therefore offer higher interest rates than debentures; the borrower must pay a specified amount of interest and repay the entire amount on maturity
Leasing - a contract allowing use of another person’s asset for a specific period of time and at a set fee; lease payments are tax deductible
In 2019, McDonald’s paid over US$1.6 billion in lease payments worldwide
What is private equity?
Private companies can invite specific people to become part-owners by selling them shares in the business
An advantage is that the cost of the finance is postponed, as dividends can take time
A disadvantage is that with more owners, the original investor’s power becomes diluted
What are the five types of public equity?
Ordinary Shares - provide part-ownership in a public company; shareholders receive a dividend as their share of the business’s profits
New Issue - the first issue of shares, where businesses receive the money of the sale
Rights Issue - issue of shares that is offered at a special price to existing shareholders in proportion to their current share ownership in that company
Placement - an additional share issue that is offered to specific institutions and specific investors to raise up to 15% of the business’s current capital base
Share Purchase Plan - companies can offer up to $15,000 in new shares to each existing shareholder at a discounted price
McDonald’s relationship with public equity
Since 1965, McDonald’s has issued 1.66 billion shares
As of 2020, 746 million shares were still in the market and McDonald’s has 914 million shares in its own treasury
What is the influence of banks on a business + McDonald’s example
Accept deposits from the general public and provide funds for loan
Provide many financial products for their corporate clients, including:
Business credit cards and overdraft management
Business insurance and superannuation funds
McDonald’s are assigned a credit rating of B+ by financial agencies Moody’s and Standard & Poors, which influences the likelihood of banks to lend to them
What is the influence of investment banks on a business?
Financial institutions that act as intermediaries in complex corporate transactions
Provide services such as:
Raising large amounts of capital by underwriting share issues
Finding buyers for large bond issues
Assisting businesses involved in mergers and takeovers
What is the influence of finance companies on a business?
Provide various types of secured and unsecured loans to consumers and businesses
Usually charge higher interest rates than banks
Can arrange:
commercial bills
leasing finance
debentures
What is the influence of superannuation funds on a business?
All employees must have 9.5% of their wage or salary invested in superannuation funds
The fund invests the superannuation to earn a return for the employee
Its purpose is to provide an investment people can use as an income source when they retire
What is the influence of unit trusts on a business?
Formed under a trust deed, with a trustee who controls and manages the trust
Units are offered to the public for investment
All the money from the sale of units is pooled and invested by the trustee
What is the influence of ASIC on a business?
A market for buyers and sellers to exchange shares, bonds and other securities
Businesses can issue new shares to the general public on the primary market, raising capital
In order to do so, the business must be of a reasonable size and have a good record
How do ASIC influence the financial sector of a business, including McDonald’s?
An independent statutory commission that regulates corporations, markets and the provision of financial services covered under the Corporations Act 2001 (Cth)
Compels McDonald’s to submit audited financial statements that can be accessed by public
Attempts to ensure honest, efficient and fair provision of financial services
Performs market assessments of businesses, raises questions about business reports and identifies areas of improvement to meet corporate requirements
How does company tax impact businesses such as McDonald’s?
For 2021 and beyond, company tax is currently a flat rate of 25% on net profit for small businesses (those with less that $50 million turnover in the financial year)
Larger businesses are subject to a 30% tax
Superannuation funds pay 15% tax, incentivising people to save for retirement
During the 2018 Australian financial year, the ATO reported that McDonald’s Australia paid AU$135 million tax on its profit of AU$456 million
