L25 - Balance Sheets and Legal Concepts

Question 1

Identify the most useful information contained in a company’s annual report

Answer 1

•	Statement of financial position
o	Assets – what the company owns
o	Liabilities and Equity – how the company is financed
o	Profit or loss
•	Income statement
•	Report of external auditor

Question 2

Distinguish between different types of financing and describe their main characteristics

Answer 2

• Own funds
o Private company
o Stock exchange listing
• Choose investment bankers → prepare public offering memorandum → road show → pricing → comply w/SM rules
• Depending on listing requires certain CG standards (i.e. Sarbanes-Oxley)
• Debt
o Bonds – export financing – govts finance foreign companies that do business in their territory or buy from their companies
o EMTN programs (Euro Medium term notes) – offered directly to the market, mature in less than 5 years, outside of US/Canada
o Bank loans
• Bilateral (one bank, one borrower) or syndicated (multiple banks, one borrower)
o Commercial paper
o Debt ratings matter – how credit-worthy is the company?
o Negative pledge – prevents borrower from taking out a second loan on the same assets if the first is unsecured (b/c first lender would recoup money secondarily)
• Off balance sheet
o Leasing