Lectures 4 and 5 Flashcards
Factors affecting the sensitivity of NPV calculations
Sales price Annual sales volume Project life Financing cost Operating costs Initial outlay
Long term external sources of finance
Ordinary shares Preference shares Borrowings Financial leases Hire purchase agreements
Short term external sources of finance
Bank overdraft
Bills of exchange
Debt factoring
Ordinary shares
No fixed rate of dividend
More risky
Preference shares
Less risky
Fixed rate of dividend
Get priority
Lower levels of return
Lowest risk to return ratio
Loan capital
Followed by preference shares
Followed by ordinary shares
Loan capital
It’s a loan so they bank don’t really benefit??
Benefits of finance leasing
Ease of borrowing
Reasonable cost
Flexibility
Improves cash flows
What is hire purchase
A method of buying goods through making instalment payments over time
Benefits of hire purchasing
Cash flows can be weighted towards the end of the term
Flexible
However, overall cost is higher
What is financial leasing
A form of renting an asset, using it without owning it
What is bank overdrafts
Allows business to maintain a negative balance on its bank account
What is debt factoring
A way a business can raise cash by selling their sales invoices to a third party at a discount
How does debt factoring work
Company sells factor invoices for less but receives the money now
What are retained earnings
Shareholders leaving their dividends in the business