Module 2

Question 1

What is matching?

Answer 1

borrowers should attempt to match lives of financial instruments with those of the assets being funded.

Question 2

What are examples of long term financing?

Answer 2

• ordinary share cap
• preference share cap
• bonds

Question 3

What are ordinary shareholders entitled to?

Answer 3

dividends and to vote at AGMs

Question 4

What is ordinary share capital seen as the riskiest for investors?

Answer 4

• no guaranteed income
• no guarantee of return
• last in the queue in case of liquidation

Question 5

What are the different ways a company can issue ordinary share capital?

Answer 5

-offer for sale
-offer fro subscription
-rights issue
-placing
-crowdfunding
-

Question 6

What is an offer for sale?

Answer 6

invites public and institutions to purchase, usually at a fixed price

Question 7

What is an offer for subscription?

Answer 7

can be aborted if it doesn’t raise enough case. popular fro new companies

Question 8

What is a placing?

Answer 8

sold privately to elected investors. normally the least expensive and is common for small issues

Question 9

What is a rights offer ?

Answer 9

existing shareholders are offered the opportunity to buy more shares pro rat to their existing holdings

Question 10

What is crowdfunding?

Answer 10

modern way usually for start ups.Large no investors for small amounts

Question 11

What are the advantages of issuing equity share capital for the company?

Answer 11

Permanent capital, doesn’t have to be repaid

Flexible returns

Question 12

What are the disadvantages of issuing equity share capital for the company?

Answer 12

• loss of control - original shareholders will be diluted
• high costs- usually more expensive than debt issue
• not tax deductible

Question 13

What is preference share capital?

Answer 13

Not entitled to vote, so no say. Can be bought or sold.

Dividend is usually fixed as a percentage of nominal value BUT there is no guarantee it will be paid.

Above ordinary in case of liquidation

Question 14

What are some conditions that may be attached to preference shares?

Answer 14

• cumulations -if preference div is not pair one year, it my be carried froward
• redemption
• convertibility - to ordinary at shareholders discretion
• participation - may be entitled to receive additional dividends if ordinary shareholders enjoy dividends over certain level.

Question 15

What are the advantages of issuing preference share cap for the company?

Answer 15

• lack of dilution -no voting rights
• no loss of control over profits- fixed div
• div doesn’t have to be paid
• alternative to bad debt - company might be resticted by covenants etc

Question 16

What are the disadvantages of issuing preference share cap for the company?

Answer 16

high costs

not tax deductible

Question 17

What are the advantages of issuing bonds for the company?

Answer 17

cheaper

tax deductible

Question 18

What are the disadvantages of issuing bonds for the company?

Answer 18

must be paid

some bonds are secured - claim on assets

Question 19

What is hire purchase?

Answer 19

allows the hire to use asset whilst hired makes payments. at the end of the period, ownership of asset is transferred

Question 20

What are lease contacts?

Answer 20

obtain the right to use assets
lessee pays rent in exchange for rich to use
lessee has all the risks and rewards apart from legal ownership

Question 21

What are venture capitalists?

Answer 21

invest in new or expanding companies in exchange for high returns. Usually medium term (3-5 years)
Mix of equity/debt
Will want a member of their staff on the board
will want a clear exit plan, listing etc

Question 22

What are business angels?

Answer 22

Think dragons den.
usually invest for shares.
Invest at an easier stage.
Same period as VCs

Question 23

What three services can a factor provide?

Answer 23

-Provision of finance - receives percentage of invoice , maybe 80%, net of a factoring fee. Remainder is paid when factor receives cash.

Sales ledger admin- takes fee pot around 2% of revenue. to record credit sales and chase debttors.

Credit insurance