Module 2 Sources of Finance Flashcards
1
Q
Two basic principles of Financing
A
- Matching - short term financing for short term requirements and visa versa
- Risk and return relationship - high risk should bring in a highr return and visa versa
2
Q
Three froms of long term financing
A
- Ordinary share capital
- Preference share capital
- Bonds
3
Q
Why is ordinary share captial the risksy for investors?
A
- No guaranteed minimum income
- No guaranteed avalible return (Not able to sell shares or sell them at a loss)
- All other creditors payed first in the event of liquidation
4
Q
Five ways a company can issue ordinary share captial?
A
- Offer for sale - Company invites public and institution to buy shares.
- Offer for subscription - Same as sale but allows the company to abort if not enough money is raised.
- Placing - Not offered to public but sold privately to selected investors.
- Rights issue - Exsisting shareholders offered further shares, they can choose to seel the right to a third party.
- Crowdfunding - Large number of investors invest small amount through onlune platforms and recieve share in exchange.
5
Q
Advantages of ordinary share captial
A
- Permanent captial - captial is permenant does not have to be repaid
- Flexible returns - no obligation to pay dividends
6
Q
Disadvantages of ordinary share captial
A
- Loss of control - Dilute the control of original shareholders
- High costs
- Non tax deductible - Dividends cannot be used to reduce taxable profits unlike intrest payments
7
Q
Preference share characterisitcs
A
- Not entitled to vote
- Dividends usually payed as a fixed percentage of their nominal value
- Still no guarantee dividend will be payed
- Dividend payed before ordinary holders and prior claim liquidation
8
Q
Preference share conditions
A
- Cumulation - Dividends not paid in one year then the entitlement is carried forward
- Redemption - May be an obligation for the company to redeem prefernce shares
- Convertibility - Can carry an option to convert preference shares to ordinary shares
- Participation - Can be entitled to participate in additional profits above a certian minimum
9
Q
Advantages of preference share captial
A
- Lack of dilution
- No loss of control over profits
- Dividend does not have to be paid
- Alternative to debt
10
Q
Disadvantages of preference share captial
A
- High costs
- Non tax deductibility
11
Q
Bonds key charateristics
A
- Raise finiancing by borrowing withoug going to a bank
- Intrest bearing
- Intrest must be paid before dividends
- Intrest must be paid even if no profits
- Intrest can be fixed or floating
- Bonds can be credit rated e.g AAA
12
Q
Advantages of bonds
A
- Cost - cheaper to issue debt captial then equity capital
- Tax deductible - intrest can reduce taxible profits
13
Q
Disadvantages of bonds
A
- Security - Some bonds are secured, claim on assets if terms of bond are broken
- Lack of flexibility - Terms of bonds such as payment of intrest must be paid
14
Q
5 key characteristics of term loans
A
- Obtianed from banks for periods of a few years
- Repaid following a fixed pattern
- Intrest charged may be fixed or floating
- Bank will impose covenants such as maximum gearing levels
- Miss repaymants or break covenants results in default and bank will demand full repayment
15
Q
Hire purchase
A
- Finance company purchase and own an asset
- Allows another company to use the assets in return for payments
- Fixed rate of intrest
- End of agreement ownership passes to hiree
