Module 4

Question 1

What are the five methods of issuing share capital?

Answer 1

Offer for sale
Offer for subscription
Placing
Rights issue
Crowdfunding

Question 2

What is an offer for sale?

Answer 2

Invites public and institutions to buy shares at fixed price

Question 3

What is an offer for subscription?

Answer 3

Allows company to state in advance that if the share issue doesn’t raise enough money it will be aborted

Question 4

What is a placing?

Answer 4

Shares not offered to the general public but sold privately to selected clients of the issuing house or stock broker

Normally least expensive means of issue and common for small issues

Question 5

What is a rights issue?

Answer 5

Existing shareholders offered opportunity to purchase further shares pro rata ( in proportion) to their existing holdings

Shareholder can choose to sell the right to a third party

Unwelcome predators opportunity to acquire
Can’t be used first time

Question 6

What is crowdfunding?

Answer 6

New startups

Large numbers invest small amounts and receive shares in exchange

Question 7

Advantages of issuing ordinary share capital?

Answer 7

Permanent capital- doesn’t have to be repaid

Flexible returns - no obligation to pay

Question 8

Disadvantages of issuing ordinary share capital?

Answer 8

Loss of control

High costs

Non tax deductible

Question 9

What is preference share capital?

Answer 9

Part of shareholders funds
Not entitled to vote

Dividend paid before ordinary
Usually fixed % of nominal value

Question 10

Preference shares conditions attached may include?

Answer 10

Cumulation - dividend owed carried forward
Redemption - like debt, obligation to redeem
Convertibility - into ordinary, at shareholders digression
Participation - additionally in profits above a minimum, or div if ordinary get one above a %

Question 11

Advantages and disadvantages of issuing preference share capital?

Answer 11

Lack of dilution
No loss of control over profits
Dividend doesn’t have to be paid
Alternative to debt

Disadvantages same as ordinary other than dilution

Question 12

Bond / debenture / loan stock?

Answer 12

Security issued by a company in return for a long term loan

Question 13

Security of bond?

Answer 13

Secured by a fixed charge on a specific asset or a floating charge over several assets

Unable to pay back principal can take control of the assets

Rank ahead of shareholders in claims

Question 14

What is a trust deed?

Answer 14

Documentation detailing terms of bond including interest and details of redemption

Question 15

Pecking order if go into liquidation?

Answer 15

Fixed charge
Floating charge
Other creditors 
Preference shares
Ordinary shares

Question 16

Credit rating that are investment grade?

Answer 16

AAA
AA
A
BBB

(BB-D are not/junk)
Lower the grading the higher the risk
Higher the coupon to attract buyers

Question 17

Bond yield

Answer 17

Coupon/ market price x 100

Question 18

Advantages and disadvantages of issuing bonds? Debt cheaper than equity as

Answer 18

Debt is usually secured, investor feels safer lower rate of return

Interest payments reduce taxable profits of business

Disadvantages

• creditors have a claim on some assets
• lack of flexibility

Question 19

What are term loans?

Answer 19

From banks 3-10 years
Fixed instalments - secured by fixed or floating charge

Single bullet repayment at end?

Fixed rate will be higher than floating as risk of interest rates of decreasing during term

Floating rate margin over LIBOR

Question 20

What is hire purchase?

Answer 20

Purchase and own asset for hiree to use in return for payments

Charges fixed rate of interest on capital sum
At end ownership passes to hiree

Question 21

What is a lease contact?

Answer 21

Agreement between lessor (provider) and lessee (user) for the lease of a specific type of asset

Retains ownership but give right to use for period of time

All risks and rewards other than legal title

Question 22

Reasons to lease

Answer 22

Liquidity
Technological updates
Depreciation
Scalability

Question 23

Overdraft

Answer 23

Simple to arrange and flexible

Subject to review
Expensive in the long term
Repayable on demand

Question 24

What services does a factor provide to a company with trade debtors?

Answer 24

Provision of finance - passes new invoices to factor for collection (percentage of invoice value in cash, net of factoring fee)

Sales ledger administration

Credit insurance - against customer not paying

Question 25

What are the basic principles of financing?

Answer 25

Matching

Relationship between risk and return

Question 26

What is matching?

Answer 26

Match funds to requirement of funds

Question 27

Relationship between risk and return?

Answer 27

Higher the risk the higher the return will seek