Module 4 Flashcards
What are the five methods of issuing share capital?
Offer for sale Offer for subscription Placing Rights issue Crowdfunding
What is an offer for sale?
Invites public and institutions to buy shares at fixed price
What is an offer for subscription?
Allows company to state in advance that if the share issue doesn’t raise enough money it will be aborted
What is a placing?
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
What is a rights issue?
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
What is crowdfunding?
New startups
Large numbers invest small amounts and receive shares in exchange
Advantages of issuing ordinary share capital?
Permanent capital- doesn’t have to be repaid
Flexible returns - no obligation to pay
Disadvantages of issuing ordinary share capital?
Loss of control
High costs
Non tax deductible
What is preference share capital?
Part of shareholders funds
Not entitled to vote
Dividend paid before ordinary
Usually fixed % of nominal value
Preference shares conditions attached may include?
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 %
Advantages and disadvantages of issuing preference share capital?
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
Bond / debenture / loan stock?
Security issued by a company in return for a long term loan
Security of bond?
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
What is a trust deed?
Documentation detailing terms of bond including interest and details of redemption
Pecking order if go into liquidation?
Fixed charge Floating charge Other creditors Preference shares Ordinary shares
Credit rating that are investment grade?
AAA
AA
A
BBB
(BB-D are not/junk)
Lower the grading the higher the risk
Higher the coupon to attract buyers
Bond yield
Coupon/ market price x 100
Advantages and disadvantages of issuing bonds? Debt cheaper than equity as
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
What are term loans?
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
What is hire purchase?
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
What is a lease contact?
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
Reasons to lease
Liquidity
Technological updates
Depreciation
Scalability
Overdraft
Simple to arrange and flexible
Subject to review
Expensive in the long term
Repayable on demand
What services does a factor provide to a company with trade debtors?
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
What are the basic principles of financing?
Matching
Relationship between risk and return
What is matching?
Match funds to requirement of funds
Relationship between risk and return?
Higher the risk the higher the return will seek
