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corporate finance > Overview of Financing Options > Flashcards

Overview of Financing Options Flashcards

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Series 65 flashcards Series 79 Top-Off Exam flashcards
1
Q

What are the Three Categories of Corporate Financing? (RED)

A
  1. Retained Earnings.
  2. Equity.
  3. Debt.
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2
Q

Technically speaking, What is a Debt?

A

A bundle of rights against an inividual or company.

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3
Q

Technically speaking, What is a Share?

A

A bundle of legal rights in a company.

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4
Q

Are Shareholders legally considered Owners of their Companies?

A

“Shareholders are not, in the eyes of the law, part owners of the undertaking.”

Short v Treasury Commissioners [1948] AC 534 (HL)

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5
Q

If not an Owner, what is a Shareholder?

A

“A shareholder is essentially an investor: he or she pays a sum of money in the hope of earning a return.”

Ferran & Chan Ho – Principles of Corporate Finance Law (2014)

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6
Q

For a Company Limited by Shares, what is the Minimum Issuance Quantity?

A

One share.

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7
Q

What are the Byproducts of Share Issuances?

A
  1. Raising of capital.
  2. Changes in shareholding distribution.
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8
Q

In a company, who has the Power to Issue Shares?

A

The Board of Directors.

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9
Q

Under what Conditions can the Board of Directors execute a Share Issuance?

A
  1. Permission from the Articles of Association.
  2. Permission by Ordinary Resolution.

§550 and §551 CA 2006, respectively.

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10
Q

What are Pre-emption Rights?

A

Shareholders’ rights to be offered to purchase an allotment of shares in proprotion to the size of their shareholding before said shares enter the open market.

§561 CA 2006.

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11
Q

Can Pre-emption Rights be Disapplied?

A

Yes, but only with the consent of the shareholders.

§569-571 CA 2006.

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12
Q

What is the Practical Effect of Pre-emption Rights?

A

Shareholder empowerment. It enables shareholders to more effectively perform their monitoring role by affording them the ability to maintain power over the Board.

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13
Q

From Where do the Rights attached to a Share originate?

A

A company’s Articles of Association, wherein upon the purchase of a share, the company and its shareholder are contracutally bound by the Articles under §33 CA 2006.

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14
Q

What is a Shareholders’ Agreement?

A

An agreement entered into between all or some shareholders in a company that seeks to regulate the relationship between shareholders, company management, etc, and that is as binding as the Articles of Association.

§40(3)(b) CA 2006.

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15
Q

What are the Advantages and Disadvantages of Shareholder Agreements? (IOU)

A
  1. A: Inherently private as they needn’t be registered.
  2. D: Only bind new shareholders with their direct assent.
  3. D: Usually very difficult to amend.
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16
Q

What are the Three Main Rights that attach to Shares? (CIV)

A
  1. Capital Rights.
  2. Income Rights.
  3. Voting Rights.
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17
Q

What are the Two Main Types of Shares issued by companies?

A
  1. Ordinary Shares.
  2. Preference Shares.
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18
Q

How do the Three Main Rights usually attach to Ordinary Shares?

A

Ordinary Shareholders tend to have no dividend entitlement, to be subordinate to creditors and preferential shareholders in the case of winding up, and to carry one vote per share.

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19
Q

How do the Three Main Rights usually attach to Preferential Shares?

A

Preferential Shareholders’ entitlements tend to be much more variable, but usually, they are entitled to a return of dividend and a return of capital, but not to participation in the company’s surplus assets and to limited voting rights.

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20
Q

What are the Advantages and Disadvantages of Going Public? (AER | ARC)

A
  1. A: Access to External Capital.
  2. A: Exit Strategies for Investors.
  3. A: Reduced Cost of Capital.
  4. D: Greater Administrative Burden.
  5. D: Greater Regulatory Burden.
  6. D: Upfront Cost.
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21
Q

What Primary Need does Debt Financing Fulfill?

A

Cashflow. Debt financing is typically used to overcome steep upfront costs, allowing a company to unlock its potential and repay its debt with interest.

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22
Q

Of the two, which form of Financing is more Flexible?

A

Debt, as it is the more variable form of financing.

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23
Q

Who may Executre Debt Financing?

A

The Board of Directors, in their unfettered discretion.

24
Q

Who are the Main Sources of Debt Financing?

A

Banks and ACPs.

25
Q

What are the General Forms of Debt Financing? (LCD)

A
  1. Loan.
  2. Credit.
  3. Debt Security.
26
Q

Which Factors are Relevant to a company’s Choice of Debt Financing? (SCPR)

A
  1. Its Size.
  2. Cost of Borrowing.
  3. Purpose of Borrowing.
  4. Restrictions on Borrowing Capacities.
27
Q

How do Creditors protect themselves from the Risk of Debtor Default?

A

Through the stipulation of contractual and/or proprietary rights against the debtor, wherein the former and latter are unsecured and secured respectively.

28
Q

What are the Two Types of Contractual Interest?

A
  1. Those against the Borrower.
  2. Those against a Third Party.
29
Q

What are the Two Types of Proprietary Interest?

A
  1. Absolute, i.e. in the entirety of the asset.
  2. Security, i.e. in proportion to the debt owed.
30
Q

What are some Examples of Contractual Interests against the Borrower? (CATS)

A
  1. Covenants, both Positive and Negative.
  2. Acceleration and Cancellation Clauses.
  3. Termination Clauses.
  4. Set-Off Clauses.
31
Q

How do Regulators protect Creditors from the Risk of Debtor Default?

A

By using statute to stipulate the inclusion of certain clauses, usually prerequisite conditions, within a given type of contract.

32
Q

What is the Purpose of Regulation to Protect Creditors?

A
  1. Minmize risk exposure imbalances between creditors and debtors.
  2. Minimize the systemic risk inherent to certain transactions.
33
Q

What are the Two Main Types of Loans for Companies?

A
  1. Committed Loans.
  2. On-Demand Loans.
34
Q

What is a Committed Loan?

A

An agreement wherein the lender is contractually bound to loan the borrower a specified sum of money, typically subject to conditions precedent, warranties, and the like.

35
Q

What is an On-Demand Loan?

A

An agreement wherein the lender is contractually bound to provide the borrower with capital on-demand up to a pre-determined limit.

36
Q

What is a Debt Security?

A

A tradeable debt instrument which a company can issue in order to raise capital from a variety of lenders.

37
Q

What are the Main Types of Debt Securities? (BNP)

A
  1. Bonds.
  2. Notes.
  3. Paper.
38
Q

Generally speaking, between Issuing Debt Securities and Taking a Loan, which is Cheaper?

A

Issuing Securities, but at the long-term cost of flexibility.

39
Q

Why is Issuing Debt Securities Cheaper than Taking a Loan? (LLFG)

A
  1. Lower upfront and maintenance costs, i.e. due diligence and regular monitoring.
  2. Lower interest paid out due to risk aversion.
  3. Fewer and less stringent covenants and warranties.
  4. Greater participating pool of lenders.
40
Q

Why might a Company Struggle to Issue Debt Securities?

A
  1. It’s not publicly-traded.
  2. It’s not sufficiently strong to have earned an investment-grade credit rating.
41
Q

What are Debt Securities’ advantages over Equity?

A
  1. Cheaper because they’re tax-deductable.
  2. Don’t disrupte the established shareholding power distribution.
42
Q

What is a Plain Vanilla Bond?

A

An unadorned fixed-rate debt security.

43
Q

What is a Zero Coupon Bond?

A

A debt security without interest payable, where the debt is paid in full on maturity.

44
Q

What is Asset Finance?

A

A form of financing wherein capital is raised in proportion to the collateralizing assets presented by the borrower.

45
Q

What is Receivables Financing?

A

An arrangement wherein a lender loans a borrower immediate capital in proportion to a currently outstanding receivable, expecting repayment once the account is settled.

46
Q

What is Supply Chain Financing?

A

An arrangement wherein a borrower arranges for a lender to purchase its receivables and settle them early, for a fee, on the expectation that it will repay the lender when the receivables are due.

47
Q

What is Asset-Based Lending?

A

A form of loan agreement that is collateralized by either a fixed or revolving asset, e.g. machinery or intellectual property respectively.

48
Q

What is the Difference between Asset-Based Lending and Traditional Lending?

A

The former assesses creditworthiness exclusively on the merits of the collateralized assets, while the latter assesses the enterprise’s wholesale profitability, cashflow, and other merits.

49
Q

What is a Sale and Leaseback Agreement?

A

An agreement wherein a financier purchases an asset on the expectation that a borrower will lease it back from him.

50
Q

What is Finance Leasing?

A

An arrangement wherein a borrower leases an asset from a lender for a fixed period of time, paying for capital and hire costs, following which he can either purchase the asset, sell it as agent, or just pay for hire.

51
Q

What is Project Finance?

A

An arrangement wherein lenders are paid out of the contractually-guaranteed income generated by the project their capital financed.

52
Q

What is a Mezzanine or Hybrid Security?

A

A security which possesses characeristic features of both debt and equity capital, e.g. preference shares or convertible bonds.

53
Q

What are the Advantages of Debt Characteristics?

A
  1. Tax deductability.
  2. Much lower cost of issuance.
54
Q

What are the Advantages of Equity Characteristics?

A
  1. Dividends repayable only on surplus.
  2. Weaker claims on insolvency, i.e. less competition.
  3. Less fixed compared to debt.
  4. Attractive to investors.
  5. Favorable for regulatory capital requirements.
55
Q

What can be done with Retained Profits?

A
  1. Reinvestment.
  2. Dividend Payout.
  3. Share Buyback.
56
Q

In what sense, then, can a Shareholder be Considered an Owner?

A

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