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FM > Sources of Finance > Flashcards

Sources of Finance Flashcards

1
Q

What are the 3 equity financing options?

A
  • Retained earnings
  • Rights Issue
  • New Issue
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2
Q

4 pros and 1 con of retained earnings-

A 
\+Quick and easy.
\+No issue costs.
\+No change of control.
\+No "pricing" to do.
-Cash may not be available or may need to cut a dividend.
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3
Q

4 pros and 1 con of a rights issue-

A 
\+Fairly quick and easy.
\+Fairly low issue cost.
\+No change of control.
\+Pricing is straightforward.
-Existing shareholders may not be willing to invest.
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4
Q

4 negatives of a new issue-

A
  • Can be time consuming.
  • Highest issue cost.
  • Existing shareholders control will be reduced.
  • Important to set the price at the right level.
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5
Q

Ex issue price=

A

(Old MV of the firm + cash raised + NPV of any project)/

New total number of shares

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6
Q

Value of a right per new share=

A

Ex rights-exercise price

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7
Q

Change in SH wealth=

A

Market Cap before vs Market Cap after +/- any cash received/paid

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8
Q

What are the three debt financing options?

A
  • Overdrafts
  • Term loans
  • Debentures
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9
Q

2 pros and 2 cons of an overdraft-

A

+Flexible and easy to arrange.
+Possibly useful for a seasonal business.
-Risky (repayable on demand).
-Interest cost can be high if not repaid quickly.

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10
Q

2 pros and 2 cons of a term loan-

A

+Low arrangement fee.
+Safe-as repayment date is fixed (can match term to lifetime of a project).
-Generally require security (but this keeps the interest rate low).
-Interest rate can be fixed or floating.

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11
Q

2 pros and 1 con of a term loan-

A

+Safe-as repayment date is fixed (could even be irredeemable).
+Interest is generally fixed.
-Higher issue costs.

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12
Q

What 8 factors should you consider when choosing a source of finance?

A
  • Cost
  • Gearing
  • Control
  • Security
  • Cash flows
  • Availability
  • Exit routes
  • Green finance
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13
Q

What level of efficiency is the market if all information is reflected in the share price?

A

Strong.

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14
Q

What level of efficiency is the market if all publicly available information is reflected in the share price?

A

Semi-Strong.

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15
Q

What level of efficiency is the market if all information regarding previous share price movements is reflected in the share price?

A

Weak.

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16
Q

What level of efficiency is the market if it’s impossible to beat?

A

Strong.

17
Q

What level of efficiency is the market if it’s possible to beat by using insider information?

A

Semi-strong.

18
Q

What level of efficiency is the market if it’s possible to beat by using secret and some published information?

A

Weak.

19
Q

What level of efficiency is the market if new information hits the share price as soon as it exists?

A

Strong

20
Q

What level of efficiency is the market if new information hits the share price when published?

A

Semi-strong.

21
Q

What level of efficiency is the market if new information hits the share price slowly?

A

Weak.

22
Q

What 4 human behaviors can affect market efficiency?

A
  • Overconfidence and miscalculation of probabilities.
  • Conservatism and miscalculation of probabilities.
  • Availability bias and narrow framing.
  • Representatives and extrapolative expectation.
23
Q

What are the 5 fundamental ethical pricipals?

A
  • Integrity.
  • Objectivity.
  • Professional competence and due care.
  • Confidentiality
  • Professional behavior.
24
Q

What are the 5 threats to objectivity?

A
  • Self interest.
  • Self-review.
  • Advocacy.
  • Familiarity.
  • Intimidation.
25
Q

Why shouldn’t an accountant underwrite/promote the issue of shares for a client if he is also the auditor?

A

Creates a significant advocacy threat.

26
Q

What governing corporate finance assignment should accountants be aware of and comply with when performing an acquisition/takeover?

A

City Code on Takeovers and Mergers.

27
Q

4 points on what crowdfunding is?

A
  • Uses online platform to pitch for finance from a large number of investors.
  • Requires an attractive business plan.
  • Need low gearing.
  • Can attract new customers and build awareness of company.
28
Q

4 points on what peer to peer lending is?

A
  • Uses online platform to connect businesses who are looking to borrow with investors who want to lend.
  • Requires borrowers to have track record and submit financial accounts. Perform credit checks.
  • Investors can lend small parts of individual loans..
  • Competitive interest rates, flexible terms and a fast and convenient application process.
29
Q

What has the emergence of electronic share trading platforms done to the market efficiency? pro and con.

A

+Enables rapid share trading in response to events.

-Can lead to increased volatility if a number investors all decide to buy/sell at the same time.

30
Q

What is an alternative source of finance you can mention?

A

Selling surplus assets.

FM (10 decks)

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