Sources of finance

Question 1

Give 5 factors which should be considered by a firm when deciding between sources of finance?

Answer 1

• Which is Cheaper
• Duration required
• Term structure of interest rates (short term usually chearper)
• Gearing
• Accessibilities

Question 2

What is a reverse yield gap?

Answer 2

When bond yield exceeds equity yield.

Question 3

When might a reverse yield gap occur?

Answer 3

During high inflation because equities are expected to provide capital gains to compensate of inflation, while gilt edged securities are not.

Question 4

Give.6 examples of short term finance

Answer 4

Bank loan
Bank overdraft
Better management of working cap
Squeezing trade credit
Leasing 
Sale and leaseback

Question 5

There are two types of lease agreements, what are they?

Answer 5

Short term

Long term

Question 6

How long is a short term lease period?

Answer 6

Usually less than an assets economic useful life

Question 7

In a short term lease agreement, who is responsibly for maintenance and repairs?

Answer 7

The Lessor

Question 8

Can a short term lease be cancelled at short notice?

Answer 8

Yes

Question 9

What are 4 disadvantages of sales and lease back?

Answer 9

1. Loss of ownership and potential appreciation
2. Rental agreement, often of over 50+years.
3. Borrowing capacity is reduced ( property a security)
4. Rent subject to review and will increase.

Question 10

How do you calculate:

1) the value of a right
2) Value of a right pre-existing share

Answer 10

1) Terp - Issue price

2) (Terp-Issue Price)/No of shares needed to obtain a right

Question 11

What is a placing?

Answer 11

Used for smaller issues of shares (up to 15m)

The bank selects institutional investors to whom the shares are ‘placed’.

Question 12

Why might unquoted companies struggle to raise finance?

Answer 12

1) Shares are not easily realisable
2) Cheaper to invest in large parcels of shares than in many companies
3) Small firms are regarded as risky.

Question 13

In order for an unquoted company to place shares, what must there be a prospect of?

Answer 13

Being a quoted company on the stock exchange.

Question 14

What is a public offer?

Answer 14

An invitation to the apply for shares in a company based on information contained in a prospectus at a fixed price, or tender

Question 15

Why might a company wish to become listed on the stock exchange?

Answer 15

To increase its pool of investors and offer shares to the public.