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FM > Sources of finance > Flashcards

Sources of finance Flashcards

1
Q

Methods of green financing : green loans

A

Loans to finance green project = often better borrowing terms

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2
Q

Methods of green financing : green bonds

A

A fixed-interest bond used to raise £ for climate environmental projects

May have associated tax incentives

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3
Q

Methods of green financing : sustainability linked loans (SSLs)

A

Loans for any purpose BUT cheaper if borrower achieves certain sustainability-related targets

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4
Q

Methods of green financing : green funds

A

Helps investors target investments in companies with higher standards of social responsibility - stock markets have an index of funds that satisfy social and environmental criteria

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5
Q

Methods of green financing

A 
Green loans (funds : bank) - finance green projects - better terms to borrowers if they can show they are reducing their environmental impact
Green bonds (funds : investor market) -  fixed-interest rate bond used to raise $ for climate + environmental projects; tax incentives

Green loans + green bonds = £ for green projects

Green funds - for investors - stock index of sustainable companies

Sustainability linked loans (SLLs) - cheaper if borrower achieves certain sustainability-related targets (the loan can be used for anything)

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6
Q

International money markets : Eurocurrency market

A

The money market (trading for short term loans) for a major currency outside of the country where it is legal tender
ie dollars in UK = eurocurrency

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7
Q

International money markets : International bond market

A

Bonds issued by large companies (seeking finance) + sold to international investors
Pulls together investors from different countries

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8
Q

International money markets : International syndicated loans market

A

Syndicated loan = financing offered by a group of lenders (syndicate) who work together to provide loans for a borrower - the credit risk is spread around the group

tf

International syndicated loan market = medium-long term loans for large amounts issued by syndicates of banks who then sell on to investors

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9
Q

International money markets : 3 types

General advantages

A
  • these loans do not require any security
  • easier to get hold of larger loans
  • more attractive to investors than domestic loans : interest is paid gross with no withholding tax
  • more liquidity on secondary market

Eurocurrency market
International bonds market
International syndicated loans market

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10
Q

Capital efficiency market

A

= prices on the stock/bond market are FAIR if the market is efficient (reflects all known info)

Strong = SP reflects all info about a company (even non-publicised info)

SEMI-STRONG = SP reflects all publicised info about a company ***most is this

Weak = SP only reflects certain information ie audited FS

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11
Q

Behavioural finance

A

= irrational behaviours can cause the market to appear inefficient + not moving in the expected way after the release of new information

Narrow-framing = concentrate too much on one piece of information
Positive feedback = assumption that rising SPs continue to increase/decreasing SPs continue to decrease
Conservatism = underreaction to good/bad news
Availability bias = paying too much attention to latest news + disregarding the bigger picture
Cognitive dissonance = holding onto beliefs instead of conflicting evidence
Ambiguity aversion = averse to investing in new businesses

Overconfidence
Miscalculation of probability

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12
Q

Portfolio theory

A

By diversifying in a range of investments, can decrease UNSYSTEMATIC risk to nil

~ 15-20 randomly selected shares

systematic risk cannot be diversified away!!!

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13
Q

CAPM

A

Beta = exposure to systematic risk - compares the change in return in an individual share to the change in return for the market portfolio

<1 = less risk
1 = same risk
>1 = more risky
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14
Q

Equity finance : venture capital

A

Invest £ in return for shares in private companies w/ high growth potential : start-ups, emerging, early-stage

High risk therefore seek high return

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15
Q

Equity finance : crowdfunding

A

Pitch for finance from a large number of investors

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16
Q

Equity finance : initial coin offering (ICO)

A

Raises finance from investors (cryptocurrency form of IPO)
Funds must be used for a new coin, app or service

ICO coin/token - share or entitlement to a product/service

Pay in cryptocurrency!

There is increasing regulation so not as simple as it used to be

17
Q

Sources of equity finance

A 
Retentions (1) - retaining funds instead of paying out as dividends (cheap : no issue costs)
Rights issues (2)
Issue new shares: Initial Public Offering (3) - when a private company becomes public by selling its' shares on a stock exchange (often use an UNDERWRITER who will undertake to purchase any unsubscribed shares)

Initial coin offering (ICO)
Crowdfunding
Venture capitalists

18
Q

Sources of debt finance : convertible loans

A

Can be converted into ordinary shares
During loan : pay interest

Lower rate of interest compared to ordinary loans (holder has the benefit of potentially converting to shares)

19
Q

Sources of debt finance : loan stock with warrants

A

Loan stock not convertible into shares but comes with call options/warrants allowing the holder to separately buy shares in the future at a set price tf often has lower interest

20
Q

Sources of debt finance : peer-to-peer lending

A

Online platform that connects established businesses with investors

Compared to traditional bank lending:

  • lower interest rates
  • quicker to arrange
  • provides a more accurate source of funding for lower credit rate borrowers
21
Q

Sources of debt finance

A

Convertible loans
Stock warrant
Peer-to-peer (P2P) lending

Loan documentation often required:

  • representations + warranties = legality of borrowing; given by the borrower to induce the lender - if they are not met, the lender has the right to remedy. A warranty is a promise of indemnity if the assertion is not made.
  • guarantees
  • covenants = restrictions on the future ie cannot take out more loans, agree to not pay divs etc
22
Q

Gearing theories : traditional

A

Kd < Ke

Increase debt = debt cheaper due to tax shield, slightly decrease WACC
Increase increase debt= equity holders want increased return, outweigh cheaper Kd, increase WACC
Increase increase increase debt = Kd increases as debt holders worried about loan security - WACC increases

Concludes: there is an optimal level of gearing - can only find it by trial and error

23
Q

Gearing theories: M+M early

A

NO TAX SAVINGS ON INTEREST REPAYMENTS - benefits of cheap debt is only enough to offset the increased cost of equity therefore

WACC remains constant
Kd remains constant
Only Ke increases!

No decrease in WACC due to cheap debt or no increase in WACC due to increased gearing

The WACC and therefore the value of the firm are unaffected by changes in gearing levels - tf gearing is irrelevant
Implication for finance: choice of finance is irrelevant to shareholder wealth

24
Q

Gearing : M+M later theory

A

debt interest = tax deductible tf model reflects this

required return in equity is directlly linked to the increase in gearing = increase gearing, increase Ke

  • increased gearing = cheaper
  • the increase in Ke does not offset the benefit of the cheaper debt finance and tf the WACC falls as gearing increases

Both theories:
-perfect capital market assumptions

25
Q

Arguments against M+M

A
  • perfect capital markets do not exist
  • as gearing increases, so does the chance of bankruptcy - if SHs become concerned, this will reduce SP + increase WACC (increased returns required)
  • agency costs/loan covenants can restrict further gearing
  • tax exhaustion: after a certain level of gearing, companies will discover they have no tax liability left against which to offset interest charges
  • borrowing/debt capacity: high levels of gearing are unusual because companies run out of suitable assets to offer as security against loans

FM (7 decks)

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