Sources of finance Flashcards
Methods of green financing : green loans
Loans to finance green project = often better borrowing terms
Methods of green financing : green bonds
A fixed-interest bond used to raise £ for climate environmental projects
May have associated tax incentives
Methods of green financing : sustainability linked loans (SSLs)
Loans for any purpose BUT cheaper if borrower achieves certain sustainability-related targets
Methods of green financing : green funds
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
Methods of green financing
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)
International money markets : Eurocurrency market
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
International money markets : International bond market
Bonds issued by large companies (seeking finance) + sold to international investors
Pulls together investors from different countries
International money markets : International syndicated loans market
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
International money markets : 3 types
General advantages
- 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
Capital efficiency market
= 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
Behavioural finance
= 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
Portfolio theory
By diversifying in a range of investments, can decrease UNSYSTEMATIC risk to nil
~ 15-20 randomly selected shares
systematic risk cannot be diversified away!!!
CAPM
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
Equity finance : venture capital
Invest £ in return for shares in private companies w/ high growth potential : start-ups, emerging, early-stage
High risk therefore seek high return
Equity finance : crowdfunding
Pitch for finance from a large number of investors
Equity finance : initial coin offering (ICO)
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
Sources of equity finance
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
Sources of debt finance : convertible loans
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)
Sources of debt finance : loan stock with warrants
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
Sources of debt finance : peer-to-peer lending
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
Sources of debt finance
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
Gearing theories : traditional
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
Gearing theories: M+M early
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
Gearing : M+M later theory
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
Arguments against M+M
- 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
