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FM > Sources of Finance > Flashcards

Sources of Finance Flashcards

1
Q

Name 5 sources of finance

A

Stock markets
Banks
Bond markets
Leasing
Debt factoring
Crowdfunding
Peer-to-peer lending
Gov grants

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2
Q

What are the three main types of capital finance? (Kx)

A

1: Equity/ordinary shares
2: Preference shares
3: Debt (Loan stock or debentures)

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3
Q

Name three features of Equity/ordinary shares

A

The equity shareholders are the true owners of the company, they suffer the most risk and therefore equity attracts the highest return.

1: Dividends are related to profits therefore will generally grow over time

2: Full voting rights therefore you control the company

3: Paid last in the winding up of a company. Entitled to all profits remaining after debt and preference shares are paid

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4
Q

Are preference shares equity or debt

A

They are not strictly equity and are often treated as debt when considering gearing levels.

The dividends are not tax deductible and not guaranteed therefore higher risk

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5
Q

4 features of preference shares

A

1: Fixed % dividend (paid in priority of OS)

2: Dividend usually cumulative

3: Limited right to vote at a general meeting

4: Repaid before equity in the winding up of a business

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6
Q

3 features of debt

A

1: It has interest that needs to be paid irrespective of the level of profits.

2: No voting rights

3: Paid first in the winding up of the company

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7
Q

What order does capital finance get paid in the winding up of the company?

A

1: Debt

2: Preference shares (fixed %)

3: Ordinary share (split of remaining profit)

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8
Q

advantages and disadvantages of internally generated funds to raise capital

A

A: Readily available
Low cost
immediate
no change in control

D: Cash may not be available
May have an impact on the dividend policy

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9
Q

Advantages of a rights issue (3)

A

1: Issue costs are lower than for a new issue

2: No change in control (unless SH do not exercise their rights)

3: Pricing is much easier than for a new issue

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10
Q

Main disadvantage of a rights issue

A

shareholders may be unable or unwilling to invest (especially a problem for
unlisted companies whose shareholders will find difficulty in just selling the
rights).

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11
Q

Definition of a rights issue

A

The issue of new shares for cash to existing SH in proportion to their existing shareholdings

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12
Q

Why are rights issue shares usually priced at a discount to the market price? (2)

A

Attractiveness of the offer and the provide protection against a fall in the share price

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13
Q

What two things can a shareholder do in a rights issue?

A

Sell the rights or exercise the rights. Theoretically also let them lapse but the company would not allow this as it would be unethical therefore the company would sell the right on the SH’s behalf)

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14
Q

Definition of a new share issue

A

The issue of new shares to new investors

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15
Q

Main advantage of a new issue

A

The finance is generally found somewhere - always new investors

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16
Q

Disadvantages of a new issue (3)

A

They have high issue costs - expensive
Will reduce the control of the existing SH - needs approval i.e. waiving pre-emption rights)
Pricing is difficult

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17
Q

Why is pricing a new issue of shares difficult?

A

Too high of a price and the issue will fail.
Too low of a price and the existing SH will suffer.

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18
Q

What are the two main ways in which new shares are issued?

A

1: Public offer - send the shares to the issuing house and then the public buy them from here

2: Direct offer or offer for subscription

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19
Q

What is venture capital

A

Dragons den style.

Usually expect 20% - 49.9% of the shares of the company

Often demand a position on the board

The investor provides advice and is able to influence management

Much of the return is in the form of capital gains after three to five years

20
Q

What is a equity ratchet

A

Failure to hit targets set by a venture capitalist leading to shares being transferred to their ownership at no additional cost.

21
Q

3 advantages of crowdfunding

A

1: Useful for start - ups that do not have a trading history

2: Provides a business awareness to attract customers

3: Can be a quick process

22
Q

What costs are involved with crowdfunding?

A

A fee to the CF website
Legal/advisory costs
admin fee of dealing with investor requests for more info

23
Q

What is an initial coin offering?

A

It raises finance from investors. The investor receives a token that might be for a share or an entitlement to use a product of service, the payment is made in cryptocurrency such as bitcoin.

So the issuer raises money by issuing a ‘white paper’ which details the venture concept and the details of the token will be exchanged for crypto. Its like a crypto version of crowdfunding.

24
Q

What are the 5 sources of debt?

A

1: Term loans
2: Loan stock (debentures)
3: Convertible loan stock
4: Loan stock with warrants
5: Peer 2 peer lending

25
Q

What is a term loan?

A

A term loan is a loan from a single lender (normally from a bank), which
has to be repaid, with interest, at fixed periods including a fixed final
repayment date.

26
Q

What is a loan stock / debenture?

A

This is a method of borrowing small amounts from many different
lenders. The company issues a ‘loan stock certificate’ in return for an
amount of cash.

27
Q

Advantages of a term loan

A

> Small arrangement fees
Fixed or floating interest rates
Interest rates attract tax relief

28
Q

Disadvantages of a term loan

A

Are generally secured on company assets (either fixed or floating charges), and
so may not be available if a company doesn’t have a strong balance sheet.

29
Q

What is the nominal value of a loan stock (debenture)

A

£100 - although the bond may be issued at a premium or on discount

30
Q

Advantages of loan stock

A

May be unsecured. The loan stock certificate (issued by the company in exchange for cash) can be sold on and the interest (paid by the company) is paid to whoever owns the certificate at the time.

Flexible - irredeemable vs redeemable debentures

Debentures are offered with either conversion rights or warrants.

31
Q

Disadvantages of loan stock

A

High issue costs and have higher interest rates than a term loan.

32
Q

What is a convertible loan stock?

A

This is loan stock that may be converted, at certain times during its life,
into predetermined amounts of the company’s equity, at the discretion
of the bond holder.

33
Q

What is a loan stock with warrants?

A

These entitle the holder to subscribe for ordinary shares in the company
at a predetermined price at set future dates.

34
Q

What is peer to peer lending?

A

Peer-to-peer lending connects established businesses looking to
borrow with investors who want to lend, usually via an online platform.
This is for any type of lending and allows a wide range of lenders to
lend small parts of individual loans.

35
Q

Advantages of P2P lending (3)

A

> P2P loans usually come with lower interest rates due to greater competition
between lenders
Usually quicker to arrange
Can be more accessible, especially for companies with low credit ratings.

36
Q

What are 3 advantages to borrowing money through an international money market?

A

> Interest rates tend to be cheaper (the spread between borrowing and lending
narrows) because there is less regulation.

> Access to a wider market of investors.

> Where investment in a foreign country is required, borrowing in the same
currency tends to protect against exchange rate movements (see later).

37
Q

What are 2 disadvantages to borrowing money through an international money market?

A

> Unless you are borrowing substantial sums, issue costs can be high – therefore
only large companies tend to use the international markets.

> When the time comes for the loan to be repaid, exchange rates might have
moved adversely.

38
Q

What is green finance?

A

Green finance can be thought of as the financing of investments or
companies that provide environmental benefits, as part of a broader
context of encouraging environmentally sustainable development.

39
Q

Are companies failing to consider appropriate sustainability facing increasing costs of finance?

A

Yes

40
Q

What is a green loan?

A

A loan provided to finance green projects. Go backed and provide better terms than a traditional loan.

41
Q

What is the Efficient Market Hypothesis? (EMH)

A

In an efficient market, new info is rapidly and rationally incorporated to share prices to ensure investor confidence and reflect the performance and prospects into the share price.

There are three forms of efficiency based on different theories about where this new info comes from.

42
Q

EMH - where does the information comes from for the weak efficient market theory?

A

Past share price movements only

In a weak form efficient market, when a new event happens (or is made public) the
share price doesn’t react instantly. It takes some time for the new information to be
fairly reflected in the price. However, all information about past price movements are at all times incorporated
into the share price.

This is most likely what the market is in the real world.

43
Q

EMH - where does the information comes from for the semi -strong efficient market theory?

A

All public info inclusive of the past share price movements

In a semi strong form efficient market, the share price incorporates all information
that has been made public about a company.

This is kind of what the market is like in the real world. it takes 5-10 mins for share prices to reflect breaking news.

44
Q

EMH - what
information does the strong efficient market theory base on?

A

All info (Public and Private). Therefore all share prices would immediately reflect new events INSTANTLY.

Insider trading wouldn’t even be able to beat the strong market.

Share prices do not react immediately - particularly not to those that are not public!

45
Q

EMH - Summary

A

If the market is semi strong then a number of key conclusions can be drawn:
> shares are fairly priced – the purchase is a zero NPV transaction
> managers can improve shareholders’ wealth by investing in positive NPV
projects and communicating this to the market
> most investors (including professional fund managers) cannot consistently beat
the market without inside information.

FM (6 decks)

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