Sources of Finance

Question 1

Equity =

Answer 1

Shares (S) + Reserve (R)

Question 2

Sources Of Finance include :

Answer 2

1. How many options do we have
2. Whose cost is low or less expensive

Question 3

Types of shareholders :

Answer 3

There are two types of shareholders;
I. Ordinary shareholders
II. Preference Shareholders

Question 4

Difference B/W Ordinary shareholders & Preference Shareholders:

Answer 4

. rate of dividend is variable VS Fixed

#. payment of dividend after to Preference Shareholders Preference Shareholders VS priority right
#. payment on liquidation after toPreference Shareholders VS priority right
#. Has voting right VS no voting right

Question 5

Features of shares:

Answer 5

1. Two types of returns;
   !. Dividend
   !.Change in share price (Capital gain)
2. Cost of Shares is higher as compared to debt
3. Pre-emptive rights
4. Issuance / Floatation cost of equity is higher than debt.
5. Voting rights

Question 6

Why cost of equity is higher as compared to debt?

Answer 6

Because;
1. Dividend is not deductible for tax purposes…
2. Risk is higher as compared to debt…

Question 7

Methods of floatation:

Answer 7

1. Private placement
2. Initial public offering (IPO)

Question 8

What is private placement?

Answer 8

Not offered to general public but offered to specfic investors Through brokers

Question 9

Features of Private placements:

Answer 9

1. Low cost method as there is no need of marketing, underwriting
2. Suitable for small amount of financing
3. Popular in Alternative Investment market [AIM]
4. Quicker
5. Less disclosure of information

Question 10

Disadvantages of private placement:

Answer 10

Shares are restricted to institutional investors who may get control of company.

Question 11

Alternative Investment Market [AIM]

Answer 11

Also called as OTC [ Over the Counter Market].
is sub-market of main Stock Exchange that is established to help smaller companies seeking capital to grow.

Question 12

What is IPO?

Answer 12

When company offers shares to general public for the first time.
In IPO:
!. Offer price is decided by company and broker.
!. Large numbers of shares is acquired by Issuing house, which are then offered to general public

Question 13

What is introduction?

Answer 13

No new shares are issued to general public. Rather, existing shares are registered on stock exchange to increase their marketability and public trading so that company can have better access to capital in future.

Question 14

What is meant by ‘‘2 for 5’’?

Answer 14

2 new shares for every 5 existing shares.

Question 15

Difference B/W Right Issue & Bonus Issue?

Answer 15

In R.I, cash is received. Hence assets & liabilities both increase.
In B.I, cash is not received. Therefore, assets are not increased, only reserve is capitalised.

Question 15

Bonus Issue Entry:

Answer 15

R/E = Debit
Share capital = Credit

Question 16

What is debt?

Answer 16

Borrowing money in exchange for interest.
1. may be short-term or long-term
2. may be redeemable or irredeemable.

Question 17

Factors influencing choice od debt:

Answer 17

[ADFS]
1. Availability
2. Duration
3. Fixed or Floating rate
4. Security & covenants

Question 18

What is fixed and floating rate?

Answer 18

Fixed rate is agreed at start. Fixed rate finance is risk-free but may be more expensive.
Floating rate varies during lifetime of debt depending on market rates

Question 19

Different type of Debt Instruments?

Answer 19

!. Commercial Paper
{S.T, maturity upto 1 year}
!. Loan Notes
{M.T, maturity upto 5 years}
!. Debentures
{Un-secured L.T loan.}
!. Bond
{Secured L.T loan, maturity upto 5 to 20 years.}

Question 20

Different types of Bonds ?

Answer 20

1. Deep Discounted Bonds
   {Offered at a large discounts on par value }
2. Zero Coupon Bonds
   {Offered at zero interest rate at discounted rates and investors earn through higher redemption value.}
3. Euro Bond
   {Issued in a foreign currency. Named after the currency in which they are issued. If issued in dollar, it’s called Eurodollar Bond.}