Sources of finance Flashcards
Give 2 ways companies can raise finance.
1) Internally by reinvesting retained earnings
2) Externally through either equity or debt capital
What is a financial security? What are two other names for it.
Assets traded on financial markets, i.e, bonds, stocks etc.
Also referred to as financial assets or financial instruments.
Explain ordinary shares
Shares that give the holder partial ownership in the company. They can attend shareholder’s meetings and vote on certain decisions in the business. Unlike preference shares, ordinary shares usually don’t give the holder a right to dividends.
Explain preference shares
Shares that don’t give the holder partial ownership in the business. Unlike ordinary shares, they usually require the business to pay dividends to the holder.
Explain authorised share capital.
The maximum amount of shares a company can put on the market. This figure is decided in their memorandum of association or their articles of incorporation.
Explain issued share capital.
The amount of shares a company has sold so far on the market.Also referred to as number of shares in issue.
What is the par value of a share.
The initial value of a share at the time it is issued.
What is the market value of a share?
The value of a share after it is issued. Share prices go up and down depending on the market so the market value of a share is almost always either greater or lesser than the original par value.
What is a share premium?
The initial market value of a share minus the par value. A company may sell a share at a price that’s above it’s market value. This acts as extra profit for the business.
What is market capitalisation? How is it calculated?
A method of finding a company’s value. It’s calculated by multiplying the share price by the number of shares issued.
What is EPS? How is it calculated?
EPS (Earnings per share)
Calculated by dividing the profits after tax/ earnings of a company by the number of issued shares.
What is DPS? How is it calculated?
A metric that tells investors how much they can expect to earn in dividends by buying a particular company’s shares.
The total amount of distributed profits given to shareholders by the company divided by the number of shares issued.
What is dividend yield? How is it calculated?
Serves a similiar purpose to DPS.
Calculated by dividing the DPS by the share price, then multiplying that figure by 100 over 1 to find a percentage figure.
What is earnings yield? How is it calculated?
Calculated by dividing the company’ EPS by the share price then multiplying by 100 over 1 to get a percentage figure.
What are credit markets?
Markets where financial assets such as loans, bonds and shares are sold. These transactions always involve a lender and a borrower.
Name the 2 types of capital markets.
Primary markets
- Equity: Company sells shares to buyers.
-Debt: Bond issuer (Borrower) issues bonds to lenders
Secondary markets:
-Equity: Shareholders sell on shares they hold to other investors.
-Debt: Lenders sell bonds to other investors
