Sources of Finance (2) Flashcards

1
Q

What is equity capital?

A

Refers to finance provided by owners of business. As such normally refers to capital invested by ordinary shareholders

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2
Q

What do ordinary shareholders have a right to vote on?

A

A directors’ appointments and to receive a share of any dividend that is agreed by the board

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3
Q

Preference shareholders?

A

Receive dividends normally at a fixed rate

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4
Q

What is meant by redeemable preference share?

A

The entity has to repay the principal

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5
Q

If preference share is cumulative?

A

The entity must pay dividend where sufficient distributable profits arise

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6
Q

If preference share are non-cumulative?

A

The entity never has to pay this dividend

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7
Q

Advantage of preference shares compared to debt?

A

More flexible than debt finance (dividend is not paid)

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8
Q

Advantage of preference shares compared to ordinary shares?

A

No dilution of control since preference shares don’t carry voting rights

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9
Q

Disadvantage of preference shares compared to debt?

A

No tax relief is received in dividend payments

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10
Q

Disadvantage of preference shares compared to ordinary shares?

A

Creates extra risk for ordinary shareholders because preference dividend is paid before the ordinary dividend

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11
Q

What is venture capital?

A

Risk capital, normally provided by a venture capital firm in return for an equity stake

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12
Q

What are venture capitalists seeking?

A

A high return, as it is required through a stock market listing

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13
Q

Where can failure to hit targets set by venture capitalists lead to? (Equity ratchet)

A

Extra shares being transferred to their ownership at no additional cost

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14
Q

Most common companies for venture capital?

A

Already have a track record of business development and which need additional finance to grow

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15
Q

Why do companies choose to retain cash?

A

To finance their investment needs

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16
Q

Why does cash represent equity finance?

A

As it has been paid out to shareholders and is a significant source of equtiy finance

17
Q

What are the main ways of issuing shares?

A

A rights issue
A placing
A public offer

18
Q

What is a rights issue?

A

Ordinary shareholders are invited to apply for shares in proportion to their existing shareholdings

19
Q

What is a placing?

A

Sell large blocks of shares at a fixed price to a narrow group of external institutional investors

20
Q

What is a public offer?

A

An offer for sale to the public, either at a fixed price or by tender

21
Q

Choices in a rights issue?

A

Buy the new shares

Sell their right to buy shares

Both

22
Q

WHat is usually in a rights issue

A

A significant discount to the existing share price

23
Q

What is an offer for sale - fixed price?

A

Issue is advertisied and underwritten and outlines company’s future plans and performance

24
Q

Placing vs sales with fixed price?

A

Placing does not incur significant underwriting and advertising costs

25
What is an offer for sale - tender?
Shareholders are invited to bid for shares at a variety of different prices. Share issue is underwritten at a guaranteed minimum price
26
What is cum rights price?
Purchaser of existing shares has right to participate in the rights issue
27
What is issue price?
Price of which new shares are being offered for sale
28
What is TERP?
Theoretical price after the rights issue
29
What is value of a right?
Price at which a right can be sold (TERP - issue price)
30
What is value of a right per existing share?
Value of a right dividend by number of shares that need to be possessed to own a right