Sources of Finance (2) Flashcards
What is equity capital?
Refers to finance provided by owners of business. As such normally refers to capital invested by ordinary shareholders
What do ordinary shareholders have a right to vote on?
A directors’ appointments and to receive a share of any dividend that is agreed by the board
Preference shareholders?
Receive dividends normally at a fixed rate
What is meant by redeemable preference share?
The entity has to repay the principal
If preference share is cumulative?
The entity must pay dividend where sufficient distributable profits arise
If preference share are non-cumulative?
The entity never has to pay this dividend
Advantage of preference shares compared to debt?
More flexible than debt finance (dividend is not paid)
Advantage of preference shares compared to ordinary shares?
No dilution of control since preference shares don’t carry voting rights
Disadvantage of preference shares compared to debt?
No tax relief is received in dividend payments
Disadvantage of preference shares compared to ordinary shares?
Creates extra risk for ordinary shareholders because preference dividend is paid before the ordinary dividend
What is venture capital?
Risk capital, normally provided by a venture capital firm in return for an equity stake
What are venture capitalists seeking?
A high return, as it is required through a stock market listing
Where can failure to hit targets set by venture capitalists lead to? (Equity ratchet)
Extra shares being transferred to their ownership at no additional cost
Most common companies for venture capital?
Already have a track record of business development and which need additional finance to grow
Why do companies choose to retain cash?
To finance their investment needs
Why does cash represent equity finance?
As it has been paid out to shareholders and is a significant source of equtiy finance
What are the main ways of issuing shares?
A rights issue
A placing
A public offer
What is a rights issue?
Ordinary shareholders are invited to apply for shares in proportion to their existing shareholdings
What is a placing?
Sell large blocks of shares at a fixed price to a narrow group of external institutional investors
What is a public offer?
An offer for sale to the public, either at a fixed price or by tender
Choices in a rights issue?
Buy the new shares
Sell their right to buy shares
Both
WHat is usually in a rights issue
A significant discount to the existing share price
What is an offer for sale - fixed price?
Issue is advertisied and underwritten and outlines company’s future plans and performance
Placing vs sales with fixed price?
Placing does not incur significant underwriting and advertising costs
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
What is cum rights price?
Purchaser of existing shares has right to participate in the rights issue
What is issue price?
Price of which new shares are being offered for sale
What is TERP?
Theoretical price after the rights issue
What is value of a right?
Price at which a right can be sold (TERP - issue price)
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
