Sources of Finance

Question 1

Start up

Answer 1

Family and friends
Crowdfunding
Angel investor

Question 2

Expansion (Growing their customer base / business)

Answer 2

Grants
Accelerators
Venture Capitalists

Question 3

Growth (dominating the market)

Answer 3

Private equity
Bank loans / leases
Internally generated funds

Question 4

Exits

Answer 4

Original owners of the business leave

Question 5

Crowdfunding

Answer 5

This is when a group of people raise / contribute some money for a project or company to be funded.

Question 6

Angel Investor

Answer 6

This is a group /individuals who provide money / capital for a business start up

Question 7

Grants

Answer 7

These are government grants which can help with different business activities

Question 8

Venture Capitalists

Answer 8

These are individuals who provide capital to companies which display high growth in the market in exchange for a small stake in the business.

Question 9

Bank Loans

Answer 9

This is only available for a company once it has proved it can operate successfully then banks will provide loans to help develop and grow the business further.

Question 10

Leases

Answer 10

This is a contract where a person / party lets a company use its resources for a specified period of time in return of a payment.

Question 11

Initial public offering

Answer 11

This when a company make a public offering to the members of public to purchase shares and own a stake in the business.

Question 12

Public debt issuance

Answer 12

This is where the company is able to borrow straight from the people instead of borrowing from the banks.

Question 13

Types of capital

Answer 13

Businesses have two types of capital available for expenditure use. The first being debt and this from bank and loans. The second is equity and this comes from investors and shares.

Question 14

Financial Markets

Answer 14

This is a place where companies can obtain money

Question 15

Debt Crowdfunding

Answer 15

This is peer to peer lending where the money lent most be paid back.

Question 16

Bank Loan (Debt)

Answer 16

This is where the business goes to the bank to obtain a loan and is classified as a debt.

Question 17

NZDX (Debt)

Answer 17

Instead of going to the banks and debt crowdfunding options businesses can borrow money through the bond market.

NZ Stock Exchange provides this function

Question 18

Bond Costs

Answer 18

a bond is basically a loan and must be paid back by the business and these bonds pay interest.

Higher interests
Coupon rate: This is the agreed rate of interest by both the lender and the borrower.
Market rate: This is the price that the investor pays for the bond.

Question 19

IPO

Answer 19

The money paid for shares under IPO, the money from the sale of shares goes directly to the owner of the shares and the additional money paid for the shares goes to the company.

Question 20

Dividends (Equity Costs)

Answer 20

The dividend yield is the cost of selling a share for a company. Companies will pay dividends and this is the cash that is distributed due to the profits made. Companies have no obligation to repay the shares hence why shareholders are offered dividends.

Question 21

Gross Dividend yield

Answer 21

The gross dividend yield is the yield on an investment before any taxes and expenses are deducted.

Question 22

Regular Dividend Calculation

Answer 22

Return = Dividend / Share Price

*Initial Share price

Question 23

Capital Gains

Answer 23

Return = Difference in share price / original share price

(Initial shares - original shares) = Difference in share

Question 24

Combination of both capital gains and regular dividends (Return on Equity)

Answer 24

Return on equity = ((Dividend + new share price) / original share price) - 1

Investors in company shares have return expectations hence it is up to the company to meet the expectations of the shareholders.

Question 25

Retained Earnings

Answer 25

This is when companies don’t pay dividends and keep the money within the company and use it to fund its capital expenditure/

Question 26

Debts

Answer 26

This is borrowing from places like banks and they will impose conditions to which the company must agree to and also secure assets incase the company defaults.

Question 27

Pecking Order Theory

Answer 27

Financing comes from three sources, retained earnings, debt, new equity. The pecking order theory suggests the business to prioritise their sources of finance as follows.

First using retained earnings
Second using debt
Thirdly using new equity such as shares

Question 28

New Equity

Answer 28

Crowdfunding

Shares

Question 29

Debt Costs and Benefits

Answer 29

Benefits
Cheaper then equity and debt is less riskier then equity
Interest from debts are tax deductible

Costs
Higher levels of debts leads to higher levels of interest
Conflicts between shareholders and lenders
Higher levels of debts reduce financial slack

Question 30

Weightings

Answer 30

Debt% = Debt / (Debt + Equity)

Equity% = Equity / (Debt + Equity)

*Market value weightings will be different

Question 31

Returns

Answer 31

ra x Assets = rd x debt + re equity x tax(1-28)

rd = Market return for debt 
re = Return required from shareholders

Question 32

WACC (Weighted average cost of capital)

Answer 32

This is the minimum rate of return required from assets the company owns.

WACC = ra = wd x rd x (1-28) + we x re

wd = Proportion of debt 
we = Proportion of equity