Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

F3 Resit > Sources of Long Term Funds > Flashcards

Sources of Long Term Funds Flashcards

1
Q

What is debt finance?

A

Loan of funds without conferring ownership rights

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the tax considerations with debt finance?

A

Debt is tax-efficient form of financing
Interest paid out of pre-tax profits as an expense

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is debt security?

A

Fixed charges
Floating charges

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are covenants?

A

Dividend restrictions - Level of dividends permitted to pay is restricted
Financial ratios
Financial reports
Issue of further debt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

How does debt covenants benefit both the lender and borrower?

A

Protect lender by requiring or prohibiting certain activities of the lender
Benefit borrower by reducing cost of borrowing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are negative debt covenenants?

A

Borrower cannot do and may include:
Incur additional long term debt
Pay cash dividends exceeding certain threshold
Sell certain assets
Enter into leases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are positive debt covenents?

A

State what borrower must do and may include:
Maintain certain financial ratios
Maintain accounting records in accordance with generally accepted accounting policies
Provide audited financial statements
Performs regular maintenance of assets used as security

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What can the lender do if a covenant is breached?

A

Waive the breach and continue the loan
Waive the breach and impose additional constraints
Require penalty payment
Increase interest rate
Demand immediate repayment of loan

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are the two types of debt finance?

A

Bank Finance
Capital Markets - Bonds or commercial paper

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the two types of bank finance?

A

Money market borrowings
Revolving credit facilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is money market borrowings?

A

Consists of financial institutions and dealers in money or credit who wish to either borrow or lend.
Used as a means for borrowing or lending in the short term

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Whatt is revolving credit facilities?

A

Borrower may use or withdraw funds up to a pre-approved credit limit.
Amount of available credit decreases and increases as funds are borrowed and repaid.
Borrower makes payment on the amount they have used or withdrawn.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are the types of debt finance on the capital markets?

A

Bonds
Commercial paper

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is a bond?

A

Issuer owes the holders a debt and is obliged to pay interest and/or to repay the principle at a later date.
Bonds and shares are both securities in the capital markets but the major difference between the two is that shareholders have an equity stake in the company whereas bondholders have a creditor stake in the company.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is a commercial paper?

A

Large, well-established companies with good credit ratings may issue short-term unsecured money market securities, referred to as commercial papers.
Papers will generally mature within 9 month, typically between a week and 3 months.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are the three main groups on the bond market?

A

Issuer
Underwriters
Purchasers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is the issuer on the bond market?

A

sells bond in capital markets to fund the operations of their organisations.
The biggest of these issuers is the government, which uses the bond market to help fund the country’s operations.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is the underwriter on the bond market?

A

Made up of investment banks and other financial institutions that help the issuer to sell the bonds in the market.
Underwriters sometimes place the bond with specific investors or they can attempt to sell the bonds more widely in the market.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is a purchaser on the bond market?

A

Buyers basically include every group mentioned as well as any other type of investors.
Governments play on of the largest roles because they borrow and lend money to other governments and banks.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

How do you issue bonds on the market?

A

Listing - If not already listed a company must become listed on London Stock Exchange. A debt issuer seeking a London listing for its securities must apply for admission to the Official List through the Financial Conduct Authority (FCA).
Admission

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is the main reason for borrowing in a foreign currency?

A

Fund foreign invesment projects or foreign subsidiaries

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What are eurobonds?

A

Bonds issued on the international capital markets. Eurocurrency bonds may be listed on the domestic currency stock exchange but cannot be traded through that exchange.

23
Q

What is interest rate risk?

A

Risk of gains or losses on assets and liabilities due to changes in interest rates.

24
Q

What is refinancing risk?

A

Risk that borrowings will not be refinance or will not be refinanced at the same rates.

25
Q

What is currency risk?

A

Risk that arises from possible future movements in exchange rates.

26
Q

What are some other sources of finance?

A

Retained earnings/existing cash balances - retained earnings are a form of equity that is created through the retention of profits
Sale and leaseback
Grants
Debts with warrants attached
Convertible debts
Venture Capital
Business Angels
Crowd Funding
Gov assistance

27
Q

What are debt with warrants attached?

A

warrant is an option to buy shares at a specified point in the future for a specified price. Warrant offers a potential capital gain where the share price may rise above exercise price.

28
Q

What are business angels?

A

Wealthy investors who provide equity finance to small businesses

29
Q

What is a lease?

A

commercial arrangement where an equipment owner conveys the right to use the equipment in return for payment by the equipment user of a specified rental over a pre-agreed period of time.

30
Q

How does a company maximise its value?

A

Minimise WACC

31
Q

What is the downward force on WACC?

A

Debt is cheaper than equity and would cause the WACC to fall. Interest is tax deductive, whereas dividends are paid out of post-tax profits. This further reduced the cost of debt for a company.

32
Q

What is the upward force on WACC?

A

Ke increases because of financial risk and would cause the WACC to rise

33
Q

What is the impact of capital structure on equity investors?

A

High gearing increases the financial risk of the equity investor, but the reward can be in the form of increased dividends when profits rise.
Low gearing or no gearing may not necessarily be in the equity investors best interest.
Provided those returns generated from borrowed funds is greater than the cost of those funds, capital gearing could be increased.

34
Q

What is the traditional view of gearing and cost of capital?

A

As organisations introduce debt into capital structure the WACC will fall.
As gearing continues to increase the equity holders will ask for increasingly high returns
Cost of equity rises as gearing rises.
Optimal capital structure where the WACC is at a minimum.

35
Q

What is M&M’s view without tax?

A

Companies which operate in same type of business and have similar operating risk must have the same total value.
Value of company depends solely upon the future post tax operating income.
Value of company will not change with gearing.
WACC will not change with gearing and will be the same at all levels
Any benefits from increased proportion of cheaper debt finance must be exactly offset by increase the cost of equity.
Investors are indifferent between personal and corporate gearing

36
Q

What are M&M’s assumptions?

A

Exists a perfect capital market in which there are no information or transaction costs
Debt is risk free and Kd remains constant at levels of gearing
Investors are indifferent between personal and corporate gearing
Investors and companies can borrow as same rate of interest.

37
Q

What are the practical considerations when determining capital structures?

A

Company’s ability to borrow money
Existing debt covenants
Increase cost of debt finance as gearing rises
Views of other stakeholders and rating agencies
Tax Exhaustion
Directors’ interests

38
Q

What is the general considerations for groups of companies?

A

Tax Issues
Country risk – less exposure to risk if entity borrows funds in the country where it generates its net income
Type of finance provided by the parent
Transfer pricing

39
Q

What is the thin capitalisation rules?

A

Aims to stop companies from getting excessive tax relief on interest.
Occurs because they have entered into a borrowing with a related party that exceeds the amount a third party lender would be prepared to lend.
Rules ensure that: Interest on the part of the borrowing that an independent third party would be prepared to lend the company is allowable, Excess is disallowed, Borrowing capacity of the individual company and its subsidiaries is considered.

40
Q

What are the factors determining thin capitalisation?

A

Gearing
Interest Cover

41
Q

What are the key factors to determine in relation to payments of dividends?

A

M&M Dividend irrelevancy theory
Interests of shareholders
Signalling effect or information content of dividends
Cash needs of entity

42
Q

What is the M&M dividend irrelevancy theory?

A
  1. Return on share is determine by share’s risk
  2. Return is split into two parts: one is dividend paid, two is capital gain/loss in share price
  3. Dividend decision is a decision as how the return is delivered
  4. As dividend decision does not affect the risk of the shares, it does not affect their return
43
Q

What are the two types of stakeholder interests?

A

Clientele effect
Bird-in-hand effect

44
Q

What is the clientele effect?

A

Companies should follow a consistent dividend policy to ensure that they gather to them a clientele of shareholders who like that policy.

45
Q

What is the bird-in-hand effect?

A

Dividend is certain and some investors prefer a certain dividend now, to the promise of uncertain future dividends.

46
Q

What are the two strong dividend signals?

A
  1. A reduction in dividend per share signals that the company is in financial difficulties
  2. Failure to pay out any dividends at all signals that the company is very close to receivership
47
Q

What are the four commonly adopted dividend policies?

A

Stable dividend policy
Constant payout ratio
Zero dividend policy
Residual approach to dividends

48
Q

What is the stable dividend policy?

A

paying a constant or constantly growing dividend each year

49
Q

What is a constant payout ratio?

A

Paying out a constant proportion of equity earnings

50
Q

What is the zero dividend policy?

A

all surplus funds are invested back into the business

51
Q

What is the residual dividend policy?

A

Dividend paid only if no further positive NPV projects available

52
Q

What are scrip dividends?

A

Shareholders offered bonus shares free of charge as an alternative to a cash dividend
Useful when business wishes to retain cash May be tax advantages to receiving shares rather than cash
Share price and earnings per share are likely to fall as a result

53
Q

What is share repurchase?

A

Return surplus cash to shareholders
Used when company has no positive NPV projects to invest in

F3 Resit (3 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions