T9

Question 1

What is capital structure?

Answer 1

Is the balance between equity and debt?
Loans and borrowing for debt
Equity ownership of a company shares and dividends

Question 2

Debt financing

Answer 2

The company borrowed funds and agrees to repay the funds with interest
May add collateral, so I said with two times alone
Less expensive than equity financing

Question 3

Equity financing

Answer 3

Raising capital by selling shares
More expensive to have a share of a company
you share profits and losses
sold through dividends shares can change voting rights

Question 4

Financing decision debts, pros

Answer 4

Flexible, these are more prioritised to the company

Debt holders are prioritised in case of bankruptcy paid first
Less risky

Added tax advantages example tax
Deductibles more dead interest lessons corporate tax

Clear and finite terms
No lending involved

Question 5

Disadvantages of debt financing

Answer 5

Repayment and interest monthly
Quick start of repayment
Potential for losses
Not paying back can lead to bad credit score

Question 6

Financing equity pros

Answer 6

Shareholders bring expertise
No debt repayment
Losses are shared
No dividends obligations
Possibility to buyback shares
Better cost of funding if credit rating increases

Question 7

Disadvantages of equity financing

Answer 7

Control loss
Share profit
Time consuming
No tax deductible
Control implementations when share prices full
Higher cost funding of credit rating falls

Question 8

Marketable debt

Answer 8

Companies raise capital using financial markets by issuing bonds and commercial paper not needing to use banks as some companies have a better credit rating

Question 9

Banks v marketable debt

Answer 9

Most companies prefer to go to banks then financial markets
Banks can offer committed lines and agreement between a bank and borrower for a certain amount of time suitable for managing short term liquidity

Question 10

Financial markets

Answer 10

Financial markets are often cheaper longer maturity available lighter regulations such as Eurobond market and alternative to currencies and remove reliance upon one source of funding

Question 11

Banks v financial markets

Answer 11

Banks confidentiality no information leaked and speedy for companies that need cash for capital no formal credit rating because the banks can do it

Question 12

Debt seniority

Answer 12

Arrange in debt from highest get paid first and smallest get paid last

Question 13

Debt seniority
Part two

Answer 13

Is the company becomes liquid debt holders get paid for equity holders?

The seniority of each is outlined to the investor at the time of agreement

The more the debt has lower interest so higher safety

Question 14

Senior debt

Answer 14

They get paid first in case of bankruptcy so they charge lower interest because it’s more safe

Question 15

Subordinated debt

Answer 15

Debt which is ranked last in case of bankruptcy, they charge higher interest in case they don’t get paid

Question 16

Debt maturity profile

Answer 16

Financial markets usually have a long-term borrowing whereas banks have short-term borrowing

Companies have to plan the bond maturity to avoid all due at the same time, but also raising funds were needed to pay the borrowing to avoid financial strain

Question 17

Market bonds/loans

Answer 17

Calculate the cost of the debt at the current cash flow of the bond or loan it needs to be compared to if it was issued today

Calculation involved would be IRR that matches the future cash flow with its present market value of bonds and loans