14. Financing Sources

Question 1

The 72 rule (important)

Answer 1

to double the money, divide 72 by the interest rate to get the number of year

Question 2

define stock

Answer 2

portion of ownership in a corporation

Question 3

define common stock

Answer 3

basic form of ownership which have voting rights for major issues

Question 4

define blue-chip stock

Answer 4

common stock of
- well-established and respected company
- sound financial history
- stable pattern of dividend payout

examples: Digi, TM, Genting Malaysia

Question 5

define dividend

Answer 5

payment to shareholder, on a per-share basis, out of a company earnings

Question 6

define market value

Answer 6

current price of a share of stock in stock market

Question 7

define book value

Answer 7

value of a common stock expressed as
- firm owner equity divided by the number of common shares

Question 8

define securities

Answer 8

stocks, bonds, and mutual funds representing secured

Question 9

define securities market

Answer 9

market where bonds and stocks are sold

Question 10

primary and secondary securities market

Answer 10

primary for new stocks and bonds
secondary for existing stocks and bonds

Question 11

Securities Commission Malaysia (important)

Answer 11

to regulating and systematically developing capital market in Malaysia

Question 12

investment bank

Answer 12

financial institution that specialized in issuing and reselling new securities

Question 13

stock exchange

Answer 13

organisation that provide institutional auction setting in which stock can be bought and sold
- Bursa Malaysia

Question 14

bull market and bear market (important)

Answer 14

bull - rising stock price lasting 12 months or more than that, giving confidence for future gain and motivation to buy

bear - falling stock price, giving motivation to sell

Question 15

define market index

Answer 15

statistical indicator used to track performance and change in prices of stock market

Question 16

risk return relationship (important)

Answer 16

safer investment - lower return
riskier investment - higher return

Question 17

define interest dividend yield

Answer 17

percentage of yearly dividend income divided by current market value of investment

Question 18

price appreciation

Answer 18

increase of value of investment at two points in time

Question 19

define capital gain

Answer 19

profit from increasing investment

Question 20

define total return

Answer 20

sum of interest dividend yield and capital gain

Question 21

formula of investment return (important)

Answer 21

( (current dividend + capital gain) / original investment )x100%

Question 22

define diversification

Answer 22

invest in several different kind of investments

Question 23

define asset allocation

Answer 23

allocate relative amount of fund to each of several investments alternatively

Question 24

define portfolio

Answer 24

combined holdings of all financial investments

Question 25

4 sources of fund

Answer 25

• owners’ savings
• borrow from bank
• solicit cash from private outside investors
• sell bonds to public

Question 26

debt financing and equity financing

Answer 26

debt - long-term borrowing from outside source of the company (long-term loan)

equity - using owner’s funds from inside the company (common stock)

Question 27

pros of debt financing

Answer 27

• speed of availability
• no public disclosure

Question 28

pros of equity financing

Answer 28

• no interest
• cash flow
• less risk

Question 29

cons of equity financing

Answer 29

• dividend to shareholder is more expensive than the interest
• retained earnings as source causing low dividend to shareholders

Question 30

secured bond and unsecured bond

Answer 30

secured - borrower pledging asset as collateral to the lender
unsecured - do not required collateral, to meet short term operating expenses

Question 31

corporate bond

Answer 31

obligating the company to pay interest periodically and repay the principal at the maturity

Question 32

bond indenture

Answer 32

legal document containing complete detail of a bond issue

Question 33

define maturity date

Answer 33

the date when the repayment of bond is due

Question 34

define face value

Answer 34

• par value
• the amount of money the lender lent to the borrower
• the lender will receive upon the repayment

Question 35

3 type of corporate bond

Answer 35

• short-term (<5years)
• intermediate term (5-10years)
• long term (>10 years)

Question 36

example of equity financing

Answer 36

becoming a public corporation

Question 37

initial public offering (IPO)

Answer 37

the first sale of company stock to the public

Question 38

what is prospectus

Answer 38

a file containing information of security to be offered and the issuing company