7: Business Finance Flashcards
(35 cards)
What are the two types of business finance?
Equity (shares)
- invested by shareholders and proprietors
- want dividends in return
- higher risk and higher returns
Debt (money)
- borrowed by the business from lenders
- want interest in return
- lower risk and lower returns
What is the treasury trade off?
Liquidity - being able to pay debts as they fall due
Profitability - minimising the holding of cash - an idle asset
What are the four reasons for holding cash?
Transaction motive
- to meet daily financial obligations
Precautionary motive
- to cushion against unplanned expenditure
Investment motive
- to take advantage of oppurtuntiies
Finance motive
- to cover major transactions
Benefits and negatives of shorter and longer term finance?
Shorter
- cheaper
- flexible
- renewal and interest rate risk
Longer
- expensive
- predictable and assured
- higher level of uncertainty
What are the three approaches to short/long term finance?
Aggressive
- uses short term finance
- greater profitability, higher risk
Defensive
- uses long term finance
- less risk, more expensive
Average
- balance between the two
What are banks?
Financial intermediaries!
Bring together investors/lenders with borrowers/users of money
Provide a risk-free lending environment and easily accessible funds
What are the 5 roles of the financial intermediary?
Risk diversification
Aggregation
Maturity transformation
Making a market
Advice
What are the three kinds of bank?
Retail banks
- day to day money transmission
Commercial and investment banks
- tailored advice to large commercial clients
Bank of England
- bank to the banks
What are the two main roles of the Bank of England?
Carrying out monetary policy
- lends money at base rate which is set by Monetary Policy Committee
- banks then lend among themselves at Sterling overnight index average
Financial stability
- BoE’s Financial Policy Committee is responsible for taking action to remove systemic risks
- Prudential Regulation Authority responsible for prudential regulation and supervision of banks
Anyone not supervised by PRA is regulated by Financial Conduct Authority, independent
8 types of cash transmission:
Faster payments scheme
Electronic Funds transfer (EFT)
Bank automated clearing system (BACS)
Clearing House Automated Payments System (CHAPS)
SWIFT - international
Payment gateways
Digital commerce platforms - ie. paypal
General clearing - like cheques
What are the four contractual relationships between bank and customer?
Mortgagor
- right to assets
Principal/agent
- transactions and payments
Bailor
- safeguarding property
Receivable/payable
- contractually owe each other, overdrawn or credit
What are the two types of market and summarise?
Money market
- buying/selling money or marketable securities
- short terms borrowing and investing (under a year)
Capital market
- obtaining finance for short term and long term plans
- national and international
- longer term financing, normally on a Stock Exchange
What are the 6 types of money market financial instruments?
Treasury Bills
- BoE, up to £500,000, max. 12 months
Deposits
- up to 5 years
Certificates of Deposit
- £50,000 or more fixed term
Gilts
Bonds
Commercial papers
What are the 6 types of capital market financial instruments?
National Stock Market
- primary (new shares)
- secondary (existing shares)
Banking systems
- retail market
- wholesale market
Bond markets
- very large orgs only
Leasing
Debt factoring
- small businesses
International markets
3 types of key capital market instruments?
Equity
Preference shares
Loan stocks and debentures
What are the three ways of raising equity finance?
Retained earnings
- profits paid out in dividends or reinvested
Rights issue
- existing shareholders have first rights of refusal (pre-emption rights)
- maintain their existing percentage
- can be waived by selling them
New issue
- only done if company is listed, or listing for the first time
What are the two forms of new shares?
Placings
- issuing house places shares to clients
- lower cost but offers to a narrow pool
Public offers
- on sale to the general public
- via an issuing house (offer for sale) or not (direct offer/offer for subscription)
What are the two ways the pricing of new share issues can be managed?
Underwriting
- an institution agreeing to purchase any securities not subscribed for in exchange for a fixed fee
Offer for sale by tender
- investing public offer shares at at least a minimum price
- all tenders are received then shares are issued at one price
Advantages and disadvantages to preference shares?
No voting rights
No right to share in excess profits
Good: avoid additional debt
Bad: fixed rate of dividend, expensive
What is ‘going public’?
A company deciding to go on the stock exchange
Plus:
- access large sources of finance
- increasing marketability
- raise profile
Minus:
- expensive
- dilution of control
- trading 3 years min
- can get taken over
- greater scrutiny
What advisors are involved in going public?
Company
Sponsor
Corporate broker
Public
Solicitors
Registrars
Accountant
What are the five types of debt finance?
Overdraft
- short term cash deficits
- interest charged day to day
Debt factoring
- business receives loan finance and insurance so that the business does not have to repay the loan if they customer does not pay
Term loan
- repayment date is set
- small arrangement fees, fixed against assets
- schedules are flexible
Loan stock
- loan repaid at par or premium
- interest rate (coupon rate x nom value)
Leasing
What is leasing?
Finance lease
- transfers substantially all the risks and rewards if the ownership of an asset
- long term, majority of assets life
- ownership basically passes to lessee
- cannot be cancelled
Operating lease
- short term rental
- lease is less than assets life
- ownership still with OG party
- can be cancelled
What are the four routes of finance for a growing business?
Business angels
- wealthy people getting invested early in start-ups
Crowdfunding
- raising a specific sum of money, from the internet
- can pre-buy
- peer to peer lending and equity based are regulated
- the rest is unregulated!
Venture Capitalists
- risk bearing capital
- high risk, high return
- investor provides advice and can influence management
- exit route is tricky, can be flotation
Alternative Investment Market
- available to companies with a value of under £1mil
- less stringent regulations
