Chapters 9-10

Question 1

4 types of short term finance

Answer 1

overdraft
short term loan
trade credit
short term lease

Question 2

what is a loan covenant

Answer 2

a condition that the borrower must comply with. if the borrower does not act in accordance with the covenant, the bank can demand payment

Question 3

whats a positive covenant

Answer 3

maintaining certain financial ratios

Question 4

whats a negative covenant

Answer 4

limiting a borrowers behaviour, such as borrowing from an another lender or disposing of a key asset

Question 5

what are loan notes

Answer 5

fixed rate IOUs that are sold on the stock market

Question 6

4 features of a loan note

Answer 6

coupon note
marketable
redeemable
secured

Question 7

what is the coupon rate

Answer 7

its fixed at the time of issue, and will be set on the credit rating of the company

Question 8

what does marketable mean

Answer 8

the ability to sell the debt can mean investors accept a lower rate of return

Question 9

how do you calculate conversion premium

Answer 9

current market value of loan note - current conversion value of shares

Question 10

what are the adv’s of pref shares compared to debt

Answer 10

more flexible than debt finance - if losses are made dividends are paid

Question 11

what are the adv’s of pref shares compared to ordinary shares

Answer 11

no dilution of control as preference shares hold no voting rights

Question 12

what are the disadv’s of pref shares compared to debt

Answer 12

no tax relief

Question 13

what are the adv’s of pref shares compared to ordinary shareholders

Answer 13

creates extra risk for ordinary shareholders as the preference get paid dividends before them

Question 14

what is venture capital

Answer 14

risk capital, normally provided by a venture capital firm or individual venture capitalist in return for a equity stake

Question 15

what do companies have to do first when raising equity finance

Answer 15

issue a rights issue

Question 16

what do companies do when raising equity finance, after issuing a rights issue

Answer 16

a placing - this is shares issued at a fixed price to institutional investors

a public offer

Question 17

what are the options for shareholders, when a company offers a rights issue

Answer 17

buy them or sell there right to buy them. They can do a mix of these things

Question 18

what is TERP

Answer 18

theoretical ex -rights price issue - the theoretical price after the rights issue

Question 19

how can the value of a right be calculated

Answer 19

TERP-issue price

Question 20

what is placing

Answer 20

cheapest and quickest way of raising equity from new investors is to sell large blocks of shares at a fixed price to a small group

Question 21

what does islamic finance have to comply with

Answer 21

sharia law

Question 22

5 types of islamic instruments

Answer 22

murabaha

musharaka

mudaraba

Ijara

Sukuk

Question 23

what is murabaha

Answer 23

trade credit

seller of the assets delivers goods immediately and the buyer pays later

Question 24

what is musharaka

Answer 24

venture capital - losses must be shared to according to capital contribution

Question 25

what is mudaraba

Answer 25

equity

profits are shared in a pre agreed contract and losses are solely attributable to the investor

Question 26

what is ijara

Answer 26

leasing

lessor owns assets but lessee takes care of day to day wear and tear

Question 27

what is sukuk

Answer 27

bonds

similar to traditional bonds but there is an underlying tangible asset

Question 28

main advantage of internal finance

Answer 28

it is immediately available and you do not need to pay issue costs

Question 29

main disadvantage of internal finance

Answer 29

using internal finance is cash that couldve been paid out as a dividend

Question 30

what are the 3 types of dividend policy

Answer 30

constant payout ratio
stable growth
residual policy

Question 31

what is the constant payout ratio

Answer 31

payment of a constant % of profit as a dividend

can create volatile dividend payments

Question 32

what is stable growth

Answer 32

dividends are increased at a level the directors think is sustainable

Question 33

what is residual policy

Answer 33

a dividend is paid only if all NPV + have been funded

Question 34

what kind of company usually follows a residual policys

Answer 34

young companies

Question 35

what kid of companies usually follows a stable growth or constant payout

Answer 35

mature

Question 36

why is dividends irrelevant if a company pays less / no dividends

Answer 36

the company is likely to be investing and therefore share price will go up so shareholders can sell shares to make money

Question 37

why is dividends irrelevant if a company pays more dividends

Answer 37

the company is likely to issue more shares to fund investments so share price will go down

Question 38

assumptions of dividend irrelevancy theory

Answer 38

no taxes exist

capital markets are efficient

no transaction costs

information is freely available to SH’s

Question 39

what is a scrip dividend

Answer 39

a dividend paid by the issue of additional company shares, rather than by cash

Question 40

advantages of scrip dividends

Answer 40

it will conserve cash

an increase in issued shares could lead to a decrease in gearing

Question 41

disadvantage of scrip dividends

Answer 41

if dividend per share is maintained or increased the future total cash payment will increase

due to an increase in supply of shares, the price of an individual share may fall