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Financial Management > Chapters 11 -12 > Flashcards

Chapters 11 -12 Flashcards

1
Q

when is debt particularly low risk

A

when its secured on a specific asset

when its secured on a general asset

it is due to be repaid in the short term

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2
Q

what kind of charge is it, when a loan is secured on a specific asset

A

fixed

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3
Q

what kind of charge is it when a loan is secured on general assets

A

floating

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4
Q

order of the creditor hierarchy

A 
creditors with fixed charge
creditors with floating charge
unsecured creditors
preference shareholders
ordinary shareholders
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5
Q

expression for return expected by debt holders

A

Kd or rd

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6
Q

expression for return expected by

A

Ke or re

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7
Q

expression for cost of preference shares

A

Kpref or Kp

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8
Q

what does D1 mean

A

dividend in 1 years time

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9
Q

what does D0 ( 1 + G) mean

A

D0 is latest dividend paid

g is annual dividend growth rate

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10
Q

what is P0

A

expected dividend yield

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11
Q

what is a cum div

A

the current share price if a dividend is about to be paid

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12
Q

formula for calculating growth rate

A

1 + g = (latest dividend / earliest dividend) to the power of 1/n

where n is number of growth periods

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13
Q

in the formula g = bre, what is b

A

balance of profits reinvested at a percent

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14
Q

what does CAPM stand for

A

capital asset pricing model

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15
Q

what is unsystematic risk

A

component of risk that is associated with investing in a particular company

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16
Q

what is systematic risk

A

component of a risk that will remain even if a diversified portfolio has been created

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17
Q

what are beta factors

A

measures the average change in the return on a share each time there is a change in the stock market as a whole

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18
Q

what does a beta factor of below 1 mean

A

below average risk,

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19
Q

what does a beta factor of 1 mean

A

average risk, moves in line with market

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20
Q

what does a beta factor of above 1 mean

A

above average risk

21
Q

what is market or equity risk premium

A

difference in expected average market return and risk free rate of return

22
Q

what does Rf mean

A

risk free rate

23
Q

what does Rm mean

A

market return

24
Q

what does E(Ri) mean

A

expected return

25
Q

what does (E(rm)-Rf) mean

A

market risk premium

26
Q

drawbacks of CAPM

A

only a single period model

beta values are historic and therefore not accurate

CAPM ignores size of company

27
Q

formula for cost of irredeemable loan notes

A

Kd ( pre-tax) = I / Po

where I is interest paid and Po is market value of debt

28
Q

formula for impact of corp tax on irredeemable loan notes

A

Kd ( post tax ) - I (1-T)/ Po

29
Q

IRR Formula for redeemable debt

A

a% + (NPVa/ NPVa-NPVb) x (b%-a%)

30
Q

what is WACC

A

weighted average cost of capital

31
Q

what is Ve in WACC formula

A

total market value of shares ( ex div)

32
Q

what is Vd in WACC formula

A

total market value ex interest of debt

33
Q

what is Kd in WACC formula

A

cost of debt

34
Q

what is Ke in WACC formula

A

cost of equity in a geared company

35
Q

if there is a choice, should you use book or market values when calculating WACC

A

market

36
Q

what is capital structure

A

the capital structure of a company refers to the mixture of debt and equity finance used by a company

37
Q

disadvantage of debt finance compared to equity

A

debt increases dividend variability

worsens interest and gearing ratios

debt payments must be made even if a business doesnt make a profit

38
Q

adv’s of debt compared to equity

A

cheaper

better impact on EPS

quicker than issuing shares

interest repayments attract tax relief

39
Q

what does the traditional theory state

A

debt brings benefits, up to a certain level of gearing

40
Q

drawbacks of the traditional theory

A

it doesnt identify optimal levels of gearing

fails to consider impact of tax

41
Q

what is arbitrage

A

purchase and sale of a security takes place simultaneously in different markets, with the aim of making a risk free profit through the exploitation of any price difference between markets

42
Q

what order is the pecking theory order

A

use internal funds if available

use debt

convertible debt

preference shares

issue new equity

43
Q

what is an asset beta

A

an ungeared beta, ie only measures business risk

44
Q

what is equity beta

A

a measure of the systematic risk of a share, including its business and financial risk

45
Q

what is the funding gap

A

inability of SME’s to raise adequate finance

46
Q

why is it that SMEs find it hard to raise adequate finance

A

business is owned by a small group of investors amd is likely to be unquoted

greater failure rate of SMEs

knowledge of sources of finances may be limited

47
Q

what is the maturity gap

A

when medium sized business cannot obtain more debt finance as they have inadequate security

48
Q

what is business angel financing

A

when a wealthy individual or groups of individuals invest directly into an SME

49
Q

What is supply chain finance

A

where a middle man company pay off debts with a discount to the receiver so they are able to get the cash asap, and the sender of the funds can wait the full payment terms to pay the middle man

Financial Management (8 decks)

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