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FLP - Management - AFR - LTF > Capital Markets And Methods For Raising Long-Term Capital > Flashcards

Capital Markets And Methods For Raising Long-Term Capital Flashcards

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1
Q

What are capital markets:

A

They facilitate the issue and subsequent trade of equity and debt financial instruments.

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2
Q

What is the US$1 Trillion Club?

A

The 16 stock exchanges (out of over 50) that together have a market capitalisation of US$1 Trillion.

Collectively all stock exchanges market businesses worth over US$65 Trillion.

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3
Q

What are debt markets

A

Markets that facilitate the trade of debt, like bonds.
The biggest debt exchanges are based in the US and in Japan.

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4
Q

What is the relationship between bonds and interest rates:

A

It’s inverse.

When interest rates are high, the price of bonds falls.
Because in this case it is more lucrative to save rather than to invest in bonds.
This reduces the demand for bonds and depresses the price.

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5
Q

What is the relationship between the value of bonds and shares:

A

It’s inverse.

Shares are an alternative option to invest in when interest rates are low.
Because it is then not encouraged to save. This encourages people to invest in shares and bonds. This will push the price of bonds up, with the preference then going to invest in shares.

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6
Q

What is the Primary function of a capital market:

A

To make it possible for companies to raise new medium- to long-term finance.

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7
Q

Types of investors that wish to buy shares (or stock):

A
  • Institutional investors (pension funds and investment trust companies)
  • governments
  • corporations
  • private individuals
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8
Q

What is the secondary function of a capital market:

A

To facilitate trade of shares and/or debt.
This provides potential liquidity of listed shares - they can be bought and sold easily by investors.

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9
Q

Factors that affect a share price:

A
  • macro-level pressure, like a recession
  • supply and demand
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10
Q

Factors that influence bond prices:

A
  • macro-economic factors like a recession
  • supply and demand
  • expectations of risk
  • what other investments are available
  • bond prices go down, when stock markets are soaring.
  • the interest rates. When these are high, people prefer to save rather than by bonds
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11
Q

What is an IPO:

A

Initial public offering, also called a flotation.

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12
Q

Advantages of listing on a stock exchange:

A
  • Raise finance to support the companies investment in capital projects
  • can improve stakeholders perceptions about reputation and credibility of the company
  • allow a more accurate valuation of shares - the market provides an objective price
  • provides a trading platform so that company shares can be bought and sold by investors
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13
Q

Disadvantages of listing:

A
  • Associated costs can be high (legal and accountancy costs, underwriting etc)
  • existing shareholders control of the company will be diluted
  • rules, regulations and reporting requirements of the stock exchange can be onerous in terms of time and costs
  • share price can be volatile
  • shareholders pressure for short-term returns can lead to short-term management thinking
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14
Q

LSE

A

London Stock Exchange:
- Founded in 1698
- significant amount of regulation
- costs are high
- for buying and selling shares

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15
Q

TSE

A

Tokyo Stock Exchange:

Also know for its benchmark index:
Nikkei 225 Stock Average

This is a price weighted index composed of Japan’s top 225 blue-chip companies.

(Similar to the Dow Jones Industrial Average index, which is the benchmark index for US-based blue-chip stocks.

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16
Q

NYSE

A

This is the worlds largest stock exchange.
- listing costs are high.
- significant amount of regulation
- a listing on the NYSE creates a very high public profile for a company.

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17
Q

NASDAQ

A

This is the worlds second largest stock exchange.
- Listing Fees are significantly lower than for the NYSE.
- Many tech companies prefer the NASDAQ, including Facebook, Apple and Microsoft

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18
Q

Shanghai Stock Exchange:

A

This is China’s largest stock exchange:
- 2 types of stock listed:
1) A shares priced in local renminbi yuan
2) B shares priced in US$

There is also STAR Market in China since 2019, which is comparable to the Nasdaq. With more relaxed listing rules, to attract domestic tech companies to list their shares in China.

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19
Q

What advisors play a role when listing a company:

A
  • Sponsor
  • Investment banks
  • Underwriters
  • Stockbrokers
  • accountants
  • Lawyers
  • Public and investor relation advisors
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20
Q

What is a sponsor:

A

This is the intermediary between the issuer and the exchange. Often an investment bank.

They advise on:
- share pricing,
- marketing,
- rules and requirements
- liaise with other advisors

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21
Q

What is an underwriter:

A
  • They help to decide the initial flotation price.
  • They may buy all the initial share offering with a view to selling it on to their network of investors.
  • this provides the issuer with the reassurance the listing will be a success
  • The underwriter will be looking to sell the shares onto their network of investors.
  • fees for this service can be significant
  • sometimes underwriters don’t buy the shares but work on a Best Effort basis to sell the shares onto their investors
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22
Q

3 ways to issue new shares:

A
  • IPO
  • Rights Issue
  • a Placing
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23
Q

IPO:

A

Shares are listed publicly for the first time to a wide range of new inevestors.

They can offered at Fixed Price or through a Tender offer.

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24
Q

A rights issue:

A

Offering for sale new shares to existing shareholders in proportion to the size of their current holding.

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25
A placing:
Involved selling shares directly to a select group of investors on a pre-arranged basis. For example to a pension fund.
26
IPO - for sale at a fixed price:
The price is set by the company in conjunction with its advisors.
27
IPO - offer for sale by tender:
In this case, investors tender for shares at or above a minimum fixed price. This is the investors indicating what they are willing to pay. The company then sets a Strike Price, which is the price at which the company can raise the finance it requires. All investors who tendered for the strike price or higher will be offered to buy the shares at the strike price. Investors who offered a price below the Strike price will not be offered any shares. The company will only issue the required number of shares to raise the finance needed. So companies will buy a percentage of the shares they offered to buy, not the full proposal.
28
What are pre-emption rights:
The right to new shareholders to buy new shares in proportion to their holdings, so that their holding doesn’t get diluted by the issue of new shares.
29
Factors about a Rights Issue:
- they are usually priced at a discount to the current share price. -
30
What does it mean when shares are traded cum-rights:
This happens when existing shares are being traded after the announcement of a Rights Issue, but before the rights issue has take place. This means that the market price at which the shares are bought and sold reflects the rights that are attached to them.
31
What is TERP:
Theoretical ex-rights price: After the rights issue has taken place, the rights no longer exist. These shares are then traded ex-rights. The price ex-rights is the price the shares trade at the day after the rights issue.
32
Formula for TERP:
(N x cum-rights price) + issue price / N+1 N is the number of shares that need to be owned to buy one new share.
33
How to interpret TERP:
- a projected increase in the net investment value motivates shareholders to take up the rights issue. - a projected decrease in net investment value doesn’t. TERP is not the only reason why shareholders would or wouldn’t take up a rights issue. It also depends on the planned use of the proceeds.
34
Advantages of a Placement:
- it’s relatively inexpensive - administratively straightforward - the company can be selective about the investors it deals with
35
Disadvantages of a placement:
- narrow shareholder base - shares are less liquid
36
When is an IPO appropriate:
- to raise a large amount of equity - if private shareholders wish to sell their shares - to raise company profile and appear more prestigious
37
When is a rights issue appropriate?
If current shareholders have available funds and are willing to support investing more in order to protect their proportionate ownership of the company.
38
When is a placement appropriate:
When an organisation has certain investors in mind. And if they want to save costs and admin of an IPO.
39
Advantages of bonds:
- more flexible than bank debt - traded on the open market - can be cheaper than bank debt
40
Other word for maturity date of a bond =
Redemption date
41
3 types of bonds:
- Redeemable - Irredeemable - Convertible
42
3 types of bonds:
- Redeemable - Irredeemable - Convertible
43
Which market is bigger, the stock market or the bond market
Bond market
44
3 main parties in the bond market:
- Issuers - Investment banks - Investors
45
Examples of bond issuers:
- companies - governments - banks - other institutions The largest issuers of bonds are governments.
46
Another name for bonds issued by governments:
Gilts
47
What bonds are less risky:
The ones issued by governments. Bonds issued by stable governments are considered very low-risk. Corporate bonds are considered more risky.
48
What is the role of investment banks in the bond market:
- market maker - underwriter - advisor
49
What is the role of the underwriter:
They buy the bonds from the issuer and sell the bonds at a higher price to investors. The difference in price is the underwriting fee. Underwriting happens a lot with corporate bond issues, as this reduces the risk for the issuing company that they won’t sell all the bonds. The banks uses its contacts to sell the bonds.
50
Who can investors?
- Governments - Companies - Financial institutions - Pension funds - wealthy individuals
51
What are zero coupon bonds:
Bonds that don’t pay a coupon rate. Instead these bonds get sold at a big discount, so the investor obtains a significant return on redemption.
52
Differences between bonds and bank loans:
- bank loans are not tradeable (they are, but not on public exchanges) This makes bank loans less liquid. - bonds can often be issued with a lower interest rate, which will be cheaper for the borrower. - bank loans are often restricted by convenants. Issuing bonds is a more flexible option.
53
Redeemable bond:
The bond is repaid in cash to the investor upon maturity by the issuer. The issuer pays interest over the duration of the period.
54
Irredeemable bonds:
These are rare, because investors don’t like the idea of not being able to redeem the bonds. In this case the investor can get their money back by selling the bonds to another investor.
55
Convertible bond:
This type of bond gives the investor the choice to either redeem the bond for cash upon maturity or they can convert it into ordinary shares. The interest rate on these bonds is usually lower, as the investor has a chance to benefit from the increase in share price upon maturity of the bond.
56
Private placement of unregistered bonds:
This is when the bonds are sold to a particular group of investors. In this case the bonds are not publicly traded. These bonds usually have a higher interest rate as a result.
57
Consequences of bonds:
- interest on bonds reduce the profits - interest is a finance expense - interest reduces the amount that can be distributed as dividend (as it reduces profits) - interest negatively affects ratios like: - interest cover (= profit from operations/finance cost) - earnings per share (= profit for the year/number of ordinary shares) - increasing debt, increases gearing = debt to equity ratio = Debt / (Debt+Equity) - from an investor perspective it’s more risky to invest in a highly leveraged organisation. - Bond finance is often cheaper than equity finance, because issue costs are lower and interest is a tax allowable expense.
58
4 Types of bank finance:
- Bank loan (secured or unsecured) - Overdrafts (usually unsecured) - Asset finance (secured) - Revolving credit facilities (secured or unsecured)
59
Other word for Bank Term Loan and what is it?
Cashflow Loan, which is for the medium to long term. - It’s for example used for Fixed Assets. - Can have a fixed or variable rate - Principal paid back according to a pre-agreed schedule. - Sometimes the loan is secured on the assets of the company (by means of a fixed or floating charge)
60
What is a Fixed Charge:
When a loan is secured against a specific asset, like land or buildings.
61
What is a Floating Charge:
When a loan is secured against underlying assets that are subject to change frequently (like inventory or receivables)
62
What is collateral:
The assets used to secure a loan.
63
Difference between a secured and unsecured loan:
When a company has an unsecured loan, the lender hasn’t secured any assets against the loan. Secured loans have usually a lower interest rate than unsecured loans. Unsecured loans are more risky for the lender, as the lender won’t be able to take ownership of an asset if the borrower can’t make the repayments.
64
What are debt covenants:
- Debt covenants reduce the risk of a loan for the lender. - they are specific conditions or limitations that can result in debt becoming immediately repayable if they are broken. - Debt covenants are seen as restrictive by the borrower and can be a reason why they go for a different type of lending.
65
Examples of debt covenants:
- a certain interest cover ratio - Net debt to EBITDA ratio - A certain gearing level (debt to equity ratio)
66
What is an overdraft:
It’s a short-term loan that allows a company to take their bank balance below zero. Overdrafts can be provided for a fixed period or on a rolling basis. Overdrafts are most of the time unsecured, which is why they often have a higher interest rate. Because this type of lending is riskier for the lender. Overdrafts are usually used for Working Capital. Overdrafts are sometimes cheaper than term loans, if the company only needs to borrow the money for a short amount of time.
67
What is a pre-arranged overdraft:
This is when the maximum lever of overdraft is negotiated and agreed in advance.
68
What is an unareanged overdraft:
This is when the overdraft wasn’t agreed in advance and there is no formal credit facility in place. This type of overdraft often carries higher fees and interest charges than a pre-arranged overdraft.
69
What is a Revolving Credit Facility: (RCF):
This is when there is an open-line of credit available from the lender to the borrower. The borrower can’t borrow the money when they need it and then repay it. As soon as it’s repaid, they can borrow the money again. The difference with an overdraft is that an overdraft can be withdrawn any time, while a RFC is a committed facility lasting for a defined period. An RFC can be arranged with any bank, while an overdraft is usually with the ba k where the borrower has a current account. An RFC can be used to finance Capiral Expenditure, but is mostly used for working capital, to pay payroll before invoices have been paid, or seasonality) An RCF can be secured or unsecured. The interest rate is often variable, so it can fluctuate
70
When is an RCF provided by a syndicate of banks:
If the RCF is for a very large amount to fund a significant capital project.
71
What is a non-revolving CF:
When the CF is only used one and has a closed-end.
72
What is asset finance:
When the lending happens against an asset. Examples are: - leasing - hire purchase - debt factoring

FLP - Management - AFR - LTF (3 decks)

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