Chapter 10

Question 1

Withholding tax

Answer 1

Tax deducted from a payment and remitted to the IRD on behalf of a recipient who receives the after-tax payment

Question 2

Tax credit

Answer 2

A deduction from taxes payable

Question 3

Floating debenture

Answer 3

Medium-term or long-term debt funds secured by a charge over all otherwise unsecured assets

Question 4

Financial lease

Answer 4

A lease contract whereby the lessee acquires the use of an asset over a period approximately equal to the useful life of the asset

Question 5

Lease interest

Answer 5

A contractual relationship between a tenant (lessee) and a property owner (lessor), where the tenant has the right to use the land for the period specified in the lease agreement in return for rental payments and other obligations

Question 6

Operating lease

Answer 6

A short-term, cancellable lease where the lessee gains the use of an asset without ever buying the asset

Question 7

Crowdfunding

Answer 7

Crowdfunding is a means of raising relatively small amounts of funds from the public to finance a business venture or project

Question 8

Venture capital

Answer 8

Funds (usually equity) provided to relatively new businesses by public companies or government-sponsored enterprises

Question 9

Retained earnings

Answer 9

Profits retained and reinvested in assets of the firm. Represents an internal source of equity finance

Question 10

Private placement

Answer 10

A placement of shares or debt offered only to selected investors

Question 11

Unpledged assets

Answer 11

Assets that have not been used as security for a loan

Question 12

Line of credit

Answer 12

An informal arrangement with a bank to allow a firm to borrow up to a maximum specified amount over a set period of time

Question 13

Revolving credit facility

Answer 13

A legal commitment by a bank to provide credit to a borrower up to a maximum specified amount when requested. Similar to a line of credit

Question 14

Pledge

Answer 14

To put up assets as security for a loan

Question 15

Collateral

Answer 15

Assets, such as inventory, that are pledged as security for a loan

Question 16

Factoring

Answer 16

The discounted sale of accounts receivable to a factoring company or financial institution in return for immediate receipt of funds. Credit and collection activities are undertaken by the factor

Question 17

Non-resource basis

Answer 17

With respect to the sale of accounts receivable, when the factor takes on the risk of bad debts

Question 18

Invoice discounting

Answer 18

The discounted sale of accounts receivable to a factoring company or financial institution in return for immediate receipt of funds. Unlike factoring, credit and collection activities are retained by the seller of the accounts

Question 19

Commercial bills

Answer 19

Unsecured short-term marketable securities issued either by companies or by banks

Question 20

Unsecured

Answer 20

When no collateral is offered as security against a loan

Question 21

Syndicate

Answer 21

A group of lending institutions which pool funds on a one-off basis to lend to a very large borrower. Limits risk exposure for any one given lender

Question 22

Public offering

Answer 22

Issue of securities by a company to the public

Question 23

Underwriting

Answer 23

The agreement by an investment bank to purchase any securities that are not subscribed by the public in a new issue

Question 24

Subscribe

Answer 24

To agree to purchase a security, often shares

Question 25

Convertible securities

Answer 25

Securities that begin their life in one form (usually debt) and that may be converted to another form (usually equity) at a later date. Includes convertible notes, capital notes and convertible preference shares

Question 26

Offshore finance

Answer 26

Capital raised overseas

Question 27

Euromarket

Answer 27

An international financial market that facilitates the trading of debt and equity securities outside the country of origin

Question 28

Eurocurrency loans

Answer 28

Loans issued by an international bank, denominated in a major currency other than the legal currency of the country in which it is issued

Question 29

Foreign bonds

Answer 29

Bonds issued in a foreign country, denominated in the currency of that foreign country

Question 30

Eurobonds

Answer 30

Bonds issued outside the country of the currency in which they are denominated

Question 31

Euroequities

Answer 31

Equity funds issued in offshore centres to achieve a wider distribution of ownership and greater capital than would otherwise be possible

Question 32

Subsidiary

Answer 32

A company owned and controlled by another company

Question 33

Parent company

Answer 33

A company that owns and controls another company

Question 34

Consolidated

Answer 34

The combined financial accounts of a group of companies, composed of a parent and its subsidiaries

Question 35

Dividend policy

Answer 35

A strategic policy that considers the need for profits to be retained within the firm for reinvestment and the preferences of shareholders for the amount and consistency of dividends

Question 36

Debt ratio

Answer 36

A measure of the proportion of debt relative to total financing; or, alternatively, the proportion of assets financed by debt

Question 37

Debt-equity ratio

Answer 37

A measure of the proportion of long-term debt relative to shareholders' equity

Question 38

Cost of capital

Answer 38

The cost of raising and using funds

Question 39

Optimal capital structure

Answer 39

The best mix of debt and equity that minimises the cost of capital and maximises the value of the firm

Question 40

Capital structure

Answer 40

The proportionate mix of debt and equity used to finance a firm

Question 41

Cost of debt

Answer 41

The cost of financing with debt. Composed of interest and issue costs, less any interest tax shield

Question 42

Issue costs

Answer 42

Administration, selling and underwriting costs associated with the issue of a new security

Question 43

Interest tax shield

Answer 43

The savings a business makes due to the tax-deductibility of interest payments

Question 44

Cost of equity

Answer 44

The cost of financing with equity. Composed of dividends and issue costs

Question 45

Weighted average cost of capital (WACC)

Answer 45

The overall cost to a firm of all long term sources of finance