Chapter 14 Flashcards
(40 cards)
How do firms raise money for investment? (2)
- external financing
- plow back profits and reinvest them rather than paying them out as dividends
Two types of external financing, and what they are?
1) Debt: involves borrowing money to be repaid (+interest)
2) Equity: involves raising money by selling interests in the company
See
Note on figure 14.2 top of side 1
See
14.1: balance sheet (and practice it)
What are the two ways to calculate the debt ratio?
1) Total debt to total assets (debt/assets)
2) Total LT liabilities to total capitalization (LT liabilities/LT liabilites+equity)
What do common stock/ordinary share in the UK represent?
Ownership in a corporation
This ownership is exercised by voting in appointment of board of directors and voting on corporate policy
What does it mean that common stock is a residual claim?
Means if the firm is liquidized, holders get paid only after BHs, preferred shareholders, debt holders and workers
2 ways banks protect their claim on debt?
- Borrowing allowances
- Dividend sizes
In practice, SHs only really vote on boards and key firm decisions such as mergers; if many don’t vote…?
Can lead to management getting a ‘free hand’
Explain the voting procedures wrt board of directors? And exception?
Come up for re-election every year
UNLESS classified BofD
then only 1/3 will come up each year - this has been found to increase firm value
What is the difference between book and market value?
- BV tells how much capital a firm has raised from SHs in the PAST
- MV depends on future dividends SHs expect to receive (and tf share price)
What are DCSs? Give an example of dual class shares?
Dual class shares are when there are different dividend/voting rights attached to two different types of share
They often sell at a premium (sometimes have private benefits attached eg. seat on BofD)
eg. Google when first made public, founders got 10 votes/share
What is tunnelling?
Exploitation of minority shareholders
What is preferred stock?
Stock that takes priority over common stock in regards to dividends (ie. they get paid first)
Define net worth?
Bookvalue of common shareholder’s equity + Preferred stock
What are floating-rate preferred stock?
Preferred stock paying dividends that vary with ST interest rates
Advantage of partnerships?
They avoid corporate income tax tf losses/profits are passed straight through to partners’ (investors)n tax returns
Example of a limitation to partnerships?
Limited life span (search why?)
What is a trust? Give an example of them and explain?
A trust, the owners of ‘units’ have passive ownership tf no voting rights (tf firms rarely set up like this)
Example:
REITS = Real estate investment trusts (avoid taxes as long as they pay 95% of earnings to REITS owners, but are limited to real estate) (created to encourage public investment in commercial real estate)
What does debt allow for that equity doesn’t?
Allows borrowers to walk away from obligations in exchange for assets of company
Define default risk?
Likelihood a firm will walk away from its obligations
What are bond ratings used for?
They are issued on debt instruments to help investors assess the default risk of a firm
5 questions a debt financial manager should ask?
1) LT or ST borrowing? (depends on I length)
2) Should debt be fixed/floating rate?
3) Borrow in own/other currency?
4) What promises should be made to lender?
5) Should you issue straight or convertible bonds?
See pages 357-358 for full discussion
LEARN ALL DEFINITIONS PAGE 2 SIDE 1 OF NOTES!!!
now
