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FM > Chapter 4 > Flashcards

Chapter 4 Flashcards

1
Q

Why do debt holders face lower risk than SH

A

Receive interest before SH get dividends, rank higher if the company fails, therefore get lower rate of return

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2
Q

Why do SH face more risk than debt holders

A

Suffer downside of fall in profits, don’t necessarily get returns,

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3
Q

When can preference share holders vote

A

at general meeting when dividend is in arrears or when it is proposed to change legal rights of the shares

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4
Q

Obligation to return capital to preference shareholders

A

If redeemable - fixed amount per share
otherwise no obligation unless liquidated

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5
Q

Issue cost of equity

A

Up to 15% of finance raised

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6
Q

Rights issue

A

issue of new shares for cash to existing shareholders in proportion to their existing holdings

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7
Q

Value of the right to subscribe for a new share =

A

Ex rights price - subscription price

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8
Q

ex rights inc NPV

A

(MV shares * pre rites issue + Rights proceeds + NPV) / number of shares ex rights

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9
Q

Factors to consider when making rights issue

A

issue costs - 4% £2m - lots fixed so % fall as amount increase
Shareholder reactions - shareholder react badly sell shares
Control - shouldn’t change
Unlisted companies - SH not have funds to tae up rights and can’t sell as listed

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10
Q

Two methods of IPO

A
  • Offer for sale (shares sold to issuing house (investment bank) who sell to general public
    Direct offer / offer for subscription - direct sale
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11
Q

Costs of issuing shares

A
  • Advertising
  • Following legal requirements
  • Stock exchange regulations (large volumes of info that must b provided (listing particulars/prospectus)
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12
Q

Underwriting definition

A

The process whereby in exchange for a fixed fee (1-2% of total finance to be raised) an institution will undertake to purchase any securities not subscribed for by the public§

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12
Q

Underwriting definition

A

The process whereby in exchange for a fixed fee (1-2% of total finance to be raised) an institution will undertake to purchase any securities not subscribed for by the public
form of insurance - ensures all securities are sold

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13
Q

Disadvantage of underwriting

A

The cost - depends upon characteristics of the company issuing and the state of the market. Payable even if they do not have to purchase the securities
shares hang over the market - when there is a pick up in demand, underwriter will sell, decreasing share price

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14
Q

Venture capital definition

A

Risk capital - normally provided by a VC firm or individual in return for equity stake

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15
Q

Distinguishing factors of venture capital

A

More participatory (20-49.9% of shares desired)
More long term focus (involvement usually medium term)
Investor advises and influences management, does not run business
Return as capital gains 3-5 years
Usually sold to another company or floated on stockmarket

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16
Q

Equity ratchet definition

A

When targets set by VC are not met, extra shares are transferred to them at no extra cost

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17
Q

Advantages of crowdfunding

A

Available to start ups who may struggle with other types of finance,
Helps attract customers
can be quick

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18
Q

Costs of crowdfunding

A

Fee to the site
legal/advisory
administrative costs dealing with information requests

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19
Q

Initial Coin Offering (ICO_ key differences to IPO

A

Investor receives a token (for share or product/service)
Payment in crypto

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20
Q

Convertible loans

A

Debt with an equity kicker - convert at option of holder into ordinary shares in same company at future date

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21
Q

Issuer of convertible loan benefits by

A

Obtaining finance at lower cost
encouraging possible investors
introducing short term gearing
avoids redemption problems
issue equity cheaply

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22
Q

Loan stock with warrants

A

Cannot themselves be converted to shares, but give holder right to subscribe at fixed future dates for ordinary shares at predetermined price. can detach and sell warrants.
Loan stock is retained as separate investment.

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23
Q

What are representations and warranties

A

Debt holders need to ensure borrower has adequate loan documentation - need representations and warranties about ability to repay laon

24
Q

What are guarantees

A

If ability of borrower to repay is in doubt, guarantee may be required - e.g. parent company guarantees loan of subsidiary

25
Q

What are covenants

A

The borrower needs to commit to do/refrain from doing various things. Undertakings by the borrower = covenants

26
Q

Covenant example - providing information

A

e.g. provide lender financial statements, interim accounts, quarterly/monthly management accounts

27
Q

Covenant example - negative pledge

A

Borrower pledge not to use assets for security for other loans

28
Q

Covenant example - financial covenants

A

Set financial limits within which the borrower must trade (maximum earning ratio)

29
Q

Covenant example - restrictive covenants

A

Limit ability of borrower to take actions that may damage the lender’s position (not taking on more debt)

30
Q

Advantages of peer to peer lendign

A

Usually lower interest rates
quicker to arrange than bank loan
may be more accessible

31
Q

Eurocurrency market

A

short term borrowing and lending by banks in currencies other than that of the country in which the bank is based (only available in major currencies where there is an active market)

32
Q

International bond market

A

Market where bonds are issued by large companies etc and sold to international investors. bonds may be denominated in any freely-convertible currency

33
Q

International syndicated loans market

A

market for Medium-long term loans. Loans created when syndicate of international banks lend money to a borrower, some of the loan can be marketed, allowing other investors to acquire an interest. Spreads credit risk. banks are lenders

34
Q

Factors to consider between borrowing on international market/domestic system

A
  • eurocurrency loans often require non security
  • international bonds are attractive to investors as interest paid gross
  • International bond securities can be sold on secondary market
  • easier to raise very large sums quickly on international markets rather than domestic
35
Q

Methods of financing green

A
  • Green loans
  • Sustainability linked loans
  • Green bonds
  • Green funds
36
Q

Four components of green loan princpals

A
  • use of proceeds - for green projects
  • process for project evaluation and selection - communicate to lenders environmental sustainability objectives, process to appraise and select, related eligibility criteria
  • Management of proceeds
  • Reporting
37
Q

Weak form efficiency - share prices reflect

A

information about past price movements
they follow a random walk - up with good news down with bad

38
Q

Weak form efficiency - implications

A

Future price cannot be predicted from past movements
analysts incorrect in belief they can predict future price

39
Q

Semi Strong efficiency - share prices reflect

A

All publicly available information

40
Q

Implications if semi strong efficient

A

Market cannot be beaten by examining publicly available information, only with inside

41
Q

Strong form efficiency - share price reflect

A

all available information, in and external

42
Q

Implication if strong from efficient

A

investors cannot consistently beat the market

43
Q

Lessons of market efficiency - no memory

A

Past is no guide to the future, managers can time issues by using inside inforamtion

44
Q

Lessons of market efficiency - Trust market prices

A

in efficient market, prices are fair

45
Q

Lessons of market efficiency - no financial illusions

A

Firms can’t fool the market. The market is concerned with cashflows, manipulating accounting policies won’t improve share price

46
Q

Lessons of market efficiency - DIY alternative

A

In efficient market, investors won’t pay companies for what they can do themselves - if one firm takes over another, no increase of share price as investors could have bought shares in the other

47
Q

Lessons of Market efficiency - shares are a close substitute

A

Shouldn’t have to issue at discount as long as returns commensurate with risk undertaken

48
Q

Lessons of Market efficiency - reading the entrails

A

Share prices are a better guide to performance than published financial statements

49
Q

Lessons of market efficiency - value of investment advise

A

Technical analysis - predict future on historical - waste of time
Fundamental analysis - examine newly published account makes semi-strong as sare prices affected short time after published

50
Q

Behavioural finance - overconfidence

A

Investors overestimate their trading abilities and make bad investments, also overestimate accuracy of forecasts.
Can be linked to self-attribution bias (attribute success to themselves, failures are bad luck)

51
Q

Behavioural finance - representativeness

A

Judgements are based on representative observation, without taking account of numerous other factors (statistical evidence)
Can explain why investors may think past performance can be used to indicate future

52
Q

Behavioural finance - narrow framing

A

Investors unable to look at broader pictures, look at one share not the whole portfolio, worry about short term performance but looking to fund long term retirement

53
Q

Behavioural finance - miscalculation of probabilities

A

Investors attach to low a probability to likely outcomes and to high a probability to unlikely outcomes - can explain bubbles

54
Q

Behavioural finance - ambiguity aversion

A

Investors are afraid of ares they don’t have much info and prefer familiar - avoid overseas shares

55
Q

Behavioural finance - positive feedback and extrapolative expectations

A

Buy shares after prices rise and sell after fall. Build expectations about share prices, expecting to continue rise or fall. Some tend to join in and push rising prices higher and sell at a profit before falls, creating instability in the market

56
Q

Behavioural finance - cognitive dissonance

A

If investor has long held belief, they will continue to hold it, even if evidence completely contradicts this belief, e.g. carry on holding shares they think will increase in value, when evidence suggests otherwise.
Contributes to post earnings announcement drift - reaction to unexpectedly good / bad earnings slower than suggested by EMH

57
Q

Behavioural Finance - availability bias

A

Par attention to fact/event as it is most fresh/prominent in their mind, ignore bigger picture and be influenced by event.

58
Q

Behavioural finance - conservatism

A

Investors tend to be naturally conservative and resistant to changing an option. If profits higher than expected, under react

FM (11 decks)

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