debt finance and business accounts (w8)

Question 1

which 2 methods do companies use to raise money throughout their lifecycle

Answer 1

1- equity finance
2- debt finance

Question 2

define debt finance

Answer 2

company borrows money which may be secured by fixed or floating charge over its property, machinery and assets

Question 3

define equity finance

Answer 3

raised by share dealings- so some founders transfer shares to others or company issues new shares

Question 4

what are the 3 main ways to raise equity

Answer 4

1- retained earnings
2- rights issue
3- new issue

Question 5

define retained earnings

Answer 5

cumulative profits that are reinvested in business instead of being paid to shareholders as dividends

Question 6

define rights issue

Answer 6

additional allotment of shares to existing shareholders - which they will pay subscription price for

Question 7

what considerations should company take into account during rights issue

Answer 7

• cost of issuing new shares
• consequent change in control
• shareholders’ reaction

Question 8

define new issue

Answer 8

the new issue of shares to the public

Question 9

define preference and ordinary shares

Answer 9

• preference shares require dividends paid out each period ahead of other shareholders but no voting rights
• ordinary shares require right to vote in company but no requirement of set dividend to be paid

Question 10

what are the 2 ways companies propect themselves against under subscription of shares within issuing new shares? + define

Answer 10

1. underwriting- promise by institution(s) to buy any shares not subscribed by public in return for fixed fee
2. Offer for tender- not to fix the price but to invite public to tender for shares at price they are happy to pay

Question 11

what is the share capital

Answer 11

the sum value of all shares in a company
- permanent fund to creditors

Question 12

define nominal value of shares

Answer 12

the figure attributed to each share on incorporation

Question 13

define paid up shares

Answer 13

on issuing shares, company can require shareholders to pay up all or part or nominal value of shares

Question 14

define called up shares

Answer 14

if shares not fully paid for on allotment, company may require remainder to be paid at later date

Question 15

define share premium

Answer 15

the difference between nominal value and market value of shares (extra amount you pay on top pf nominal val)

Question 16

define market value

Answer 16

value that share can be purchased for on market

Question 17

what is the doctrine of maintenance of share capital?

Answer 17

law requires for companies to not artificially reduce or diminish share capital in unauthorised ways other than ordinary course of business

Question 18

what are the main methods of a company altering their share capital

Answer 18

• allotment
• share buyback
• subdivision or consolidation
• statutory reduction

Question 19

define subdivision or consolidation altering of share capital

Answer 19

-subdivision- company may subdivide shares into with the same class into smaller nominal valued shares
- consolidation- company may consolisate existing shares with same class right but higher nominal val
requires SR + court authorisation!!

Question 20

define statutory reduction to alter share capital

Answer 20

company could reduce its capital to:
1- pay back shareholders
2- company assets no longer represent true value of company
3- to create distributable reserves

Question 21

true or false?
public companies cannot give financial assistance to individuals to enable them to purchase company shares

Answer 21

True- public companies are prohibited from doing this

Question 22

name the 4 different types of debt finance

Answer 22

1- overdraft
2- term loan
3- resolving credit facility
4-bonds

Question 23

name pros and cons of overdraft

Answer 23

+flexible
+instant access to funds
- expensive
- repayable to bank on demand

Question 24

name pros and cons of term loan

Answer 24

+borrower has certainty
+allows borrower to budget
- difficult
- expensive
- less flexible than overdraft

Question 25

name pros and cons of resolving credit facility

Answer 25

+ flexible - borrower may be required to maintain balance of £0 - bank charges commitment fee to keep facilities open - less flexible than overdraft

Question 26

name pros and cons of bonds

Answer 26

+ certainty by setting out all details + can also be treated as capital markets - returns exposed to interest rate = expensive

Question 27

what does it mean for debt to be secured

Answer 27

lender has taken security- giving it rights river asset of company in event that company cannot repay back its debts or goes insolvent * secured creditors rank higher on liquidation

Question 28

what are the 6 forms of security?

Answer 28

1- debenture 2- fixed charge 3- floating charge 4- mortgage 5- guarantee 6- book debt

Question 29

define debenture - security

Answer 29

form of debt security issued by a company

Question 30

define fixed charges- security

Answer 30

charge taken over identified asset, preventing borrower from disposing of asset without consent of lender - if borrower defaults on loan, lender can taken possession of property

Question 31

define floating charges- security

Answer 31

a charge over a class of assets which in ordinary course of business would change from time to time and until some future step is taken to crystallise, company may carry on trade in ordinary way regarding these assets

Question 32

what does it mean to crystallise a floating charge

Answer 32

make floating charge a fixed charge where: - company is becoming insolvent - company is ceasing to trade - company is appointing a receiver

Question 33

define a mortgage security

Answer 33

it transfers title to asset to mortgagee subject to equity of redemption * title will be transferred back to mortgagor on repayment of debt * company cannot sell asset without permission

Question 34

define a guarantee security

Answer 34

An enforceable promise by third party that in event of borrower's default, guarantor will repay money to lender

Question 35

how is a charge registered?

Answer 35

MR01 form, charge instrument and a fee sent to Companies House

Question 36

what is the deadline to register a charge (security)

Answer 36

Within 21 days beginning day after date of charge, otherwise, charge is void and immediately payable.

Question 37

what is the priority of securities?

Answer 37

all fixed and floating charges are ranked by date of creation ** fixed charges will always have priority over floating charges

Question 38

how is charge by way of legal mortgage registered and prioritised?

Answer 38

via land registry by date of registration

Question 39

which 2 parts does a business' main financial statement consist of?

Answer 39

1- balance sheet 2- profit and loss account

Question 40

what is a gearing ratio & its formula

Answer 40

compares the size of company's share capital with the amount it has borrowed to see how highly leverage is *formula= long term liabilities divided by share capital and reserves x 100 (p147)

Question 41

what is current ratio & its formula?

Answer 41

aims to establish if a company would be able to pay all of its short-term liabilities using its current assets *formula= current assets divided by current liabilities

Question 42

what is quick ration & its formula?

Answer 42

variant of current ratio but considers only liquid assets *formula= current assets less stock divided by current liabilities

Question 43

what is return on capital employed & its formula?

Answer 43

measure of how efficiently a company is utilising its capital to generate profit *formula= net pre-tax profit divided by shareholder funds + long term liabilities x 100

Question 44

what is earnings per share & its formula

Answer 44

how profitable each ordinary share in a company is once the effect of any preference shares has been accounted for *formula= net income - preferred dividends divided by numbers of ordinary shares

Question 45

what are trial balances

Answer 45

-shows all credit and debit entries for business in its accounting period - information from this is used for P&L accounts & balance sheet - ALCIE is each ledger on the trial balance sheet (p149)

Question 46

define the profit and loss account

Answer 46

records income minus expenses of business over accounting period- showing if business made profit or loss

Question 47

define the balance sheet

Answer 47

records assets, liabilities and capital of business at specific point in time - top half= Net Asset Value - bottom half= equity or capital in business *top half and bottom half must always balance

Question 48

what are year-end adjustments?

Answer 48

adjustments made to trial balance to ensure that accounts truely reflect the incoming and outcomings in any accounting period

Question 49

what are 4 forms of year-end adjustments?

Answer 49

1- depreciation 2- accruals 3- prepayments 4- bad and doubtful payments

Question 50

define depreciation adjustments and the 2 ways to calculate depreciation

Answer 50

net book value = original asset cost minus accumulated depreciation= current value of assets 1- straight-line method- same charge of depreciation applied each year 2- reducing balance method- if asset is likely to depreciate more rapidly soon after being purchased

Question 51

define accrual adjustments

Answer 51

where business has benefitted from service or goods within an accounting period but hasn't paid for them yet

Question 52

define prepayment adjustments

Answer 52

business has paid for goods or services in advance and has not benefitted from them in current accounting period

Question 53

define bad debt adjustments

Answer 53

money owed to business that business knows it will not recover so they can be written off as bad debt

Question 54

define doubtful debt adjustments

Answer 54

when a business thinks some of its debts might not be paid off- shown on balance sheet as liability and deducted from total receivables