F2 - C1 - Long-Term Finance Flashcards
(12 cards)
Sources of Finance
Capital Markets - Stock exchange can be used to sell portions of the business
Bank borrowings - Short term loans
What 2 roles do capital markets play?
Provides opportunities for businesses to raise both debt and equity finance
Secondary function to allow investors to trade with each other
What kinds of equity finance are available?
Ordinary Shares
Preference Shares
What are the features of an ordinary share?
Dividends - Not compulsory
Winding up / Liquidation - Lowest priority
Voting rights - Full voting rights
Risk - Most risky
What are the features of a preference share?
Dividends - Usually fixed and required to pay
Winding up - Higher than ordinary shares
Voting rights - None
Risk - Lower thank ordinary but higher cost
Name 4 types of preference shares and their main features
Cumulative - Regular dividend that must be paid including missed payments
Non-cumulative - Doesn’t have to be paid for when dividends are not paid out
Participating - Earning extra dividend based on company targets
Convertible - Can be converted into ordinary shares
What features are used to ensure repayment of debt finance
Fixed charge - Secured against a specific asset (Mortgage)
Floating charge - Secured against general assets
Debt covenants - Specific conditions of the loan (Ratios, Dividends)
Types of debt finance
Bank finance - Loans, Revolving credit facilities
Capital Markets - Debentures, Bonds, Loan stock, Convertible Debentures
What are the features of Debentures, Bonds or Loan stock
Medium to long term
Liable for specific interest payment
Secured against assets
Offered to buyers via bond market
Freely transferable
No voting rights
What features differ in convertible debentures?
Can be converted into equity shares
More attractive to buyers
Lower interest rates
What is a bond market?
Source of long term debt finance
Enables raising of debt finance
Allows trading of bonds between investors
Name 2 other sources of long term finance
Sale or leaseback - Selling asset and leasing it back
Warrants - Entitles the holder to buy the stock at a fixed price
