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Flashcards in Financing Deck (9)
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1

Is debt or equity financing more beneficial tax-wise?

Debt – since interest is paid before tax, it is a DEDUCTIBLE TRADING EXPENSE. Equity financing offers no tax benefit, not even dividends (which are a distribution of net post-tax profits).

2

Regulation-wise, is debt or equity financing easier?

Debt – no statutory procedure but must have one in AoA.

Equity difficult as Board and shareholder resolutions needed for an allotment.

3

Is debt or equity financing safer for Coys in financial trouble?

Equity – dividends discretionary. For debt, poor performance might trigger EoD (breach of covenant or insolvency), loan acceleration and enforcement against security.

4

What are two disadvantages of a floating charge?

Disadvantage is that borrower may not be prevented from dealing with specific asset and floating chargeholders lower in priority.

5

What is the advantage and disadvantage of term loans and overdraft facilities respectively?

Overdraft – flexible, but expensive and payable on demand

Term loan – less flexible and also expensive; however, borrower has certainty over instalment payment sums

6

Three disadvantages of Revolving Credit Facility?

1. May be required to clean down (maintain 0 balance for a specified time)
2. Commitment fee to keep RCF open – even if not drawn upon
3. Less flexible than an overdraft

7

3 ways bank can protect loan sum?

1. ACCELERATE loan on late payment or MAC in borrower’s finances
2. Negative PLEDGE not to grant other lenders security
3. SECURITY (by way of debenture) – either fixed charge, floating charge or guarantee

8

3-step DD by borrower’s solicitors before docs executed? 3 steps by directors to execute the loan?

Check AOA to confirm directors have authority to act in relation to (i) entering into transaction; (ii) executing docs; and (iii) granting security if any.

Directors should (i) convene BM; (ii) resolve to enter into loan agreement and (iii) give someone authority to act on Coy's behalf

9

What if company acts ultra vires in entering into loan?

Loan may still be enforceable by the lender, but shareholder could seek injunction to prevent borrowing and directors might still be liable for any loss