Financing Capital Projects Flashcards
(113 cards)
When would a company be able to afford a large investment project without external sources of finance?
having a large cash surplus
What are the 3 sources of external finance?
capital markets
banks and finance houses
government and similar sources
what is equity?
shares or ownership rights in a business
What is a share?
fixed identifiable unit of capital in an entity which normally has a fixed nominal value which may be quite different from its market value
what do shareholders receive in return for their shares?
returns in the form of dividends
capital growth in the share price
what are ordinary shares?
voting rights as they are equity shares
paid at directors’ discretion
subordinate to other creditors i.e get money last
what are preference shares?
return is a fixed dividend
paid before ordinary hence the name
subordinate to other creditors but receive payout before ordinary
why are preference shares considered to behave in a similar way to debt finance?
as the return is a fixed % of the nominal value as which is similar to interest payments opposed to ordinary shares which are decided by director
how are preference shares different from debt finance?
- paid out of post tax profits so no tax benefit
- does not have the obligation to pay annually (when insufficient profits) unlike debt interest
what is a cumulative preference share?
dividend must be rolled forward and paid following year if unpaid
what is a non-cumulative preference share?
can miss dividends
what is a participating preference share?
holder gets fixes dividends + extra earnings based on performance of business
what is a convertible preference share?
can be exchanged for a specified number of ordinary shares on some given future date
-might be more profitable if share price increased than to accept cash
what is a redeemable preference share?
holder will be repaid capital (usually at par) at a pre-determined future date
why are convertible preference shares attractive to investors?
participation in hot growth companies means price will be high at conversion
for a profit, share price at conversion must be higher than amount paid on original investment
what is the primary function of a stock market?
enable companies to raise new finance through equity or debt
-can communicate with a large pool of investors
what condition must a UK company be before raising public finance?
must be a plc
what is the secondary function of the stock market?
enable investors to sell their investment to other investors
why are listed companies more attractive to investors than unlisted?
they are more marketable as they can be sold amongst investors
why are private limited companies (ltd) not offered publicly?
lighter disclosure requirements
what does limited by shares mean?
the shareholders liability is limited to the initial investment
- nominal value of shares and any premium paid in return for issue of shares
- protection of personal assets in insolvency but money invested will be lost
is a plc listed or unlisted?
can be both
what is a stock exchange listing?
quotation for its shares on stock exchange
aka flotations or IPO
what are the advantages of a listing?
- once listed, market will provide a more accurate valuation than before
- creates a mechanism for buying and selling shares in the future at will
- raises profile of entity
- raises capital for future investment
- employee share schemes more accessible, some are offered them as salary package