How corporates are financed Flashcards

Question

Medium Term Finance - Credit Sale

Answer 1

A good has been sold, but there is an agreement that the payment will be made through regular instalments over a set period of time Legal ownership is given to buyer at outset

Answer 2

The right to use the asset is given in return for a series of regular payments, BUT legal ownership does not change - Operating lease: time period is less than the life of the asset - Finance lease: time period is similar to the life of the asset (leasee is responsible for upkeep)

Answer 3

Major source of funding, which is secured on borrower's assets (collateral) Interest rates are variable and tied to a bank's rate

Answer 4

- Overdraft - Credit from suppliers - Factoring - Bills of exchange - Commercial Paper

Answer 5

Agreed maximum limit that a borrower can draw money up to Interest is payable Can be called in at any time

Answer 6

Agreement between supplier and company to pay for the goods AFTER they are supplied

Answer 7

Third party (AKA factor) that a supplier sells to Used by those with large outstanding credit sales

Answer 8

Written agreement to pay a sum of money, specified date, uses an intermediary Bills can be sold to raise money

Answer 9

Issued at a discount, redeemed at face value Used by large companies that have high credit ratings Minimum denomination of £500,000

Answer 10

Borrow from short-term depositors and lend to long-term borrowers Short-term liabilities can mature into long-term assets

Answer 11

- Shadow banking (different to regular banking system) - Project financing - Crowdfunding - Microfinance

Answer 12

Non bank financial institutions that are outside the regulatory system (but do the normal bank things) Borrow short-term funds in the money market, lend/invest long-term No deposits or reserving requirements, and cannot borrow from central banks so are exposed in an emergency

Answer 13

Large infrastructure projects High risk (therefore high returns), long term, can be costly to arrange (large capital needed) Process: - Form a SPV (Special Purpose Vehicle) - Contingent on lenders being repaid when revenue arises - Off balance-sheet financing (shareholders do not see shareholders)

Answer 14

Special Purpose Vehicle A new legal entity that means shareholders are equity investors Has a varying level of government involvement

Answer 15

Many contributions to a project (donations, investments, pre-payment/rewards, peer-to-peer lending/loans) Social media/websites Contribution flexibility UK activity is regulated by the FCA

Answer 16

Small loans with no interest Usually faster and easier to secure than a traditional loan Generous repayment periods Used by charities

Answer 17

- A source of government revenue - Redistributes wealth - Develops the economy - Maintains economic stability - Provides public goods/services

Answer 18

- Welfare - Health - State pensions - Education - Defence - Transport - Safety and public order - Business and industry - National debt interest

Answer 19

- Income tax - Capital Gains - Inheritance - VAT Tax avoidance is legal Tax evasion is illegal

Answer 20

Rates rise as income rises Based on taxing those who can pay Based on taxable income: Income earned (wages, profit) + benefits in kind - tax free income (ISA income, gambling) - tax free expenditure (pensions contributions, charities) - personal expenses

Answer 21

Arises when an asset is sold with a gain CGT is based on the increase in value, not the proceeds of the sale Do not have to pay capital gains tax on the main private residence

Answer 22

Arises when transferring wealth from a deceased person to a living one Allowances exist to protect main homes

Answer 23

Percentage charge added to the standard price of goods and services Regressive - tax rate decreases as the amount subject to taxation increases

Answer 24

Tax on a company's profits Applies to companies registered in the UK and this with central management in the UK Rates are set in the annual budget Taxable profits - 'profit on ordinary activities before tax', includes income (minus allowable expenses) and capital gains Submitted to HMRC with a corporate tax return and a copy of accounts As corporates are owned by shareholders, shareholders are taxed twice Chargeable gain (what corporation tax is payable on) = Sale Price - Purchase Price

Answer 25

Costs essential and directly related to running a business

Answer 26

Sales Revenue - Expenses = Operating Profit Operating Profit + Non-Trading income (interest, dividends) = Profit before tax and interest Profit before tax and interest - Interest paid = Profit before tax This is the profit showing in a company's accounts

Answer 27

Published Profit before tax + Business expenses/expenditure not allowable (e.g. entertainment costs) + Depreciation charge - Capital allowances - Special relief (e.g. R&D costs) + Capital Gains = Amount liable to Corporation Tax

Answer 28

An amount (fixed percentage) that shows the decline in the value of an asset over time

Answer 29

Each country has its own taxation regime Residency of a company is where it is controlled (therefore businesses can be based 'offshore' for more favourable tax arrangements

Answer 30

It is possible that foreign income/gains can be taxed locally too (double taxation) Is also possible if a tax payer lives in one country but works in another Double Taxation Relief: Local tax is not double, but is the difference (can offset tax paid overseas against domestic) BUT no refund if you pay more than you would have

Answer 31

LEARN GRAPH (0211 slide 34)

Answer 32

Can be tradeable or non-tradeable May be stock exchange listed

Answer 33

- Raise extra capital - Easier for future issues of capital - Exit route for existing shareholders - Shares are more valued and marketable

Answer 34

Needs to fulfil minimum requirements, as well as a high cost (10% of flotation value) Needs a Sponsor (does the actual listing, chooses price, marketing, underwriting) Methods: - Offer for Sale - Offer for Sale by Tender - Offer for Subscription - Placing - An 'Introduction'

Answer 35

Refers to a company selling its shares to the public for the first time First issue of shares is a Stock Market Flotation

Answer 36

Most common method of obtaining a listing Sponsor offers a specific number of sales at a fixed price to the general public (predetermined). People apply and company sells and underwrites and advises

Answer 37

Tender means bid Similar to offer for sale - but not fixed price Issuing price tells public to submit a tender (states the number of shares they wish to buy and the price they are willing to pay) Strike price (the fixed price) is determined after offer closes Applicants above get their price, below get rejected Also underwritten

Answer 38

Similar to offer for sale Can be fixed price or by tender Not underwritten (offers can be withdrawn if the shares do not raise a certain level of income) Risky - no guarantee

Answer 39

Simpler, cheaper, quicker Sponsor has loads of investor options and asked individually OR Issuing house buys the shares and offers securities to its own clients No public applications (not accepted) Minimises costs (less marketing), speeds up cashflow

Answer 40

Less common (most people want to raise capital) Does not involve the sale of any shares (no raising of capital) Existing shares are used to obtain a Stock Exchange listing 'Intro' because the company is introduced to capital markets, so chances to increase tradability

Answer 41

Go to existing shareholders and give them the right to buy more shares Raises capital Fixed price (usually discount to the current value) Can either buy additional shares or sell the 'right' of buying more (given three or more weeks to accept or sell) Timetable: Company approaches advisers Company issues the rights Shareholders sent allotment letters A successful rights issue - Creates new shares - Creates extra funds - Increases company value - Reduces share price

Answer 42

Market Capitalisation (MC) Share Price (before rights issue) Share Price (after rights issue) Extra Value

Answer 43

MC = share price (P) x number of shares

Answer 44

P = MC / number of shares

Answer 45

P = (MC + extra value) / new number of shares

Answer 46

New money - expenses +/- change in market's perception

Answer 47

- Not convinced of future success of projects/long term prospects - Cannot afford it

Answer 48

Companies give free shares (e.g. a bonus) to all ordinary shareholders (free means no capital is raised) Impact: - New shares are created - No money is raised - Fundamental value of the company is unchanged - Price per share falls (more shares overall) - Total value of investor's holding stays the same Why do it? - Increased number of shares increases marketability/flexibility - Psychological ('getting something for nothing', future confidence) - May be needed as part of a listing requirement HOWEVER there are admin costs

Answer 49

P x (previous number of shares) / (new number of shares)

Answer 50

The ability for an asset/commodity to be sold/marketed

Answer 51

The mix of various forms of external funds (capital) used to finance a business Equity capital and Debt capital (and comparison) Links to Gearing Ratio

Answer 52

A proportion of debt to equity capital Highly geared companies have high proportion of debt ^ Companies need a bit of debt (to fund growth etc.)

Answer 53

Dividend - a shareholder's return, paid periodically, indicates a company's profitability Paid out of post tax profits Is better for non-tax paying shareholders Usually paid twice a year: - Interim dividend (halfway through a financial year, is smaller than final) - Final dividend (at the end of the financial year, after the prep of accounts) Two types: - Cum dividend (purchaser of the share IS entitled to the next dividend) - Ex-dividend (purchaser of the share is NOT entitled to the next dividend)

Answer 54

- Regular Increase (likely when profits are increasing, but not necessarily the same proportion) - Fixed % of profits (offers stability and a regular return, and is easy to implement) - Nil dividends (prefer to receive salaries than dividends) - Special dividends (one-off large dividend payment, no commitment)

Answer 55

Retained Earnings Level of gearing/capital structure Maximisation of shareholder wealth

Answer 56

Profits not yet distributed to the shareholders The profits are usually used to finance projects, or for growth

Answer 57

Highly geared companies (more loan capital than equity capital) = high proportion of debt = high interest payments = less scope to pay dividends BUT there are fewer shareholders, so higher dividend payment per share

Answer 58

Wealth through dividend payments (income) and capital gains (selling shares) Dividend relevance: (investors prefer dividend certainty, dividends show profitability) Dividend irrelevance: (dividend payments have no significant role, wealth is determined by investments)

Answer 59

Share buy-backs: - Repurposing of shares (company buys them back) ^ purchasing on Stock Exchange, re-purchasing from individual shareholders - Increases value of remaining shares Scrip Dividends - Choice for additional ordinary shares, given to existing shareholders, possibly alongside or instead of money

Answer 60

(How to decide on the value of a company) - Market Capitalisation (share price x number of shares) - Book Value (value of net assets/number of shares, reflects asset value) - Adjusted book value (reflects current fair market value) - Discounted Cashflow Valuation (calculate PV by discounting future cashflows, allows for company's profit earning capability) - Dividend valuation (income of shareholders, allows for company's predicted dividend payments)

Answer 61

Increased security: Larger businesses can - defend themselves - overcome barriers (to enter new markets) - are greater threats to rivals - have less uncertainty - obtain more business (seen as reliable) - expand product range - lower transaction costs Increased profitability: - benefit from economies of scale (lower costs, better credit, machinery) - Market share = power - Expand into new markets Increased motivation: - Environment of increased power = prestige = decreased employment risk for managers = improved morale = more ambitious/productive staff

Answer 62

- Profits are needed - Long term finance - Expensive strategy - Short term growth costs (equipment, advertising, training) - Long term growth (higher revenue) Internal Approach: - Organic (expansion of own operations) External Approach: - Expansion with other firm(s)

Answer 63

- Money (raising finance, need shareholders on board) - Government policy (e.g. on mergers/monopolies) - Lack of management expertise (links to loss of control) - Share price fall (shareholders may sell if they lose confidence) - Time consuming

Answer 64

Expansion of own operations Retain control Avoid alien practice and government intervention - Horizontal expansion: (increasing production of goods and services at the SAME STAGE of production) - Vertical expansion: (new operations at DIFFERENT stages of production) - Diversification (moving into different markets)

Answer 65

Expansion with other firm(s) Easier and quicker growth Sharing assets, experience and the financial burden - Horizontal integration: (multiple firms at the SAME STAGE of production in same industry) - Vertical integration: (multiple firms at DIFFERENT stages of production in same industry) - Conglomerate integration (multiple firms in completely different industries)

Answer 66

Two or more firms agree to COMBINE their businesses = a new legal entity Managers from each firm are employed in the new business (many people keep their jobs) Finance is not always needed

Answer 67

A takeover, when one firm buys shares in another and takes control Can be friendly or hostile Finance is needed (to purchase shares) Many people lose jobs

Answer 68

- Resources - Costs - Corporate strategy - Market - Security - Compatibility

Answer 69

A detailed financial assessment is needed (analysis of financial, capital and employee information) Then an assessment of the NPV

Answer 70

High debt, more risky

How corporates are financed Flashcards

Includes tax 25% (94 cards)