Influences Flashcards
(47 cards)
1
Q
Internal sources Of finance
SIGG
A
Refers to the funds provided by the owners of the business, or from the outcomes of the business activities (Retained profits)
Internal sources of finance are from inside the business and are recorded under Equity in the balance sheet.
- These sources can include the capital contributed by owners when the business began and reinvested profits
2
Q
Internal sources of finance - Retained profits
A
Refers to the profit kept in the company, rather then paid out as dividends.
Net profit generated from previous financial periods may be retained
rather than distributed to shareholders as dividends.
- Improves owner’s equity, which will improve the solvency of the business.
- This will increase the working capital once the funds have been received by the business - LIQIDITY
- Doesn’t dilute ownership
- Could be used for business expansion - GROWTH
HOWEVER
- Available funds may be limited (Based on business performance)
- May take time to accumulate funds (Missed business opportunities)
- Decision may not reflect shareholder preference
3
Q
Internal sources of finance CASESTUDY
A
Owners’ Equity
- Apple was established in 1977 with $1000 supplied by Steve Jobs and Steve Wazniak
- Helped to launch the Apple I
- Over time new partners introduced to help fund growth
- 2020 Apple’s total shareholder equity $65b
Retained Profits
- Used to help fund the research and development into new products such as AI (Siri) and iPhone 12
- Conservative and prudent approach à electing not to pay
dividends until recently.
4
Q
External Sources - Debt finance Short term, COF.
Commercial Bill
A
Refers to a short-term debt instrument issued by financial institutions
for amounts over $100,000 for an agreed loan period and interest rate.
- 30-180 days
- High interest
- Interest rate lower than overdraft
- Commonly used to purchase inventory
WHY?
- Overcome temporary cash shortfall
- Assist with paying suppliers, purchasing inventory
- Flexible and the loan period can be rolled-over if required
- Immediate access to funds→ Addresses temp cash shortfalls
- Interest rates cheaper than overdrafts
HOWEVER
- Interest repayments incurred
- Secured against companies assets
- Typically an unsecured loan
5
Q
Short term debt finance COF
Commercial Bill CASESTUDY
A
In 2020, Apple had $5b in Commercial Bills
- Mainly used to purchase inventory, dividends and share repurchases
- Apple used commercial bills with several major US banks (Wells Fargo and Bank of America)
- Average maturity = <9 months
- Average interest rate = 0.62%
6
Q
External Sources - Debt finance Short term, COF.
Overdraft
A
Refers to a short-term instrument in which a business overdraws on their bank account to a pre-determined limit for an agreed period of time
- Up to an agreed limit and for a specified time
- Usually smaller amounts (less than $100,000)
- High interest (>10% p.a.)
WHY
- Overcome temporary cash shortfal
- Assist with paying suppliers & purchasing inventory
- Flexible, allows business to have negative cash balance.
- Immediate access to funds
- No securing against assets
CONSEQUENTLY
- Higher interest rate (>10%p.a.)
- The business must pay loan establishment fees
- The bank can demand repayment at any time
7
Q
Short term debt finance COF
Overdraft CASESTUDY
A
Apple has overdraft facilities in 16 countries
- In Aus, overdraft facility is with Westpac, who also deal with their day-to-day transactions.
- Used for a short period of time after opening a new store to maintain cash flow - Averaging 25 new Apple Retail stores each year - Particularly in China, India and Brazil.
- Due to the $200bn they have in cash, Apple tries to avoid using the overdraft facilities due to the high interest incurred.
8
Q
External Sources - Debt finance Short term, COF.
Factoring
A
Refers to the selling of accounts receivable to a factoring/finance
company at a reduced rate.
- With Recourse - Any bad debts remain the responsibility of the business
- Without Recourse - Any bad debts are the responsibility of the factoring company
WHY - Overcome temporary cash shortfall
- Assist with freeing up accounts receivable
- Assist with paying suppliers (due/overdue accounts), purchase inventory
- Provides instant access to A/R
- Reduce and simplify business activities
- Cost efficient way of collecting debt
CONSEQUENTLY
- Only receives 80-90% of the full value of A/R
- Factoring companies may use aggressive methods of debt collection
- If the A/R is factored with recourse, the business maintains the liability of a default on debt repayments
9
Q
Short term debt finance COF
Factoring CASETUDY
A
Apple occasionally uses Factoring for new retail organisations such as CT2 Mobile Phones who purchase Apple products.
- In 2018, CT2 Mobile Phones failed to repay Apple within the obligated 30 day period, which required Apple to charge the Authorised Reseller late payment fees, stipulated in their contract.
- Apple also used ‘Key Factors’, an Australian based Factoring Company to factor their A/R which assisted with alleviating the pressure and their exposure to potential bad debts.
- Globally, Apple’s A/R in 2020 equated to $16bn.
10
Q
External Sources - Debt finance Long term, MUDL.
Mortgage
A
Refers to a long-term debt instrument secured by the property of the borrower.
- Used to purchase premises, factory and office
- Periodic repayments (weekly, fortnightly, monthly)
- Agreed time frame (i.e. 25-30 years)
WHY
- Purchase property for operations - Warehouse, factory, office space, retail space
- Investment
- large amounts of money with relatively low interest rates
- Appreciation of the asset will increase equity - Solvency
- Interest repayments are an expense to the business, therefore reducing net profit and reducing the tax obligations of the business
HOWEVER
- Not meeting repayments might lead to additional fees, penalties or
repossession. - Interest incurred.
- Required to pay corporate tax on any appreciation in value of the asset (30%) and stamp duty.
11
Q
Long term debt finance MUDL
Mortgage CASESTUDY
A
Apple used mortgages on smaller stores to help fund the building of their new Headquarters
- Apple Park cost $5 billion to build (inc. land acquisition)
- Apple currently holds $16 billion worth of mortgages
12
Q
External Sources - Debt finance Long term, MUDL.
Unsecured note
A
Refers to the issuing of long-term debt instrument to public investors without security in the form of businesses assets.
DESCRIBE/ WHY.
- Used to generate funds for different initiatives - Acquisition/ Share repurchases.
- Unsecured notes are similar to debentures, but offer a higher rate of
return with less security than a debenture
- Provides access to significant funds
- Interest repayments are tax deductible
- Business does not have to provide security on the loan
UNFAVOURABLY
- Interest rates are usually higher
- The business must pay back the funds upon maturity, regardless of their liquidity.
- Increases the business’ leverage (gearing)
13
Q
Long term debt finance MUDL
Unsecured note CASESTUDY
A
Apple has increased its debt raising in a range of currencies in the form of unsecured notes.
- 2019, Apple issued $2.78b Euro in unsecured notes
- The purpose of this issue is to raise funds for the repurchase of common stock, payment of dividends, funding for working capital, capital expenditures, acquisitions and repayment of short term debt.
- Interest rates 1% p.a. for 2022 notes or 1.65% p.a. for 2026 notes
- Apple began a share repurchase scheme in 2015, aiming to downsize the number of shareholders, while increasing the value of the remaining shares. This results in an increase return on owners equity in the future.
- Another e.g. In 2015 – Goldman Sachs (financial institution) assisted Apple with the raising of $2.25b in Australia (4y, 7 year) – diversify funding. This issue was oversubscribed due in large part to Apple’s credit worthiness and reputation
IN 2020,
- Issued $8b in unsecured notes
- Goldman Sachs, Bank of America Securities, JPMorgan and Morgan Stanley are listed as underwriters on the debt deal
14
Q
External Sources - Debt finance Long term, MUDL.
Debenture
A
Refers to a long-term debt instrument issued by a business to public investors at a pre-determined interest rate and loan period.
DESCRIBE/ WHY
- Used to raise funds from investors
- Must provide investors with a prospectus stating how the funds will be used and the terms of the investment
- Access to significant funds
- Does Not dilute ownership
- Business determines the terms of the loan
ADVERSELY
- Must issue a prospectus with ASIC
- Time consuming and cost intensive
- Reveals the businesses strategic plans to competitors as the information is made public – Hindering expansionary plans .
15
Q
Long term debt finance MUDL
Debenture CASESTUDY
A
In 2013, Apple issued $17b in debentures
- Used to fund further share buyback, dividend payments and acquisitions
- The purpose of the debt offering is to avoid “repatriating” a portion of that cash which is technically overseas and paying the 35% U.S. corporate tax on it
- The interest repayments were 3% p.a. on 30 year bonds
16
Q
External Sources - Debt finance Long term, MUDL.
Leasing
A
Refers to the payment of money for the use of assets owned by another individual/business, for an agreed period of time.
DESCRIBE/ WHY
Contract to use equipment up to 5 years.
- Financial lease: The lessee absorbs the maintenance and upkeep expenses &The lessee is provided with the option to purchase the asset at the end of the lease
- Operating lease: The lessor takes on maintenance and upkeep expenses & The lessor maintains legal ownership of the asset.
- Easier to upgrade assets at the end of lease agreement - Sustain a Comp Ad though leading edge tech.
- Not shown in the balance sheet and do not affect the company’s gearing
- The lessor takes on maintenance costs if a operating lease
HOWEVER
- Lessee does not recieve capital gains
- The total cost over the time will be higher than if they paid upfront
- The lessee takes on maintenance costs if a financial lease
17
Q
Long term debt finance MUDL
Leasing CASESTUDY
A
Apple uses leasing to finance many of their retail stores (2020 - 506 retail stores)
- Due to the opportunities that high traffic areas, such as Westfield shopping centres provide (unable to purchase retail spaces within these areas, only lease)
- Apple’s retail stores are mainly leased for terms ranging from 5-20 years (most are 10 years leases) and offer multi-year renewal options
- Apple Stores drive so much traffic to shopping malls, Apple is able to
negotiate cheaper rent. - Apple Stores have been shown to increase sales in mall 10%, according
to the Wall Street Journal. - 2020 = $13bn worth in leasing commitments
18
Q
External Sources - Equity finance, Context.
Ordinary shares
A
Refers to Issuing shares to the general public through the ASX.
Holders of Ordinary shares:
- Are part-owners of a company
- May receive payments in cash, called dividends, if the company trades profitably
- May get voting rights according to the number of shares that they have
- No interest payments
- Does not increase gearing
- Businesses have the choice to not share future profits.
CONSEQUENTLY
- Dilution of ownership
- Undersubscription may occur
- Expensive, and takes longer than debt finance.
19
Q
External Sources - Equity finance, NRPS.
New issue
A
Refers to a security that has been issued and sold for the first time on a public market
- Issue a prospectus
- Sold on the ASX
- This market is also referred to as the primary market
WHY
- Initial Public Offering (IPO) – For new public companies
- Additional new issue – Existing public companies
- Access to significant amounts of funds → Growth
- No interest payments
- Reduces reliance on debt finance
HOWEVER
- Expensive and more time consuming than debt finance
- Undersubscription may occur
- Dilution of ownership
20
Q
Equity finance
New issue CASESTUDY
A
12 December 1980, Apple launched their Initial Public Offering of its stock to the NASDQ, selling 4.6million shares at $22 per share, raising $101 Million.
- When Apple went public, it generated more capital than any IPO since Ford Motor Company in 1956
- Share price has increased from $22 per share (1980) to $235 per share (2019) and then reduced to $143 after the 4-for-1 split (2021)
- There are approximately 16 billion shares
21
Q
External Sources - Equity finance, NRPS.
Rights issue
A
Refers to Existing shareholders buying new shares, in proportion to
the amount they already own
DESCRIBE/ HOW
- Occurs AFTER the IPO
- Existing shareholders get to buy more shares usually below market price
- Prospectus issued through ASIC
- Cheaper and faster than an IPO
- Access to significant funds
- No shareholder approval required if the additional capital to be raised does not exceed more than 15% of the market value of the company
HOWEVER
- Value of share price reduces
- A prospectus document may need to be issued
- Notifies competitors of strategic/tactical planning, reducing the business’competitive advantage
22
Q
Equity finance
Rights issue CASESTUDY
A
Not used by Apple.
Can use Virgin Airlines instead.
- In 2016, Virgin Airlines released an $852 million rights issue to assist with forward planned restructuring charges.
- Virgin was seeking to raise the funds via a 1-for-1 rights issue as it continued to cut costs to tide it through a difficult patch (oil prices, resurgence of QANTAS) while it waited for its international arm as well as Tiger Air to turn profitable.
23
Q
External Sources - Equity finance, NRPS.
Placement
A
Refers to Shares issued to individual investors, corporate entities, or small groups of investors
DESCRIBE/HOW
- No prospectus through ASIC
- Commonly done for mergers, acquisitions and expansions
- Cheaper, faster and easier than the IPO
- No prospectus required
- No shareholder approval required
HOWEVER
- May not raise as much as an IPO
- Dilute ownership and share price will fall
- Not favoured by existing shareholders
24
Q
Equity finance
Placement CASESTUDY
A
In 2014, Microsoft’s investment in Apple through a placement
$150million placement of non- voting shares (by 2003 these had been
sold).
- The deal between the two companies was mutually beneficial from every angle. Apple got some much needed cash while Microsoft was able to keep a weakened competitor afloat, thereby alleviating concerns about the company’s monopolistic power.
- In exchange for the money, Microsoft received non-voting shares in Apple. Jobs also agreed to introduce Microsoft’s Internet Explorer for Mac. Apple, on the other hand, got both the cash and a guarantee that Microsoft would support Office for the Mac for at least five years.
- This placement saw the two companies resolve lawsuits and agree on
software platform issues.
25
External Sources - Equity finance, NRPS.
Share purchase plan
**An offer to existing shareholders in a listed company the opportunity
to purchase more shares in that company without brokerage fees**
1. Quick and cheap
2. No prospectus required
3. No interest payments
**CONSEQUENTLY**
1. lower price than offering new shares
2. Business incurs the brokerage fees
3. Limited to $30,000 per investor
26
Equity finance
Share purchase plan CASESTUDY
**Apple offers its employees stock under its employee stock plans and share-based compensation**
* Employees can purchase stock through payroll deductions at a price equal to 85% of fair market value
27
External Sources - Equity finance
Private equity
**Refers to the money invested in a private company**
**DESCRIBE/WHY**
* The aim of the private company is to raise capital to finance future expansion/investment of the business.
**HOW?**
* Venture capital
* Private equity firms
* Partners in a private company
1. Access to significant amounts of funds
2. Easier than an IPO
3. Sometimes the investors have good ideas for the business
**HOWEVER**
1. Dilution of ownership
2. Sometimes private equity firms are not interested in growing the
business
28
External sources of finance
Private equity CASESTUDY
**Archer Capital is a private equity investment firm located in Sydney with $2.5b in funds under management invested in 31 businesses.**
* In 2007, Archer Capital successfully acquired Rebel Sport (an ASX listed company and Australia’s largest sporting goods retailer)
- Archer Capital purchased Rebel for $369m
- For the next 4 years, Archer Capital continued Rebel’s expansion plan
- In 2011, Archer Capital sold Rebel Sport to Super Retail
Group Ltd for $610m (ROI = $241m in 4 years)
29
Financial Institutions
BUS FAIL
**Financial institutions assist business’s to meet their financial needs through the provision of financial services**
* Financial institutions assist businesses in a number of ways
1. Collect funds
2. Provide financial services
3. Provide debt & equity finance
4. Assist with daily operations, e.g bank account transactions
30
Financial institutions
Banks
BUS FAIL
**Banks receive savings as deposits from individuals, businesses and governments, and, in turn, make investments and loans to borrowers.**
* Banks provide a wide variety of financial products to business’s including
1. Loans
2. Overdrafts
3. Legal and taxation advice
4. Cheque accounts
5. Credit cards
6. Economic outlook reports
Examples include; NAB, CBA, West pac, ANZ and Bendigo bank.
31
Financial institutions
Unit trusts
BUS FAIL
**Unit trusts (mutual funds) take funds from a large number of small investors and invest them in specific types of financial assets.**
_Investments include:_
* Short-term money market (cash management trusts)
* Shares
* Mortgages and property
* A trustee controls and manages the trust
32
Financial institutions
Superannuation funds
BUS FAIL
**A collection of the legally required savings of employees which cannot be accessed until retirement.**
* Some superannuation companies offer business loans as a way of investing some of their funds.
* Superannuation funds are able to invest in long-term securities such as company shares, government and company debt because of the long-term nature of their funds.
33
Financial institutions
Finance companies
BUS FAIL
**Non-bank financial intermediaries that specialise in small commercial finance (debt: short to medium term)**
* Raise money through share issues (debentures)
**Financial services:**
* Hire-purchase loans
* Personal loans
* Secured loans
* Lease finance
* Factoring
* Cash flow financing
* Regulated by APRA (Australian Prudential Regulation Authority)
34
Financial institutions
ASX
BUS FAIL
Acts as a primary market – initial sale of financial instruments (raising new capital through IPO)
* Operates as a secondary market – trading of financial instruments between shareholders
* Transactions in this market do not increase the total amount of financial assets — the secondary market increases the liquidity of financial assets and, therefore, influences the primary market for securities.
**Investments include:**
* Shares
* Futures (Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset, such as a physical commodity or a financial instrument at a predetermined future date and price. E.g. grains, precious metals)
* Exchange traded funds. In Australia, ordinary ETFs are 'passive' investments that track an asset or market index.
35
Financial institutions
Investment banks
BUS FAIL
**Investment banks provide debt (short-term and long-term) and equity to large businesses (not individuals).**
_Services include:_
* Trade in money, securities and financial futures
* Arrange long-term finance (e.g. expansion)
* Provide working capital
* Advise on mergers and acquisition
* Arrange overseas finance
* Also known as merchant banks
36
Life insurance companies
BUS FAIL
**Life insurance companies are non- bank financial intermediaries that
provide cover and a lump sum payment in the event of death**
Finance provided:
* Equity: lump sum payments (claims)
* Debt: loans to the corporate sector through receipts of insurance premiums, which provide funds for investment (premiums, called reserves, are invested in financial assets)
37
Financial institutions
Banks
**Apple use banks with their deposits and day-to-day banking requirements**
* Australia - primarily use Westpac
* US - Bank of America, Capital One Bank, Chase
* Apple Pay - mobile payment device connected to iPhone devices
* In 2021 Apple announced plans to launch Apple Pay Later (a Buy Now Pay Later service) with Goldman Sachs.
38
**Influence of government**
ASIC
**Independent statutory commission accountable to the Commonwealth Parliament**
* Enforces and administers the Corporations Act 2001
* Protects consumers and investors in the areas of investments, life and general insurance, superannuation and banking in Australia
* Enforces things such as the disclosure of information, how shares are issued and how company takeovers are handled.
1. Ensures financial statements are lodged on time appropriatley, with
methodologies and formulations.
2. Creates transparency in financial reporting in the market
3. Reduces illegal practices in the Corporations Act 2001
**CONSEQUENTLY**
1. Compliance cost with the Corporations Act 2001
2. Non-compliance can lead to fines, fees or a loss of license
39
Influence of government
ASIC CASESTUDY
**Apple, as a public company, lodges its financial records with ASIC**
* Apple complies with laws and regulations
* Impacted due to the issuance of domestic debt securities are regulated by ASIC
* In 2015, Apple released $6.2b in debentures denominated in AUD to Australian domestic investors - aimed to raise funds to finance ongoing expansion operations in Asia, whilst maintaining solvency
- Required approval from ASIC to sell the financial instrument (debenture)
40
**Influence of government**
Company taxation
**Refers to direct tax imposed by Australian government**
* Australian Tax Office taxes businesses will have an effect on the financial decisions they make.
* Through tax rates, governments try to encourage investment and improve competitiveness thereby drive economic growth.
**HOW -** Flat Tax Rate:
* 30% (businesses earning \>$50 million in sales revenue)
* 27.5% (businesses earning
1. Company tax is used for government expenditure, thereby going to essential services such as telecommunications & public infrastructure - Assisting with business operations.
2. Government’s instant asset write-off encourages business investment
3. Encourages business to utilise tax minimisation strategies
**HOWEVER**
1. Failure to pay tax may result in fines, fees and imprisonment
2. Retained profits may be limited and the distribution of
dividends may be lower due to a business’s tax obligation
41
Influence of government
Company taxation CASESTUDY
**Apple Australia is significantly influenced by company taxation - required to pay 30%tax on its profits, and thus seeks to use tax minimisation strategies in order to maintain a strong financial position.**
* Largest tax payer in the world - paid $35b in between 2014-2017
* 2020 - Apple Australia revenue was $9.79 billion for year ending 28 Sept 2020, an increase of 4% from 2019.
* Apple Australia does not disclose how much tax it actually paid but according to ASIC filings, it paid $119 million in income tax charges
- Net Profit in Australia - $288 million
- Most of Apple Australia’s customers are booked in Ireland (tax-friendly business structure)
* Apple Australia is also in-part owned by Apple Operations International , an entity incorporated in Ireland
* Apple is subject to MAAL and DPT in Australia as global revenue exceeds $1b.
* The ATO latest tax transparency report showed that Apple and feel tech giants Microsoft and Facebook were all paying the tax rate of 30%.
42
Global market influences **EAI**
Economic Outlook
NOTE; Always link to Global, & Always consider High/Low.
**Refers to the projected changes to the level of economic growth within economies throughout the world which subsequently influences business behaviour and decision making in the local economy.**
* Booms, Expansions, Busts & Contractions
* Increases/decreases in economic activity
* Production, Investment, Consumption.
_Booms/Expansions_
1. Higher levels of consumer & Business confidence within international markets.
2. Businesses may experience increased demand → Increased sales Rev → Maximise profits.
3. Businesses may respond with increasing production & investments
**ADVERSLEY**
_Busts/Contractions_
1. involves lower levels of consumer and business confidence in the international market
2. Businesses may experience decreased demand → decrease in sales Rev
3. Businesses may respond with decreasing production & investments.
43
Global market influences EAI
Economic Outlook CASESTUDY
**Apple will invest in those regions where there is forecasted growth**
* Over the past 5 years, Apple has invested in the emerging markets of China, Brazil and India
**CHINA**
* Apple is very focused on investment in China
* In 2017, invested $500m R&D centres – there are 4 now in China
* Apple directly employs more than 12,000 employees in China.
**INDIA**
* India represents growth - new manufacturing plant to help drive sales.
* India is the third largest smartphone market in the world.
* Apple currently has 2% market share in India
**- India and China account for 40% of the global smartphone market**
44
Global market influences **EAI**
Availability of funds
**Refers to the ease with which a business can access funds on the international financial markets.** (For borrowing)
* Australian businesses may fund expansion plans from overseas sources such as the Bank of America.
* Various conditions and rates will be influenced by: risk, demand & supply, & economic conditions
1. High availability of funds in international money market → business can obtain funds at lower interest rates
**HOWEVER**
1. Globally souring funds increases a businesses gearing thus increasing risk.
2. Unfavourable exhange rate flucuations can increase expenses
3. If overseas lenders stop lending, avaliability of funds decreases.
45
Global market influences EAI
Availability of funds CASESTUDY
**Apple’s significant global standing has assisted with the company accessing funds from a wide range of sources (globally).**
* Apple is able to more easily access funds during times of low and high availability
* During the GFC in 2008/09, Apple’s $60 billion in cash reserves at the time allowed them to invest in emerging economies such as Brazil and China.
**Impact of COVID on equity markets for Apple**
46
Global market influences **EAI**
Interest rates
**Refers to the cost of borrowing money**
* **Higher risk** → Higher return = Higher interest rate
→ High interest rate = More costly to borrow funds
* **Lower risk** → Lower return = Lower interest rate → Lower interest = Cheaper to borrow funds
1. If international interest rates are lower ( Than Aus), there is an
incentive to borrow from overseas.
**HOWEVER**
1. Interest rates can change quickly (Domestically & internationally) so, the advantage may disappear.
2. Exchange rates might change unfavourably
**Strategy: Hedging**
47
Global market influences EAI
Interest rates CASESTUDY
**Apple borrows primarily from US - low interest rate environment currently 2%**
* Due to Apple’s global stature, Apple has the reach and prominence to seek and negotiate interest rate arrangements worldwide, thus allowing it to access very competitive rates (currently averaging 1.5% p.a.)
- 2020, $258b in debt, interest repayments $2.8 billion
- Apple’s gearing can therefore be reduced as servicing costs are minimised However, exchange rate fluctuations can shift interest repayments and potentially negatively. impact on financial management
* Apple has recently borrowed up to $50b in debt even though it has access to more than $200b in cash (it would need to pay 35% tax on these funds so it makes commercial sense to borrow at 2% instead of repatriate funds from overseas
* Apple chooses to diversify the source of funding from countries where it makes financial sense
