Lecture 3 Flashcards
(18 cards)
What’s financing a business
Seeking funds to grow or maintain business operations
Two main forms of finance
Internal and external
3 types of internal finance
- Retained earnings
- Surplus of current assets
- Sale of underutilised fixed assets
Why are internal finances the cheapest
They don’t involve repayment or interest
2 categories of external finance
With financial liability = debtor equity
Without financial liability = grants from govt, local authority or EU
Difference between ordinary and preference shares
Ordinary shares - voting rights, higher risk, variable dividends
Preference shares - fixed dividend, no voting rights, lower risk
What is equity finance
Raising funds by issuing ordinary shares, giving investors ownership
4 sources of equity finance
- Own funds by promoters
- Venture capital
- New share issue
- Additional share issues
Venture capital
Long-term investment in unlisted companies to support growth, with the goal of eventual capital gain, not dividends or interest
What made venture capital rise in UK
MBOs during privatisation in the 1980s and online business growth
Name stages of venture capital involvement
- seed capital (pre start up, extreme risk)
- start ups (launch phase, very high risk)
- early development (trading but loss making)
- expansion/development capital (medium risk)
- bridge / mezzanine finance (pre-exit, low Rrisk)
- buy out / buy in
- turnaround (rescue, medium - high risk)
New issue (IPO)
Initial public offering – when a company sells shares to the public for the first time, becoming listed on a stock exchange
What’s the difference between primary and secondary markets?
Primary = company issue issues shares directly.
Secondary = shares traded between investors
What’s a right issue?
New shares offered to existing shareholders at a discounted price
What’s a bonus issue?
Free as given to existing shareholders. No new capital raised, it’s a reward.
What’s the accountability in business?
Social managerial practices ensuring directors are answerable for their decisions and the impact on stakeholders
How is accountability linked to the agency problem?
It shows that managers/agents act in the best interest of shareholders/principles by monitoring setting expectations
What does the corporate governance code ensure?
Proper conduct of listed companies in five main areas
1. Board leadership and purpose – long-term sustainable success.
2. Division of responsibilities – effective objective open culture.
3. Composition, succession, evaluation – fair, diverse, merit based appointments.
4. Audit, risk and control – integrity of reports, audit independence.
5. Remuneration – aligned with strategy, long-term success.
