long term finance Flashcards
(14 cards)
Reasons for long-term finance
diversify operations, fund capital expenditure, expand overseas, fund working capital
Equity finance - as equity in SFP;
shareholders own the company, have voting rights, repaid last in company wind up, dividends paid at directors discretion
Debt finance - as current liability in SFP;
lenders do not own the company, assets may have been used as security, repaid first in company wind up, lenders entitled to interest by law
When finding best source of finance, consider;
cost, gearing and availability
Bank loan positives
demand lower returns as lower risk, company receives tax relief when make interest payments, lower issue costs, no change in ownership for shareholders
Bank loan negatives
set capital repayment date, interest must be paid by law, increases gearing of a company, bank may impose security over assets and/or covenants
Bank loan is a
debt
Retained earning are
equity
New issue of shares are
Equity
Retained earnings positives
quick and easy, no issue costs, no change in ownership
Retained earnings negatives
may upset shareholders and they will expect an increased share price ‘opportunity cost’, earnings may not be readily available
New issue of shares positives
no set capital repayment date, dividends don’t have to be paid, will reduce gearing, potentially reach new investors
New issue of shares negatives
high issue costs (and underwriting costs), could get new shares price wrong (share issue would then fall), shareholders demand higher returns than the bank (being higher risk), may upset current shareholders whose ownership falls
Other sources of long-term finance
rights issue, crowdfunding, corporate bonds (debt) and islamic finance
