Sources of finance Flashcards
(20 cards)
Internally generated funds advantages and disadvantages
Advantages
Readily available
Low cost
Immediate effect
No change in control
Disadvantages
Cash may not be available
May have an impact on firm’s dividend policy
Rights issue advantages and disadvantages
Advantages
Issue costs lower than new issue
No change in control unless SHs do not exercise their rights
Pricing is easier than for a new issue
Disadvantages
SH may be unable or unwilling to invest
What can a shareholder do with a rights issue
Take up the rights
Sell the rights
Let the rights lapse (loss in value)
New issues advantages and disadvantages
Advantages
Finance will come in from somewhere, very open
Disadvantages
Can have high issue costs if through issuing house
Reduce control of existing shareholders
Pricing is difficult
What is underwriting
A service where any shares not sold by the company will be purchased by a finance institution for a fixed fee (insurance if issue fails)
Key features of venture capitalists
Seek high return
Usually expect between 20% - 49.9% of the company
Often demand position on the board
Influence
Capital gains after 3 - 5 yrs
Theoretical ex issue/rights price formula (TERP)
Share price after share issue
(Market value of existing shares) + (Proceeds from new share issue) + (Project NPV) / Number of shares after issue
Theoretical value of a right formula
TERP - exercise price of right
Loan advantages and disadvantages
Smaller arrangement fees
Either fixed or variable interest
Interest payments get tax relief
Disadvantages
Secured on company assets
What are debentures
Borrowing small amounts from many different lenders. Company issues a loan stock certificate in return for an amount of cash. Nominal value always £100
Debentures advantages and disadvantages
Advantages
May be unsecured
Loan stock certificate can be sold
Flexibility (irredeemable or redeemable)
Disadvantages
High issue costs
Higher interest due to lack of security
What are convertible loan stock
Loan stock that may be converted into predetermined amounts of the company’s equity
What is a strongly efficient market and is the market strong
A new event is instantly reflected in the share price
Impossible to beat the market
Market not strong, prices do not react instantly and people inside trade
What is a semi strongly efficient market and is the market semi strong
When an event is made public, the share price instantly moves
Market more or less semi strong, commonly traded stocks tend to react within 5 - 10 mins of info being public
What is a weakly efficient market and is the market weak
Takes time for new events to be fairly reflected in price. Share price driven from past movements
Easier to beat insider trading
No patterns or trends
Market is at least weakly efficient
What are angel investors
Individuals who invest their own money in a company in exchange for minority stake
What is crowd funding
Access finance by pitching to a large number of investors through online platform
Peer-to-peer lending
Connects lenders directly to borrowers via online platforms
Revenue based finance
Investors receive a percentage of a company’s ongoing gross revenues in return for investment
What is a start up loan
UK loan from £500 to £25k and repaid within 5 years with interest of 6%
