Sources of Finance (2) Flashcards
What is equity capital?
Refers to finance provided by owners of business. As such normally refers to capital invested by ordinary shareholders
What do ordinary shareholders have a right to vote on?
A directors’ appointments and to receive a share of any dividend that is agreed by the board
Preference shareholders?
Receive dividends normally at a fixed rate
What is meant by redeemable preference share?
The entity has to repay the principal
If preference share is cumulative?
The entity must pay dividend where sufficient distributable profits arise
If preference share are non-cumulative?
The entity never has to pay this dividend
Advantage of preference shares compared to debt?
More flexible than debt finance (dividend is not paid)
Advantage of preference shares compared to ordinary shares?
No dilution of control since preference shares don’t carry voting rights
Disadvantage of preference shares compared to debt?
No tax relief is received in dividend payments
Disadvantage of preference shares compared to ordinary shares?
Creates extra risk for ordinary shareholders because preference dividend is paid before the ordinary dividend
What is venture capital?
Risk capital, normally provided by a venture capital firm in return for an equity stake
What are venture capitalists seeking?
A high return, as it is required through a stock market listing
Where can failure to hit targets set by venture capitalists lead to? (Equity ratchet)
Extra shares being transferred to their ownership at no additional cost
Most common companies for venture capital?
Already have a track record of business development and which need additional finance to grow
Why do companies choose to retain cash?
To finance their investment needs
