WS8: Debt finance and business accounts Flashcards
(46 cards)
What are the key features of a fixed charge?
Borrower retains possession and legal ownership of the asset secured
Taken over plant and machinery
Lender can control what borrower does
Borrower can still use the asset in the ordinary course of business
What are the key features of a floating charge?
Borrower retains possession and legal ownership of the asset
Taken over stock
Lender cannot control what the borrower does with assets until crystallisation
Until crystallisation - borrower is free to dispose of assets
What is a loan facility?
agreement between a borrower and a lender which gives the borrower the right to borrow money on the terms set out in the agreement
Give names of two types of loan facility?
- Overdraft: on-demand facility, tends to be short term
- Term loan: Loan of money for a fixed period of time, repayable on a certain date
- No demands for early repayment unless borrower is in breach
- Bullet repayment: one lump sum at end of agreement
- Instalments: amortising
What is a convertible bond?
Bonds which can convert into shares
Why do preference shares look a lot like a debt?
Fixed dividend / maturity debt
How must you register a charge?
At Companies House
Within 21 days
Beginning with day after day on which charge is created
Form MR01, detailing the following:
* Company creating the charge
* Date of creation of the charge
* Short description of anything subject to a fixed charge
* Certified copy of the charge
* Relevant fee
What is the effect of failure to register a charge?
Charge is void against a liquidator, administrator and any creditor of the company + debt becomes immediately payable
What kind of charge is on a property?
Charge by way of legal mortgage
What records should a company keep regarding a charge?
- Copy of every charge
- Copy of anything that amends or varies any charge
- Can be certified copies – no need for originals
- Kept at Registered Office or other authorised location
- Company must let CH know if documents move
- Must be available for inspection by any creditor or member of the company free of charge + by anyone else for a fee
- Refusal to inspect – court may order that company can immediately inspect
- Failure to comply – offence – every officer of the company can be fined
What consequences are there for a default on loan?
Immediate repayment - acceleration
Put loan on demand
What is a gearing formula?
Ratio of debt to equity
Formula: long term debt (non-current liabilities) / equity (total equity) x 100%
Which half of the balance sheet is affected by debt finance?
Only the top half of the sheet
What will change on a balance sheet on an issue of shares?
Both the NAV and total equity will change - changes on both sides of the balance sheet
Increased share capital - bottom half of the sheet
Increased cash - top half of the sheet
What are the three ways you can value a company?
Balance sheet: value of assets, minus liabilities
Multiplier: average profit of a company, times a factor relevant to the particular industry
Listed company: number of shares in issue, multiplied by the share price at a given time
What is the EPS ratio
Earnings per share - used to measure financial performance
How will a balance sheet change if a company issues a share for more than its nominal value?
- Top half: cash received, shown by an increase in assets on the top half of the balance sheet
- Bottom half: increase in share capital
- Premium per share – shown in the newly-created share premium account
- Share premium must be shown in a separate share premium account
What is a profit and loss account?
Records the income of a business throughout an accounting period, minus expenses incurred
‘Summary of the fortunes of a business over a passage of time’
What is a balance sheet?
Records the position of a business in respect of its asset, liability and capital accounts from the trial balance
Snapshot in time
What is a trial balance?
Shows you all balances which are distributed into both P and L account and the balance sheet
What are year end adjustments?
Transaction or modification to account entries on the trial balance
What are the two parts of a balance sheet?
Top half of the sheet - Net asset value
Bottom half - capital
What is depreciation?
Mechanism used in accounts used to deal with decline in value and to spread the cost of an asset over its useful life
What are the two methods of calculating depreciation?
Straight line method - divide asset value by number of years
Reducing balance method - % reduction each year
