Financial Management - Financing

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What is the risk and return rate of different investors?
Debt holders - Face lower risk than SH's. They receive interest before SH's receive dividends and they are prioritised in liquidation. Lower return.
Shareholders - More risky position. Will suffer the downside of company losses. Will expect a higher rate
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How do you calculate the dividend payout ratio?
Dividend/Earnings after tax and preference dividends
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What is a Rights Issue?
An issue of new shares for cash to existing shareholders in proportion to their existing shareholdings
- Legally a rights issue must be made before a new issue to the public
- Issue price is less than market price to encourage take-up
- Existing sharehold
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What is the TERP?
Theoretical Ex Rights Price is the price at which the shares will settle after the rights issue has been made.
(MV of shares pre-rights issue + rights proceeds) /new number of shares ex rights
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How do you calculate the value of a rights issue if you sell it?
Value = TERP - Rights Price
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What are the important Shareholder Investment Ratios?
- Dividend Yield
- Earnings per Share
- Price-earnings Ratio
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How do you calculate Dividend Yield?
Dividend per Share/ Market Price per share X 100
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How do you calculate EPS?
Profits distributable to ordinary shareholders/ Number of ordinary shares issued
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How do you calculate Price/Earnings Ratio?
Market Price per Share/EPS
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What is Venture Capital?
The provision of risk-bearing capital, usually provided in return for an equity stake, to companies with high growth potential
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What are the characteristics of Venture Capital?
- They exert some control over the running of the business but do not run the business
- Usually a medium term investment
- Return is from capital gains after 3-5 years, rather than dividends
- Exit route is via a trade sale or flotation
-Failure to hit t
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What is crowdfunding?
Where online platforms are used to pitch for finance from a large number of investors
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What are the benefits of crowdfunding?
- Available to start-up companies with a lack of trading history
- Builds awareness of the company and attracts customers
- Can be a quick process
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What are the costs of crowdfunding?
- Fees to crowdfunding website
- Legal/advisory costs
- Administrative costs of dealing with investor information requests
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What is an ICO?
Initial Coin Offering:
1. The investor receives a token, for a share/utility
2. Payment is made in a cryptocurrency
3. A 'white paper' is issued providing details of the venture and the tokens
- ICO's offering future income streams are likely to be judged
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What is loan stock?
Debt capital in the form of securities. Also called bonds or debentures.
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What are convertible loans?
Fixed return securities, which may be converted at the option of the holder, into shares of the same company. Prior to the conversion, holders have creditor status.
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What are the advantages of convertible loans?
- Obtaining fiance at a lower rate of interest than ordinary debentures
- Encouraging possible investors with the prospect of a future share in profits
- Avoiding redemption problems if the debt is converted into equity
- Being able to issue equity cheapl
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What is loan stock with warrants?
Loan stocks which cannot themselves be converted into equity, but give the holder the right to subscribe at fixed future dates for ordinary shares at a predetermined price. The subscription rights are known as warrants.
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What is peer-to-peer lending?
Where an online platform is used to connect borrowers with investors
- Borrowers are required to have a trading track record and submit financial accounts
- Interest rates are lower than bank borrowing due to greater competition between lenders
- Quicker
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How to debt holders ensure that their position is low risk?
- Check the legality of borrowing
- Check the financial condition of the company
- Require a guarantee e.g. a parent company
- Impose covenants e.g. maximum gearing ratio or minimum interest cover ratio
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What are international money markets and what are the 3 main types?
Larger companies are able to seek finance in international financial markets. Funds are deposited and borrowed in a foreign currency.
- Eurocurrency
- International bond market
- International syndicated loans market
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What is Eurocurrency?
Short-term borrowing and lending by banks in currencies other than that of the country in which the bank is based.
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What is the international bond market?
Bonds are issued by large companies and sold to international investors. International bonds are issued on behalf of companies by investment banks, and these banks operate a secondary market in bonds
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What are international syndicated loans?
Medium to long term loans. The loans are created when a syndicate of international banks lend money to a borrower. Some of the loan may then be marketed. Syndicated loans spread the risk among participating lenders. They are arranged when a company wants
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What is green finance?
- Financial investments in environmental goods and services.
- Schemes that encourage sustainability
- It can specifically relate to financial systems that deal with green investments e.g. green binds, green loans.
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Other cards in this set

Card 2

Front

How do you calculate the dividend payout ratio?

Back

Dividend/Earnings after tax and preference dividends

Card 3

Front

What is a Rights Issue?

Back

Preview of the front of card 3

Card 4

Front

What is the TERP?

Back

Preview of the front of card 4

Card 5

Front

How do you calculate the value of a rights issue if you sell it?

Back

Preview of the front of card 5
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