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Flashcards in Financing Deck (9)
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1
Q

Is debt or equity financing more beneficial tax-wise?

A

Debt – since interest is paid before tax, it is a DEDUCTIBLE TRADING EXPENSE. Equity financing offers no tax benefit, not even dividends (which are a distribution of net post-tax profits).

2
Q

Regulation-wise, is debt or equity financing easier?

A

Debt – no statutory procedure but must have one in AoA.

Equity difficult as Board and shareholder resolutions needed for an allotment.

3
Q

Is debt or equity financing safer for Coys in financial trouble?

A

Equity – dividends discretionary. For debt, poor performance might trigger EoD (breach of covenant or insolvency), loan acceleration and enforcement against security.

4
Q

What are two disadvantages of a floating charge?

A

Disadvantage is that borrower may not be prevented from dealing with specific asset and floating chargeholders lower in priority.

5
Q

What is the advantage and disadvantage of term loans and overdraft facilities respectively?

A

Overdraft – flexible, but expensive and payable on demand

Term loan – less flexible and also expensive; however, borrower has certainty over instalment payment sums

6
Q

Three disadvantages of Revolving Credit Facility?

A
  1. May be required to clean down (maintain 0 balance for a specified time)
  2. Commitment fee to keep RCF open – even if not drawn upon
  3. Less flexible than an overdraft
7
Q

3 ways bank can protect loan sum?

A
  1. ACCELERATE loan on late payment or MAC in borrower’s finances
  2. Negative PLEDGE not to grant other lenders security
  3. SECURITY (by way of debenture) – either fixed charge, floating charge or guarantee
8
Q

3-step DD by borrower’s solicitors before docs executed? 3 steps by directors to execute the loan?

A

Check AOA to confirm directors have authority to act in relation to (i) entering into transaction; (ii) executing docs; and (iii) granting security if any.

Directors should (i) convene BM; (ii) resolve to enter into loan agreement and (iii) give someone authority to act on Coy’s behalf

9
Q

What if company acts ultra vires in entering into loan?

A

Loan may still be enforceable by the lender, but shareholder could seek injunction to prevent borrowing and directors might still be liable for any loss