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Flashcards in Sources of finance Deck (15)
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1
Q

Give 5 factors which should be considered by a firm when deciding between sources of finance?

A
  • Which is Cheaper
  • Duration required
  • Term structure of interest rates (short term usually chearper)
  • Gearing
  • Accessibilities
2
Q

What is a reverse yield gap?

A

When bond yield exceeds equity yield.

3
Q

When might a reverse yield gap occur?

A

During high inflation because equities are expected to provide capital gains to compensate of inflation, while gilt edged securities are not.

4
Q

Give.6 examples of short term finance

A
Bank loan
Bank overdraft
Better management of working cap
Squeezing trade credit
Leasing 
Sale and leaseback
5
Q

There are two types of lease agreements, what are they?

A

Short term

Long term

6
Q

How long is a short term lease period?

A

Usually less than an assets economic useful life

7
Q

In a short term lease agreement, who is responsibly for maintenance and repairs?

A

The Lessor

8
Q

Can a short term lease be cancelled at short notice?

A

Yes

9
Q

What are 4 disadvantages of sales and lease back?

A
  1. Loss of ownership and potential appreciation
  2. Rental agreement, often of over 50+years.
  3. Borrowing capacity is reduced ( property a security)
  4. Rent subject to review and will increase.
10
Q

How do you calculate:

1) the value of a right
2) Value of a right pre-existing share

A

1) Terp - Issue price

2) (Terp-Issue Price)/No of shares needed to obtain a right

11
Q

What is a placing?

A

Used for smaller issues of shares (up to 15m)

The bank selects institutional investors to whom the shares are ‘placed’.

12
Q

Why might unquoted companies struggle to raise finance?

A

1) Shares are not easily realisable
2) Cheaper to invest in large parcels of shares than in many companies
3) Small firms are regarded as risky.

13
Q

In order for an unquoted company to place shares, what must there be a prospect of?

A

Being a quoted company on the stock exchange.

14
Q

What is a public offer?

A

An invitation to the apply for shares in a company based on information contained in a prospectus at a fixed price, or tender

15
Q

Why might a company wish to become listed on the stock exchange?

A

To increase its pool of investors and offer shares to the public.