Long term finance

NotesObjective Test

Long term finance

  1. Equity

  2. Debt

Equity

  1. Ordinary shares

    via a placing - does not need to be redeemed, since ordinary shares are truly permanent finance. 

    The return to shareholders in the form of dividends depends on the dividend decision made by the directors of a company, and so these returns can increase, decrease or be passed. 

    Dividends are not tax-deductible like interest payments, and so equity finance is not tax-efficient like debt finance.

  2. Preference Share

    These are seen as a form of debt

  3. Venture Capital

    For companies with high growth and returns potential

    This is provided to early/start up companies with high-potential. 

    The venture capitalist makes money by taking an equity share and then realising this in an IPO (Initial Public Offering) or trade sale of the company

  4. Business angels

    are wealthy individuals who invest in start-up and growth businesses in return for an equity stake. 

    These individuals are prepared to take high risks in the hope of high returns.

  5. Private equity

    consists of equity securities in companies that are not publicly traded on a stock exchange.

    Private equity funds might require a 20 – 30% shareholding or/and Rights to appoint directors

Debt

  1. Finance Lease

    You will notice we have included finance leases as potential sources of finance - don’t forget too to mention the possibility of selling your assets and leasing them back as a way of getting cash.

    Be careful though - make sure there are enough assets on the SFP to actually do this - or your recommendation may look a little silly ;)

  2. Bank loans and bonds/debentures

    Bonds securities which can be traded in the capital markets.

    Bond holders are lenders of debt finance.

    Bond holders will be paid a fixed return known as the coupon.

    Traded bonds raise cash which must be repaid usually between 5 and 15 years after issue. 

    Bonds are usually secured on non-current assets thus reducing risk to the lender. 

    Interest paid on the bonds is tax-deductible, thus reducing the cost of debt to the issuing company

NotesObjective Test