E Spreadsheet

Question 1

Bank Overdraft (Advantage)

Answer 1

Flexible terms of borrowing and repayment allow businesses to borrow funds as needed up to an approved limit, and repay when cash flow permits.

Overdrafts can be established relatively quickly, providing immediate access to cash

Question 2

Bank Overdraft (Disadvantage)

Answer 2

Potential uncertainty as banks can withdraw or reduce facilities with little notice: overdrafts are technically repayable on demand.

Overdrafts are unsuitable for long-term financing needs and ongoing cash flow issues.

Question 3

Trade credit from suppliers advantages

Answer 3

Advantage: Trade credit allows a company to delay payment, providing interest-free finance for a period
Advantage: Extending the time between receipt of goods/services and payment improves cash flow management

Question 4

Trade credit from suppliers disadvantages

Answer 4

Disadvantage: The loss of settlement (prompt payment) discounts is potentially costly
Disadvantage: Late payments may result in penalties and damage supplier relationships

Question 5

Bill of exchange meaning

Answer 5

Written acknowledgement of a debt to be paid at some time in the future (e.g. by an overseas customer)

Question 6

Bill of exchange advantages?

Answer 6

Advantage: Bills of exchange provide short-term financing that can help bridge temporary gaps in cash flow

Advantage: They facilitate payments between parties in different countries, promoting international trade

Question 7

Bill of exchange disadvantages?

Answer 7

Disadvantage: There is a risk that the party obligated to pay the bill may not accept it or default on payment, leading to financial losses

Disadvantage: The documentation and verification processes involved can be administratively complex

Question 8

Commercial paper meaning

Answer 8

Commercial paper is short-term (usually less than 270 days) unsecured debt issued by high quality companies

Question 9

Commercial paper advantages?

Answer 9

Advantage: It is a cost-effective option as large sums can be raised at lower interest rates than other short-term sources

Advantage: No security is required; it relies on the creditworthiness of the company

Question 10

Commercial paper disadvantages?

Answer 10

Disadvantage: Only available to large companies with investment-grade credit ratings

Disadvantage: Issuers of commercial paper must comply with regulatory requirements that add administrative and legal costs.

Question 11

Retained Earnings advantage?

Answer 11

Advantage: It is fast (assuming the company has cash available) and avoids the transactions costs often involved in taking external credit

Question 12

Retained Earnings disadvantage?

Answer 12

Disadvantage: If a company is loss making, internal finance is unavailable

Question 13

Rights issue

Answer 13

A rights issue raises equity finance by offering new shares to existing shareholders in proportion to the number of shares they currently hold

Rights issues shares are offered at a discount to the market value

Rights issues are cheaper than other methods of raising finance by issuing new equity, such as an initial public offer (IPO) or a placing

Increasing the weighting of equity finance in the capital structure of Tinep can decrease its gearing and its financial risk

Question 14

Fixed rate debt

Answer 14

Fixed rate debt gives a predictable annual interest payment and, in terms of financial risk, makes the company immune to changes in the general level of interest rates.

Question 15

Floating rate debt?

Answer 15

if interest rates are currently high and expected to fall in the future, GTK Inc could issue floating rate debt rather than fixed rate debt

Question 16

Loan debt Characteristics

Answer 16

Debt securities issued onto the capital market in exchange for cash received by the issuing company

The cash raised must be repaid on the redemption date, usually between five and fifteen years after issue

Loan notes are usually secured on non-current assets of the issuing company, which reduces the risk to the lender

Interest paid on the loan notes is tax-deductible, which reduces the cost of debt to the issuing company

Question 17

Private placing

Answer 17

Placing involves raising finance through the sale of shares to selected institutional investors

Usefulness: Useful source of new equity for an unlisted company but control of the company will be diluted as a result

As equity finance, it does not need to be redeemed

Since dividends are a distribution of after-tax profit, they are not tax deductible like interest payments (debt finance)

Question 18

Public offer (listed)

Answer 18

If the company is listed, it may undertake a public offer whereby shares are offered for sale to the public at large

Question 19

Advantage of public offer

Answer 19

Advantage: Allow very large amounts of equity finance to be raised, and will also give a wide spread of ownership

Question 20

Disadvantage of public offer

Answer 20

Disadvantage: An expensive way of issuing shares as there are significant regulatory costs involved and like the placing, control of the existing shareholders will be diluted

Question 21

IPO

Answer 21

If the company is not listed, it can list through the process of an IPO which will raise equity at the same time

Expensive: There are further regulations having to be complied with, increasing costs. Consequently, only a large company wishing to raise a significant amount of finance would consider this option

Question 22

Current WACC as discount rate

Answer 22

It does not change the current levels of business risk and financial risk faced by the company

A way that mirrors the current capital structure of the company, as financial risk is then likely to be unchanged

WACC is likely to be anappropriate discount rate providing the investment is small in size relative to Tufa Co

Question 23

Advantage of using convertible loan notes as a source of long-term finance

Answer 23

Issue convertible loan notes to raise long-term finance even when investors might not be attracted by an issue of ordinary loan notes, because of the attraction of the option to convert into ordinary shares in the future

Option to convert into ordinary shares has value for investors as ordinary shares normally offer a higher return than debt

An issue of fixed-interest debt such as convertible loan notes can be attractive to a company as the fixed nature of future interest payments facilitates financial planning

When conversion occurs, its gearing and financial risk will decrease and its debt capacity will increase because of the elimination of the loan notes from its capital structure

Question 24

Assumptions of CAPM

Answer 24

The CAPM assumes a perfect capital market, with no taxes, no transaction costs

To compare returns, all returns are over a certain period, usually a year

A risk-free security exists which provides a minimum level of return required by investors

CAPM considers only systematic risk, as it makes the assumption that all investors hold diversified portfolios

Question 25

Gearing Problems

Answer 25

High gearing increases the volatility of company's earnings as percentage reduction in earnings is greater than percentage reduction in activity level Gearing will affect company's ability to raise new debt finance and how much debt it can support Increased risk unable to pay all its interest following on unexpected reduction in cash flow, causing bankruptcy

Question 26

Features of a rights issue for equity finance

Answer 26

Existing shareholders have a right to be offered new shares before they are offered to other buyers Share price after the rights issue has taken place. Weighted average of the cum rights price and the rights issue price To ensure company receives the funds it needs, rights issues are underwritten as a form of insurance

Question 27

Problems with Book Value

Answer 27

Book value of equity will tend to understate the influence of the cost of equity, thereby understanding the WACC The book value of equity is out of date due to the delay in publishing FSs. Market values are current Book value of equity is subjective and it depends on accounting policies

Question 28

Portfolio Theory

Answer 28

Portfolio theory suggests that the total risk of a portfolio of investments can be reduced by diversifying the investments held in the portfolio Undiversifiable risk is the risk of the financial system as a whole, and so is referred to as systematic risk or market risk Diversifiable risk, which is the element of total risk which can be reduced or minimised by portfolio diversification, is referred to as unsystematic risk or specific risk

Question 29

Efficient Market Hypothesis

Answer 29

Efficient markets hypothesis (EMH) suggests that share prices fully and fairly reflect all relevant and available information If the EMH is correct and share prices are fair, there is no point in financial managers seeking to mislead the capital market, because such attempts will be unsuccessful There is no particular time that is best for issuing new shares, as share prices on the stock market are always fair Maximise wealth in efficient market hypothesis: News will rapidly be incorporated into the share price

Question 30

Miller and Modigliani Assumptions

Answer 30

Perfect capital market, shareprices are independent of the level of dividend paid The value of the company depends upon its income from operations and not on the amount of this income that is paid out as dividends All investors are rational, have the same expectations and are indifferent to personal and corporate borrowing

Question 31

Dividend Appropriateness

Answer 31

Absence of market imperfections such as taxation and transactioncosts, it could be argued that dividend policy has no impact on shareholder wealth Once market imperfections are introduced dividend policy can be shown to have an impact on investor wealth Private individuals may pay income tax at a higher rate comapred to capital gains tax. They may therefore prefer retentions to distributions and would not be disappointed with a cut in dividends The proposed dividend cut might be seen as a signal of poor earnings in the future and lead to investors of either group selling shares If owner-managed a change in dividend policy may be possible, depending of course on the extent to which the owner or owners rely on dividend income

Question 32

Alternative Dividend Policies

Answer 32

Constant dividend policy avoids surprises and signals stability to shareholders, but shareholders might be dissatisfied if they receive relatively low dividend Constant growth is predictable and favoured by shareholders but again the dividend growth rate might not match the earnings growth rate. A constant payout ratio means paying a dividend that is a fixed proportion of each year’s earnings Residual dividend policy, retained earnings fund all positive NPV projects

Question 33

Share Buyback Programmes

Answer 33

The buyback can be performed by purchasing shares via the stock market at the prevailing price Distributable reserves must be reduced by the full value of the buyback As there are fewer shares in issue after the buyback, the share price should rise Ratios such as earnings per share (EPS) and return on equity (ROE) should also improve

Question 34

Special Dividends

Answer 34

If a quoted company announces a larger-than-expected dividend, this may raise market expectations that future dividends will also be higher. Therefore, to avoid creating expectations of an unsustainable level, a larger dividend may be announced as a "special" dividend - a bonus dividend Like a buyback, the company distributes cash. Also, all shareholders will receive cash Directors’ dividend policy may also be questioned if the dividend just paid was a one-off, high payment

Question 35

Financial risk

Answer 35

If the interest and capital payments are kept up, financial risk will be lower than its current level at the end of four years, all things being equal debt/equity ratio Interest coverage

Question 36

Semi-Strong market

Answer 36

Share prices reflect past and public information. If the expected annual after-tax savings are not announced, this information will not therefore be reflected in the share price of THP Co If the annual after-tax savings are announced, this information will be reflected quickly and accurately in the share price of THP Co since the capital market is semi-strong form efficient

Question 37

Equity vs Debt (gearing)

Answer 37

Equity finance will decrease gearing and financial risk, while debt finance will increase them

Question 38

Primary Financial Objective (minimise WACC)

Answer 38

If its primary financial objective is to maximise the wealth of shareholders, it should seek to minimise its weighted average cost of capital (WACC)

Question 39

Equity vs Debt (cheaper)

Answer 39

Debt is relatively cheaper than equity (reducxes WACC)

Question 40

Equity vs Debt (interest)

Answer 40

Prepared to take on fixed interest debt commitments than if it believes difficult trading conditions lie ahead

Question 41

Equity vs Debt (redeem)

Answer 41

Equity finance does not need to be redeemed, since ordinary shares are truly permanent finance

Question 42

Equity vs Debt (tax deductible)

Answer 42

Dividends are a distribution of after-tax profit, they are not tax-deductible like interest payments, and so equity finance is not tax-efficient like debt finance

Question 43

Equity vs Debt (equity effect on gearing)

Answer 43

If equity finance were used, gearing would fall

Question 44

Equity vs Debt (no guaranteed return)

Answer 44

The equity holders have no guaranteed return as no obligation to pay a dividend each year and capital growth is also not guaranteed

Question 45

Equity vs Debt (Lower risk)

Answer 45

Debt face lower risk as their interest is a contractual obligation and must be paid

Question 46

Equity vs Debt (Loan note vs bank loan)

Answer 46

Loan notes are more expensive than the bank loan as they are irredeemable and thus have no guaranteed repayment date

Question 47

Equity vs Debt (time consuming)

Answer 47

The finance is needed quickly, this would favour the use of debt which is less time consuming to raise

Question 48

Equity vs Debt (debt non-current)

Answer 48

Cost of new debt is lowered if there are any non-current assets to offer as lqiuidity

Question 49

Bonds

Answer 49

Debt securities issued onto the capital market in exchange for cash received by the issuing company Cash raised must be repaid on the redemption date, usually between five and fifteen years after issue. Bonds are usually secured on non-current assets of the issuing company, which reduces the risk to the lender Interest paid on the bonds is tax-deductible, which reduces the cost of debt to the issuing company

Question 50

Dividend Growth Model

Answer 50

Current market price and the current dividend are readily available, it is very difficult to find an accurate value for the future dividend growth rate Common approach to finding the future dividend growth rate is to calculate the average historic dividend growth rate and then to assume that the future dividend growth rate will be similar

Question 51

Dividend Growth Model Advantages

Answer 51

Advantage: It is easy to understand and can be applied to any share that offers a dividend Advantage: It is based solely on dividends, taking no account of market conditions, making comparisons across companies of different sizes and industries easier

Question 52

Dividend Growth Model Disadvantages

Answer 52

Disadvantage: It assumes shares have no issue costs Disadvantage: It is overly simplistic (e.g. can only be an approximation because dividends do not grow at a constant rate in reality)

Question 53

WACC

Answer 53

Value of a company can therefore theoretically be maximised by minimising its WACC Increasing gearing will decrease the WACC of a company and hence increase its value

Question 54

WACC (traditional view)

Answer 54

Traditional view: WACC decreases as debt is introduced at low levels of gearing, before reaching a minimum and then increasing as the cost of equity responds to a higher degree to increasing financial risk

Question 55

WACC (miller and modigliani)

Answer 55

Miller and Modigliani: WACC is independent of a company’scapital structure, depending only on its business risk rather than on its financial risk. But market is perfect

Question 56

WACC (optimal structure)

Answer 56

True optimal structure: Use of debt in a company’s capital structure can reduce its WACC and increase its value, provided that gearing is kept to an acceptable level

Question 57

Limitation of WACC

Answer 57

How was the growth rate found? Is the cost of debt likely to be constant over project of life? if a market price is used, is the market efficient? Will tax be constant over the life of the loan?

Question 58

Signalling Effect

Answer 58

Signalling argument suggests that in the absence of perfect information. The dividend announcement will send a message or “signal” to the market A reduction in dividend (suchas proposed here) could be interpreted as bad news by investors and result in a fall in share price

Question 59

Clientele Effect

Answer 59

Consistently paid dividends in the past so switching to a lower/zero pay-out could alienate some shareholders Large volumes of share sales

Question 60

Liquidity Preference

Answer 60

Shareholders still wish to receive some dividend now as this is a certain return compared with the more risky and uncertain future dividends or capital growth

Question 61

Short-term Investments (money-market deposits)

Answer 61

Money market deposits (i.e. bank deposits): these investments may have a notice period for withdrawals

Question 62

Short-term Investments (certificates of deposit)

Answer 62

Certificates of deposit: negotiable deposits issued by banks, with maturities from 28 days to five years. More liquid than money market deposits but with lower returns

Question 63

Short-term Investments (treasury bills)

Answer 63

Treasury bills: two, three, and six-month UK government debt. These are very low risk and very liquid

Question 64

Short-term Investments (gilt-edged government securities)

Answer 64

Gilt-edged government securities ("gilts"): the long-term version of Treasury bills with maturities usually over five years

Question 65

Short-term Investments (commercial paper)

Answer 65

Commercial paper: short-term (seven days to three months) unsecured debt issued by high-quality companies, good liquidity

Question 66

Short-term Investments (corporate loan notes)

Answer 66

Corporate loan notes: longer maturity, fixed interest securities issued by the corporate sector. Liquidity can be poor, and corporate loan notes have a risk higher than government bonds or commercial paper.

Question 67

Short-term Investments (equities)

Answer 67

Equities: investing short-term cash surpluses in the stock market is not recommended because of the high risk associated with equity investments

Question 68

Pecking Order Theory

Answer 68

The cheapest source of new finance is retained earnings, as it has no issue costs A bond issue or bank loan is the next cheapest source of new finance. These are forms of debt The most expensive source of new finance is a fresh equity issue

Question 69

Quoted Companies New Share (general public )

Answer 69

Offer for subscription - A direct sale to the general public. This is generally the most expensive method of issuing new shares.

Question 70

Quoted Companies New Share (issuing house)

Answer 70

Offer foi sale - An indirect sale to the public is achieved by selling shares directly to an issuing house

Question 71

Quoted Companies New Share (Offer for sale or subscription by tender)

Answer 71

Offer for sale or subscription by tender - Like an auction, with the public being invited to bid for shares

Question 72

Quoted Companies New Share (quoted)

Answer 72

To become quoted (i.e. raise new equity finance at the same time as becoming listed). This is known as an initial public offering (IPO)

Question 73

Quoted Companies New Share (stay unquoted)

Answer 73

To stay unquoted. Use a rights issue or private placing

Question 74

Quoted Companies New Share (no market)

Answer 74

Introduction - No shares (neither existing nor newly created) are made available to the market

Question 75

Difficulty in Raising Finance SMEs

Answer 75

SMEs are often viewed as unattractive investment opportunities because they have high levels of risk and uncertainty attached to them If an SME seeks a bank loan, the bank will look to see what security (collateral) is available for any loan provided The equity issued by small companies is unquoted and difficult to buy and sell The tax system may encourage individuals with cash to invest via large institutional investors rather than directly into small companies

Question 76

Venture Capital

Answer 76

Venture capital is equity capital provided to small and growing businesses Before investing, the providers look for: a product or products with strong potential and strong management To invest, typically 25% to 49% of equity

Question 77

Private Equity Funds

Answer 77

Attempts to gain control over a company by putting it through a restructuring programme before either selling to another fund or listing the company on the stock market. The difference between private equity and venture capital is that private equity funds usually seek total control of the target company

Question 78

Crowdfunding (donation-based)

Answer 78

Donation-based- any crowdfunding campaign without financial returns to the investors or contributors

Question 79

Crowdfunding (reward-based)

Answer 79

Reward-based− where entrepreneurs pre-sell a product or service to launch a business concept without incurring debt or issuing equity to outside investor

Question 80

Crowdfunding (equity-based)

Answer 80

Equity-based − where investors receive unlisted shares, usually in the company’s early stages

Question 81

Preference Shares

Answer 81

Shares with a fixed rate of dividend that have a prior claim on profits available for distribution. Shares have a fixed percentage (“coupon”) dividend payable before ordinary dividends. This preference share dividend is expressed as a percentage of the share's nominal value As for ordinary dividends, preference dividends are not deductible for corporate tax purposes. The preference dividends are considered a distribution of profit rather than an expense. On liquidation of the company, preference shareholders rank before ordinary shareholders and after debt holders

Question 82

Advantages preference shares

Answer 82

Advantages: No voting rights, therefore no dilution of control Advantages: Preferred dividends do not have to be paid in any specific year

Question 83

Disadvantages preference shares

Answer 83

Disadvantages: Preferred dividends are not tax deductible (unlike interest on debt which is a tax allowable expense Disadvantages: To attract investors to buy preferred shares, the company must pay a higher return than debt to compensate for the additional risk

Question 84

What is a mortgage loan?

Answer 84

A mortgage loan is typically a long-term loan (15 to 30 years or more) secured by property

Question 85

Mortgage loan advantages?

Answer 85

Advantage: Given the security, mortgage loans have a lower interest rate than shorter-term debt Advantage: Lower monthly repayments over a longer term help cash management, making it easier to budget and plan for the long term

Question 86

Mortgage loan disadvantages?

Answer 86

Disadvantage: There are likely to be restrictive covenants concerning the use of the property and its potential disposal Disadvantage: A significant proportion of finance tied up in property may be unsuitable for a business that needs liquid assets for investment opportunities or operations

Question 87

Convertible loan notes

Answer 87

Loan notes or preference shares which can be converted into a pre-determined number of ordinary shares Pay a fixed coupon or dividend until converted

Question 88

Convertible loan notes advantages

Answer 88

Advantage: For investors, they are a relatively low-risk investment with the opportunity to make high returns on conversion to ordinary shares Advantage: For the issuer, they can offer a lower coupon rate than would have to be paid on a non-convertible

Question 89

Warranty

Answer 89

The investor's right, but not the obligation, to purchase new shares at a future date at a fixed date Warrants may be attached to loan notes to make them more attractive

Question 90

Warranty advantages

Answer 90

Advantage: When initially attached to the loan note, the coupon rate on the loan note will be lower than for comparable straight debt. This is because the investor has the additional benefit of potentially purchasing equity shares at an attractive price Advantage: They may make an issue of unsecured debt possible when the company's assets are inadequate to secure the debt

Question 91

Murabaha

Answer 91

Murabaha (trade credit): trade credit for asset acquisition that is structured to avoid the payment of interest

Question 92

Ijara

Answer 92

Ijara (lease finance): lease finance whereby the bank buys an item for a customer and then leases it back over a specific period at an agreed amount

Question 93

Mudaraba

Answer 93

Mudaraba (equity finance): bank provides all the capital, and its customer provides expertise and knowledge and invests the capital

Question 94

Musharaka

Answer 94

Musharaka (venture capital): a joint venture or partnership between two parties provides capital for financing new or established projects

Question 95

Sukuk

Answer 95

Sukuk (debt finance): this involves Islamic bonds where the sukuk holders' return for providing finance is a share of the income generated by the project's assets

Question 96

Bank loan

Answer 96

Companies agree to borrow from the bank at a fixed rate for a specified period and with an agreed repayment schedule

Question 97

Bank loan advantages

Answer 97

Advantage: As the loan is for a fixed term, there is no risk of early recall. Useful for long-term financing Advantage: A predetermined repayment schedule makes it easier to budget and plan for loan repayments

Question 98

Bank loan disadvantages

Answer 98

Disadvantage: Penalties or fees for early repayment can be a disadvantage if a company want to repay a loan ahead of schedule Disadvantage: Terms and conditions tend to be inflexible; fixed repayment schedules may be non-negotiable

Question 99

Leasing

Answer 99

Instead of buying an asset outright, using retained earnings or borrowed funds, a company may lease an asset

Question 100

Leasing advantages

Answer 100

Advantage: There are many willing providers Advantage: Very flexible packages available, some of which include repairs and maintenance. This helps reduce the costs and operational burden of asset maintenance

Question 101

Leasing disadvantages

Answer 101

Disadvantage: Over the long term, leasing can be more expensive than outright purchase Disadvantage: At the end of the lease term, the company typically does not own the asset unless it has an option to purchase it, at an additional cost.

Question 102

Sale and Leaseback

Answer 102

A company sells property to an institution, such as a pension fund, and then leases it

Question 103

Sale and Leaseback advantages

Answer 103

Advantage: Immediate injection of cash into the business can be used for investment opportunities Advantage: Operational continuity in using the asset without disruption

Question 104

Sale and Leaseback disadvantages

Answer 104

Disadvantage: As the company no longer owns the property it will not benefit from any appreciation in its value Disadvantage: The future borrowing capacity of the company will be reduced, as there will be fewer assets to provide security for a loan

Question 105

SCF

Answer 105

Use of financial instruments, practices and technologies to optimise the management of the working capital and liquidity tied up in supply chain processes for collaborating business partners Growing popularity of SCF has been primarily driven by the increasing globalisation and complexity of the supply chain

Question 106

SCF advantage

Answer 106

SCF can be particularly beneficial to SMEs with a poor credit rating (or lacking a credit history) that supply goods or services to a large company with a good credit rating

Question 107

SCF disadvantage

Answer 107

Larger trading partners may be able to abuse their power by demanding lower prices from them in exchange for arranging SCF

Question 108

P2P Lending

Answer 108

Method of debt financing that enables individuals to lend money to small businesses without using an official financial institution as an intermediary

Question 109

P2P Lending advantages

Answer 109

Advantage: By effectively cutting out the middleman (i.e. the formal banking system), interest rates can be relatively attractive to lenders and borrowers Advantage: Borrowers have access to finance when banks refuse credit or would charge very high interest rates

Question 110

Creditor hierarchy (1st)

Answer 110

Secured Creditors (Secured bank loans, secured loan notes)

Question 111

Creditor hierarchy (2nd)

Answer 111

Unsecured Creditors (Trade payables, unsecured loans). Unsecured debt is also legally binding, and its interest must be paid before dividends. However, as there is no guarantee of full repayment on liquidation

Question 112

Creditor hierarchy (3rd)

Answer 112

Preference Shares

Question 113

Creditor hierarchy (4th)

Answer 113

Ordinary shares

Question 114

High Financial Gearing Problems

Answer 114

High level of financial risk: The high levels of committed interest expense make earnings to equity investors more volatile, pushing up the cost of equity Pushes up cost of equity, as the rising cost of debt will mean there is a higher required return on equity Financial distress costs: The company may lose customers due to concerns about its survival and may lose key staff if employees become concerned about job security

Question 115

MM without tax

Answer 115

Only investment decisions affect the value of the company The value of the company is independent of the financing decision (i.e. capital structure is irrelevant) There is no optimal gearing level

Question 116

MM With Tax

Answer 116

there is an optimal gearing level and that this is to maximise debt in the capital structure to generate maximum value for the shareholders At high gearing levels, the risk of default on debt (bankruptcy) becomes significant Personal taxes exist, which may cause investors to prefer injecting equity rather than debt if dividends are taxed at lower rates than interest income

Question 117

Beta = 1?

Answer 117

Beta = 1: Indicates a “neutral” share that is as sensitive as the market to systematic risk. Such shares should earn the market return

Question 118

Beta > 1?

Answer 118

Beta > 1: Indicates an “aggressive” share that is more sensitive than the market. Therefore, if the market in general rises by 10%, the returns from this share are likely to be more than 10%

Question 119

Beta < 1?

Answer 119

Beta < 1: Indicates a “defensive” share that is less sensitive than the market and is likely to rise and fall in value less than the market in general

Question 120

Small Shareholders on Investing in a Company

Answer 120

Small: Can easily sell their rights. Won't make a difference to the influence they have

Question 121

Large Shareholders on Investing in a Company

Answer 121

Large: They think about the long-term. Is the project profitabile?

Question 122

Cash from director's point of view?

Answer 122

Cash can be used for investment, but a minimum is needed to meet day-to-day obligations

Question 123

Inventory from director's point of view?

Answer 123

Inventory holding can be reduced by JIT

Question 124

Current ratio from director's point of view?

Answer 124

High current ratio may mean company can reduce working cpaital

Question 125

Selling property is difficult?

Answer 125

Selling property is difficult if it was used as security for a loan Visible and invisible costs from moving and splitting up functions

Question 126

Not to sell property (rent)

Answer 126

Rent may become more expensive

Question 127

What is financial disintermediation?

Answer 127

Refers to borrowing directly from investors rather than through a financial intermediary such as a bank

Question 128

Traditional view when gearing continues to increase?

Answer 128

Equity investors ask for higher returns and this outweights the benefit of mroe debt, then WACC rises

Question 129

Traditional view when debt is initially introduced?

Answer 129

WACC continues to fall as debt is cheaper than equity

Question 130

Does a higher cost of equity increase or decrease WACC?

Answer 130

Increases it and decreases MV of share

Question 131

Operating gearing what is riskier?

Answer 131

Lower proprtion of variable costs and higher proprtion of fixed costs Fixed costs / variable costs

Question 132

Is it more or less riskier if the value of debt falls?

Answer 132

Less riskier

Question 133

What happens to profits when a higher prooprtion of fixed costs are used?

Answer 133

Profits will fluctuate more