Chapter (9)

Source of Finance
Short Term Finance
1.overdraft
2.Short Tern Loan
3. Trade Credit
4.Short Term Lease

Short term Finance

*Short term finance matching policy Current Asset
7
regnising
W

Short term mo short term

*Short term Finance < Long term Finance

25 fic mix) cheaper than 230: b:)

Eg. Banking

Overdraft
*Bank Grant I For a fee
*up to an agreed limit or lower =>
overdraft facility
*interest is only paid an overdraft amount
*flexibility
*repayable on demand from bank
*arrange quickly
 Short term Loan
*drawn in full at beginning of loan period > repaid at specified time or
in defined instalment.
*Term of loan must be adhered to
*customers does not fall behind with their payments
*not repayable on demand by bank

Trade Credit
*inventory purchased on credit
*Interest free short term loan
*loss of discounts if delay payment
yearly payment)
worsen Co's additional Credit
obtain
rating
credit
difficulty to

Short term Lease

*rather than buying an asset outright -> lease an asset

Long term finance

Bank Loan
1. long term debt Traditional Loan /conventional
(
(Debt financing Loan note issued
Convertible loan
2. Equity Finance 7 (1) Internal Finance
(2) Right Issue
-
external
(3) Placing
finance
(4) Public offer
 (4) Public offer
3.Preference Shares
4.Venture Capital

Long term Finance

*When finance require over long term short term finance
*Risk that short term finance may not be available when renew

&
*long term finance appropriate
X- match
·

-
* term of finance term on investment
I Return from investment S to repay the debt
*because z

Loan term > investment term >unnecessary long period

interest repayment

Prior charge P share NCL

(1) Long term debt finance Capital = .
+

Bank Loan
Cash flow forecast
*present convincing business plan management team
Investment proposal
Firm’s assets fixed charge (NCA)
*provide security floating charge (CA)
Personal collateral director’s home
*written safeguard’s (loan covenants) into loan agreement > to prevent
customers over extended period with borrowing

Loan Covenants (positive, negative)

*Condition > borrowers must comply
*if not comply > loans default & bank can demand payment
Positive Covenants borrower n
Marriors un

*maintaining certain levels of particular financial ratio

Eg, debt/equity ratio. Interest cover
Negative Covenants borrower in e
question
* Limit borrower’s behavior

Eg, prevent Borrowing from another lender

,Disposal of key assets
- Dividend pay above certain level
3 Acquiring another Co;

Conventional loan notes

Loan Notes
Convertible loan notes
* After banking crisis S banks more cautious about lending to company
* increase use of loan notes

*Conventional loan notes Fixed rate IOU on stock market sold

(bonds or debentures)
Example
IOU- $100
 value auto $100
sayt nominal
as
· loar note
.

: Interest rayascleros coupon rates

Interest- 1.9%
nominal value de e mich
Redeemable in 10 years’ time at $100
IOU=loan notes
$100=nominal value
1.9%= interest (coupon) rate (on nominal value)
10 yrs = Redeem after 10 yrs because investors cas

$100= Redemption value sell lar notes the

↑
in

Interest rate of bank loan > Interest rate of bond -

market

Redeemable
* Normally redeemable
*some > irredeemable or undated (perpetual bonds) - issued by banks
Secured
* normally secured

* debt covenants if unsecured

*higher extra yield with unsecured bonds for extra risk

Convertible loan notes
*holders > rights (not obligation) to convert loan notes into new equity shares
(specified future date)- specified conversion rate
*holder > can sell these shares at favorable price
*If no conversion into shares S redeemed at maturity
*Convertible loan interest < conventional loan interest rate
share
(1) conversion ratio = no. of shares to be converted convert eurcius &

(2) conversion value= conversion ratio * market price per share

rust ano
P9 201/ Activity 2

Why do issue convertible bonds ?

(C)
companies

Boismiss o Because Investors (band bolders (

have rights to convert

Suitable
~ for
companies with cash flow problems

- Debtbolder - redemption oupas conversion

un no need to repay

Reduce gearing ratio .

Current
-
share price myspe share issue
me
finance years 21 So ,
issue bonds for now

and convert them into shares later .

(3) Conversion premium = Current market value of loans – current conversion
value of shares
Cum-interest market price
Market price
Ex-interest market price :
Conversion premium = conversion premium / conversion value *100
percentage (%)

(2) Equity Finance

* provide by owners= capital investment by ordinary shreholders

*right to S vote on director’s appointments

> Receive dividend S agree by board
Methods of raising equity finance
occua:ge:)
Internal finance (Divided ou questos :
RE

* Retain cash instead of paying dividend to financial investment (equity finance)

For long projects 3*right issue(existing shareholders)

* placing ( fixed price to institutional investors) (eg, Bank, Insurance Co;)

*public offer ( to public, fixed price or tender)

Right Issues
*issued to existing shareholders in proportional to their existing shareholdings
* no. of choices

(1) buy new shares

(2) sell their right to buy shares

(3) mix

* significant discount > So, share price after right below pre-right share price
* not damage shareholders wealth

Cum right price Rights issue espassin share price

Price at which purchasers had right to participate = price prior to right issue
Issue Price
* Price for new shares

Theoretical Ex- Right Price (TERP) Rights issue Congin theoretically

*Theoretical price after right share price
upsesses
Value of a right per existing share
*Value of a right / No. of shares before right

Value of a right (price at which right can be sold)

*TERP- Issue Price

Public Offer (offer for sales) initial public offer (IPO)

Fixed price
*Prospectus is produced 3 outline future plans & past performance

* Advertised in national press & underwritten

*Normally used for larger shares issues

Tender
*No prior issue price is announced.
*Shareholders are invited to bid for shares at different prices.
*Underwritten at a guaranteed minimum price to minimize risk of underpricing
share issue.
 Redeemable PS=loan
(3) Preference shares
Irredeemable PS= equity
*Received dividend normally at fixed rate (on nominal value)
*Some preference shares pay extra dividends fixed percentage of
ordinary dividend (participating preference shares)
Cumulative S not pay in current yr must pay in future

yr by adding

*Dividend

Non-cumulative S not pay in current yr I not pay this yr

dividend whenever
Advantages of preferences shares
* More flexible than debt finance (if loss S no dividend)
*No dilution of control (only voting rights S when proposed liquidation)
Disadvantages of preference shares
SOC E

GP X
Retained
C-
operating expense (x) Earnings
X
P B II X RE bld

C-1 interest (x)

Profit for the year X

&
PBT
<-> dividend (x)
(-) tax ( =]

Profit for the RE cId X

year r

*No tax relief

tax
relief
no taxrelief
* Create extra risk for ordinary shares (preference dividend before ordinary
dividend)
(4) Venture Capital (Risk Capital)
*in private Co; Swith high growth potential
*high return > high risk
*in Young start up Co;=small Co; S have a track record of business
developments
*need additional finance to grow surgakumsine
act like owners >
-
*not have enough capital - grin "

*fail to hit target set by venture capitalist 7 extra shares transferred to their

ownership S no additional cost (equity ratchet)

Islamic Finance
*compliant with Sharia Law

Principle of Islamic Finance

*Sharing risk & reward between investors & users of funds

*Conventional finance providers (not Islamic finance) (eg. Bank)
Interest received from money lent to customers – interest paid on money
deposits

C
* Making profit by lending alone & charging of interest C > forbidden by Sharia
Law (immoral) riba
*Wealth generated via trade or investments
*Bank’s profit is closely tied to client’s profit
Islamic Finance (financial instruments (

(1) Murabaha

(2) Musharaka

(3) Mudaraba
 (4) Ijara

(5) Sukuk opt Bury ggnomin

refrige
:

-
Murabaha (Trade Credit) i
=> s
sigwor a os
* deferred payment sale / instalments credit sale
a so interest
*immediate delivery 7 deferred payments (purchase of goods) return of

sales d yu Guld Gen

Musharaka (Joint venture)
*Partnership agreement = General Partnership (PA1890)
*All partners provide capital & know how
*Profit shared by pre- agreed contract
*no dividend paid
*loss shared by capital ratio
Mudaraba (equity) =
Limited partnership ((P1907)

*one partner (investor) contribute capital S no or little involvement in

operational decision and is liable up to capital provided > sleeping partner
-

*the other (managers) contribute skill & expertise

*profit shared by pre-agreed ratio
*losses are solely by investors
Ijara (leasing )
*lessor still owner of asset and incurs risk & responsible for major maintenance
and insurance
*lessee responsible for day to day maintenance, wear and tear and damage

short-ter leasing

conven tional
-

loan noter
longrtem leasing >
-
lesse responsible
for
....... ---
Chargebolder soy5-
Britoupcaia asset sordige rest To
risk , reward on

Sukuk (Bonds) = debt financing

*There is underlying tangible asset Isoralsugpaicos eas : :
queen
*Sukuk holder shares in risks & rewards of ownership of assets
*(equity+ bond)