Please enable JavaScript.
Coggle requires JavaScript to display documents.
LONG-TERM FINANCE - Coggle Diagram
LONG-TERM FINANCE
FACTORS IN CHOICE OF
FINANCING METHOD
Purpose of finance
Amount of finance
Repayment of finance
Term of finance
Cost of finance
Security
Restrictive covenants
Taxation
Control of business
PRINCIPAL OF
CAPITAL STRUCTURE
Asset which yield profits over
a long period of time should
be financed by long term funds
Equity finance - more expensive than debt = greater risk
Interest rate long term debt > than short term -
Issue costs short term debt > than long term
(renew frequently)
cyclical business = low gearing
Stable profit = need higher gearing (larger debt)
Issuing share = dilutes control of existing shareholder
Private co. cannot sell share to public
Debt finance only available at reasonable rate
SOURCES OF FUNDS
RETAINED EARNINGS
Cheapest form of finance
No interest
Spend on profitable investment opportunities
CAPITAL MARKET
New share issues
Rights issues
Issues of loan capital - borrow from investors
BANK BORROWING
All size of business will consider
GOV SOURCES
Grants
VENTURE CAPITAL
Carry a high level of risk for investor
INTERNATIONAL MONEY & CAPITAL MARKET
(only for large companies)
Eurocommercial paper
Eurobonds
Eurocurrency borrowing
INSTITUTIONAL INVESTOR
PENSION FUND
Separate legal entities -
consist pools of assets
Pay pension contributions to the fund
These contributions used to
purchase the pool of assets
Aim: Asset need to earn income
Investors withdraw it when retire
INSURANCE CO. :
Invest premiums on insurance
policy by policy holder
Invest money to earn a return
INVESTMENT TRUST
Invest in stock and shares
of other companies/gov
UNIT TRUST
Comprise portfolio in a
range of companies
Unit trust creates a large no. of
small units of low nominal value
Each unit represent a
stake in the total portfolio
Units are then sold to
individual investors
VENTURE CAPITAL
Raising funds for
new business ventures
CAPITAL MARKET
Market for trading long-term finance
Stock Exchange - main market also deals with gilts
AIM - 2nd tier market
Obtain through:
Raise share capital
Raise in form ordinary share
Invite investor to take an equity stake
Increase their existing equity stake
Raise loan capital
Raise in form mortgage or loan note
Mortgage deed or loan note deed will specify the security
Fixed term maturity
Can be issued in stock market and bought/sold
Interest paid on stock
Loan repaid when stock reach its maturity
FORMULA
GEARING = Debt / (Debt + Equity)
EPS = (Profit after tax-Pref. div) / no. of OS