Corporate Finance

Problems faced when financing a small business

The following problems may be relevant to a proprietor considering financing a small business: 1. Lack of equity finance: In most cases equity finance is restricted to that contributed by the proprietor. This would effectively include loans raised which are secured upon the proprietor’s own property. Clearly, this will be a limited source of finance, Read More…

Corporate Finance

Convertible debentures vs ordinary debentures with warrants attached

Both of the methods of finance mentioned are very similar. Convertible debentures are ordinary debentures but also holders have the option to convert into ordinary shares in a fixed ratio at certain dates. Debentures with warrants differ in that as the option is separated from the fixed interest security, the warrant will entitle the holder Read More…

Corporate Finance

Upward-sloping yield curve

A yield curve may be upward sloping because of: 1. Future expectations: If future short-term rates are expected to increase then the yield curve will be upward sloping 2. Liquidity preference: It is argued that investors seek extra return for giving up a degree of liquidity with longer-term investments. Other things being equal, the longer Read More…

Corporate Finance

Financing through debt or equity or long-term or short-term debt

If a company wants to use equity or debt in financing its operations, the following should be considered: 1. The cost of debt capital. Tax relief is available to companies on interest costs, but not on dividends. Debt capital is therefore cheaper than equity, and is consequently often preferred by management. 2. The board of Read More…

Corporate Finance

Rights issue

A rights issue is the sale of new shares to existing shareholders in proportion to their existing holdings. For companies which already have shares in issue, sales of new shares are required by law to be conducted via rights issue, unless shareholders agree otherwise. The circumstances in which it would be more beneficial for shareholders Read More…

Corporate Finance

What determines the rate of interest charged on a new bank loan

The following factors will influence the rate of interest charged on a new bank loan. Risk of default The bank providing the loan will make an assessment of the risk that the company might default on its loan commitments and charge an interest rate that reflects this risk. If the borrowing company is listed on Read More…

Corporate Finance

How a company can finance the takeover of another company

A company can decide to take over another one for various reasons, some of which are to eliminate competition; expand customer base; and reduce cost of production. In the absence of retained earnings, the takeover may be financed in various ways. A public issue of equity This amounts to the company selling shares, normally through Read More…

Corporate Finance

The benefits of debt finance for various stakeholders

To the company, the advantages of having debt finance are: 1. Debt has a lower direct cost than equity finance, for two reasons: it is less risky to the investor, and interest, unlike dividends, is a tax-allowable expense. 2. Issue costs of debt are cheaper than equity shares, because there are no onerous prospectus requirements. Read More…

Corporate Finance

What lenders consider before granting a loan to a company

When a company is seeking loan finance, lenders will consider several factors. They will obviously be concerned with the return they receive, and ensuring that return is reasonable given the level of risk of default. One way of remembering some of the main factors is the mnemonic PARTS: Purpose Amount Repayment Term Security 1. Purpose: Read More…