Long-term financing: an introduction

13 important questions on Long-term financing: an introduction

In what 2 ways can companies create more cash for investments?

1. Take on more debt via bank loans or through issuance of bonds in public markets
2. Give up part ownership and issue new equity

Why do unlimited authorised shares not happen often in practice?

1. Some governments impose taxes on them
2. Authorising a large number may create concern in shareholders, as they can be issued later with the approval of the board of directors but without a vote of the shareholders or supervisory board

What are the rights that shareholders have?

1. The right to share proportionally in dividends paid
2. The right to vote for directors
3. The right to share proportionally in assets remaining after liabilities have been paid in a liquidation
4. The right to vote on matters of great importance to shareholders (e.g. mergers, etc.)
5. The right to share proportionally in any new equity sold (pre-emptive right)
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What are the 3 most important characteristics of dividends?

1. It is not a liability of the corporation unless declared by the board (you cannot go bankrupt because of non-payment of dividends)
2. Payment of dividends is not a business expense (so not tax deductible)
3. Are considered ordinary income by tax authorities, and thus taxed partially or wholly

What 2 types of securities are issued by corporations?

1. Equity securities
2. Debt securities

What are the 3 differences between equity and debt securities?

1. Debt is not an ownership interest in the firm - creditors do not have voting power
2. The payment of interest on debt is a cost of doing business, and is tax deductible
3. Unpaid debt is a liability to the firm --> can lead to financial failure, which can't in case of equity issuance

What is the difference between a debenture and a bond?

A debenture is an unsecured corporate debt, whereas a bond is secured by a mortgage on the corporate property

What is long-term debt?

Any obligation that is payable more than one year from the date it was originally issued

What does it mean when a long-term debt is 'callable'?

It means that for a specific amount, a bond can be bought back before its maturity date

What 3 sources do firms receive funding from?

1. They can reinvest their profits from existing operations
2. They can borrow from the banking sector
3. They can issue securities (debt and equity) to the public

How do you calculate internal financing?

Net income + depreciation - dividends

What is non-recourse debt?

Debt that is only partially secured by some assets in the company

What is Islamic financing?

Financing in which the main characteristic is that interest of any kind is not allowed to be charged on financial securities

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