Topic 2.3 Management of Funds

2.3.1

100

Money contributed by people in exchange for ownership rights or ‘equity share’ in the business, making them part or full owners.

What is Owner's Equity

200

Money earned by the business that has not been distributed to the owners of the company in the form of dividends

What is Retained Profits

300

Money that has been acquired from people or institutions other than the owners of the business

What is Debt Equity

400

Where the company is given permission to write cheques in excess of their bank account funds up to a certain limit as determined by the bank, for which interest must be paid.

What is Overdrafts

500

Types of long-term loans which are only available to incorporated businesses. Essentially, it is a financial product aimed at raising funds from the general public

What is Debentures

2.3.2

100

If the source and terms of the finance match the economic life of the resource or asset, then the cost of the finance can be met from the earnings of the resource.

What is Matching Terms and Source to Business Purpose

200

The _________ and _______ of the finance match the economic life of the resource or asset, then the cost of the finance can be met from the earnings of the resource.

What is source and terms

300

The thing that most determines the best capital structure for a business is

What is THe Business Purpose

400

A measure of a business’s debt relative to its assets or equity

What is Gearing

2.3.3

100

• It is easier to arrange and generally can be organized on short notice. • Debt holders do not always have rights in the management of the business, hence management is able to make decisions with more freedom. • Debt can act like a ‘wolf at the door’ for management. The looming threat of debt repayments can act as an incentive for management to ensure adequate cash flow. • Directors do not have to answer to disgruntled shareholders over the state of the business as long as debt repayments are made.

What is Advantages of Debt Financing

200

• Owners do not have to be repaid for their capital after a certain period, unlike debt which must always be paid over a period of time. • Equity has lower risk. • The rate of return on investments paid to equity holders is generally lower than for debt holders, partly because they are rewarded by the increase in the value of their share ownership. • Equity financing is better in weak external conditions, as there are no fixed obligations.

What is Advantages of Equity Financing

300

Increased levels of debt mean that the company is at a higher risk of being liquidated should it fail to meet its commitments. Debt repayments must be met regardless of whether the business makes a profit or loss. • Some debt holders may only issue debt that places restrictions on a business’s actions. This puts a strain on the business’s operations and decision-making. • Acquiring additional debt may send a negative message to the business’s owners (i.e. that the business is experiencing cash flow problems) and thus cause a downward trend in the value of the equity. • Businesses remain exposed to the risk of sudden interest rate rises.

What is Disadvantages of Debt Financing

400

• Dilution of control – if the number of owners increases, as happens with the floating of a business, then the power of each owner decreases. • Can take a long time to organize. • Equity financing adds additional costs to a business. Floating a company costs the business a large amount of money for legal and administrative fees. Also executives will need to spend additional time on shareholder relations. • Becoming a public company causes a business to adhere to specific disclosure requirements, which may place them at a competitive disadvantage to non-listed competitors.

What is Diasadvantages of Debt Financing

500

• Dilution of control – if the number of owners increases, as happens with the floating of a business, then the power of each owner decreases. • Can take a long time to organize. • Equity financing adds additional costs to a business. Floating a company costs the business a large amount of money for legal and administrative fees. Also executives will need to spend additional time on shareholder relations. • Becoming a public company causes a business to adhere to specific disclosure requirements, which may place them at a competitive disadvantage to non-listed competitors.

What is Diasadvantages of Equity Financing