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dexazuxo's version from 2017-05-13 09:59

Section 1

Question Answer
Why should a firm raise capital via equity?1) Total control over funds raised
2) No contractual commitments pay interest/principle payments
3) No threat of foreclosure from banks
4) Creates public market in companies shares and raises profile.
BUT
Dilutes ownership of the company
Requires complex, expensive reporting procedures
memorize

Section 2

Question Answer
What are the advantages and disadvantages of firm offering equities for public sale?Advantage:
1. Supplies new capital with no obligation to pay dividends. Bond holder require an annual interest payment.
2. Increases firms public profile
3. Creates public market in firms shares, so existing owners can exit at measured market price
Disadvantages:
1. Expensive financial reporting requirements for stock exchange
2. Distributes share in profits to external shareholders.
3. Creates conflict of interest between management and shareholder
What are the characteristics of a bond?Maturity date: sate of last promised payment
Par value: Value of the last promised payment
Coupon: Promised payments prior to maturity
What are the differentiating features of a bond? Special tax treatments
Inflation protection
Seniority - Bonds may differ in terms of priority of getting paid. senior bonds have high priority
Variation of a basic bond? 1. Callable bond: When the issuer has the right to call back the bond (for a price). The holder must sell it back.
2. Putable bond: When holder has the right to sell back the bond. Issuer must buy it back.
3. Convertibles: At maturity, can convert bonds into equities or company shares (for a price). Only applies for corporate bonds.
4. Eurobonds: Bonds where it is issued in a country different from its own currency denomination
5: Euro bonds: Bonds in euros issued in the eurozone
6: Floating rate notes: Corporate bonds where coupons are linked to a given markets interest rate and not a number. e.g. libor and treasury bills
memorize