| what is cost of capital? | the return that a commercial enterprise is required to pay for the capital obtained for financing its business activities. |
| what is GDP? | Gross Domestic Product - the value of all of the goods made and services provided in an economy in a specific period of time |
| what happens if finance is unavailable or only available at a high cost? | companies could struggle to survive or grow, with a resulting negative impact on the economy. companies also act as a prime source of public finance due to tax |
| what is the key legislation in commercial financing? | companies act 2006 |
| what is a limited liability company? | a company where shareholders are only legally responsible for the debts of a company up to the value of their shares |
| what two crucial characteristics do limited companies have? | 1 separate legal personality - in the eyes of the law, they are a different legal person altogether from its members/shareholder
2 limited liability - liability of those shareholders to meet the company’s liabilities is limited to the amount, if any, unpaid on the shares held by them |
| who is primarily responsible for repaying the financial obligations? | the company, not the shareholders |
| true or false: the company is required to protect against potential risks at everyturn | true |
| how are shares created and distributed? | the company will sell their shares to holders, they are in exchange for money and so they cannot be discounted. |
| what is start-up capital? | the finance that is required to meet the initial expenditure of setting up a new business. Such expenditure includes office space, wages, permits and licences, inventory, manufacturing and marketing. |
| what are retained earnings? | where a company will keep an internal source of finance rather than paying them out as dividends |
| what does section 4 of Company Act 2006 state? | -A ‘private company’ is any company that is not a public company.
-A ‘public company’ is a company limited by shares or limited by guarantee and having a share
capital |
| what are the sources of finance available? | cost of capital
tax
corporate assets
business vehicles
prestige
control
market for securities
exit facilitation
risk
insolvency |
| how is tax a form of finance? | a company could opt for debt finance because it is a low-cost finance since the interest repayment on the debt is tax deductible. Thus, the company makes crucial savings via this form of financing by paying corporation tax on a smaller proportion of its profits. |
| how are corporate assets a source of finance? | a key effect of a company’s separate legal personality is that the company owns its business and is also able to own property. The availability of such property – both tangible and intangible – could affect a company’s desire and ability to utilise debt financing. a contractual appendage of the giving of debt finance by a creditor could be the demand for security over corporate property. While this is typically the case for smaller enterprises, it nevertheless remains true for larger companies |
| what is a critical difference between public and private companies? | a critical difference between public and private companies is that only public companies can sell shares to the public in order to raise equity finance. However, while all listed companies can raise finance on a stock exchange and are therefore public companies, not all public companies are listed companies. |
| what is a business vehicle? | a type of asset finance that allows you to spread the cost of the vehicle over time. This helps you to manage cash flow as you won't have to pay the full cost upfront and makes budgeting easier as you'll pay monthly costs instead. |
| what is prestige? | where public companies are listed. Being a publicly listed company is often a positive signal to financiers and the commercial market that the company is now ready to be a big player in the industry and is commercially stable enough to meet the financial and regulatory demands that come with publicly traded status. |
| what is control? | the ability of the existing shareholders of a company to retain managerial and financial control or majority in the company. In other words, the extent to which bringing more shareholders into the company through equity finance will dilute the interest of the existing shareholder(s) is a relevant factor. |
| what is a market for securities? | securities refers to financial instruments of a company with a monetary value, such as shares and bonds, that represent an investor’s interest in a company in exchange for finance. A company could opt to become a public company and list on an exchange in order to make its securities easier to sell and thereby raise more capital. |
| what is an exit facilitation? | one of the attractions of equity finance is the ability of shareholders to use it as a financial investment and therefore cash out whenever there is a commercial opportunity to enjoy a return on that investment. Thus, it is possible for a company to use equity finance as a strategy to facilitate exit by offering its shares, including those of existing shareholders, for sale to the public |
| how is risk a source of finance? | a factor behind the use of equity finance via a public offer of shares could be the need to spread the risk of doing business across a wider range of investors. While we have already seen that such financing could bring about dilution and, therefore, reduce the dividend return of existing shareholders, this financing strategy could also ensure that exiting shareholders do not bear the burden of any loss of earnings alone |
| what was established in Re Purpoint? | it highlighted the lack of a capital base (equity finance), reliance on bank borrowings and hire purchase to acquire assets, and use of a loan for work- ing capital as evidence that the company had no prospect of meeting its debts as they fell due, and to find the director liable for wrongful trading. |
| what is the importance of credit? | 1 economies depend on credit for services and value of goods
2 economy is acutely dependent on businesses or commercial entities - if the business fails to survive, so does society
3 businesses will only survive with financing from credit variants |
| what is an unsecured creditor? | creditors who have extended credit/loan capital to a business (the debtor) without extracting collateral promise to use certain property that the business is entitled to for the satisfaction of any outstanding debt in the event of default by the business. Put differently, unsecured creditors have no rights against specific property of the debtor |
| What case established limited liability? | Salomon v Salomon |
