1. Chapter 9
Financing

2. Financing “Manner in which an entity funds activities” Long-term focus
Financial structures of firms vary
Financial stability a critical consideration
often directly related to funding structure
excessive “external” funding problematic
Range of long-term sources
Equity v. debt
Chapter 9
© Philip O’Regan 2016

3. Equity Capital (see also Chapter 6)
issued/authorized
allotted/called-up/fully-paid
value
nominal/issue price/market price
Rights issues: “existing shareholders given shares at discount”
Bonus issues: “reserves translated into shares and given to existing shareholders”
Chapter 9
© Philip O’Regan 2016

4. Types of share Ordinary (equity): risk-takers – variable dividend
Preference: regular payment, fixed dividend
cumulative
redeemable
convertible
participating
NB: Preference usually counted as debt in ratio calculations relating to funding
Chapter 9
© Philip O’Regan 2016

5. Reserves
Arise from retention of profits or events such as issue of shares at a premium
Distributable
retained profits
Non-distributable
share premium
revaluation reserve
capital redemption reserve
Other
Usually attached to equity interest
Chapter 9
© Philip O’Regan 2016

6. Debt Form of funding External – does not grant ownership rights
fixed v. variable cost
Security normally required
fixed / floating
Normally serviced before shareholders
Preference shares have many of the features of debt and usually counted with debt for ratios
Chapter 9
© Philip O’Regan 2016

7. Types of debt Bank loans and overdrafts
Debentures – long-term secured loans
Debenture stock – convertible to equity
Leases – “finance” or “operating” (see Chapter 12)
Bonds
Increasingly important source of funding
“Issued” by companies and purchased on market
Covenant restrictions
Securitization – sales of future inflows
Chapter 9
© Philip O’Regan 2016

8. Derivatives Complex form of debt
Essentially a contract based on future cash flows
Derive value from underlying shares, indices, etc.
Four principal types:
forwards
options
swaps
futures
IFRS require extensive disclosure (incl. fair value)
Chapter 9
© Philip O’Regan 2016

9. Ratios Variety of ways of classifying funding:
internal/external
fixed cost/variable cost
long-term/short-term
Gearing: (note treatment of preference shares)
debt/equity
high/low
Debt to total assets
WACC: reflects mix of funding types/structures
Useful industry/sector benchmark
Interest cover: PBIT/interest expense
Chapter 9
© Philip O’Regan 2016

10. Summary Large, growing range of sources of finance
Important for firms to be able to quantify and categorize these sources
Can be classified depending on focus/purpose:
external/internal
fixed/variable cost
long-term/short-term
Gearing an important measure of stability
Increasing use of complex financial instruments
Chapter 9
© Philip O’Regan 2016