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The Finance and Growth of Firms Cheat Sheet (DRAFT) by

The finance and growth of firms explained.

This is a draft cheat sheet. It is a work in progress and is not finished yet.


loan capital
consists of those funds borrowed from a variety of financial instit­utions
risk capital
is raised by the sales of shares in the ownership of a company

Borrowing money

the cost of borrowing money
Why do banks charge interest?
lenders (banks) take it for the risk of lending money and their inability to use the money anywhere else while the borrower uses it
assetes that borrowers offer the lenders to cover for the repayment of a loan in case their business fails and the are unable to repay it; afterwards the lender seizes the collateral
Where to borrow money?
commercial banks - banks checks the borrowers ability to repay, reputa­tion, how much they are asking for, and the purpose of using the money and afterwards decides whether they will give the money to the firm with interest
specia­lists banks - specialize on risky clients (start ups); money lend to such firms is known as venture capital, higher riske = higher IR
intern­ational banks and markets - multin­ati­onals, in return for a loan a company issues and Eurobond (which is in different currency than euro) - it is a promise to repay the sum of interest each year and to repay the loan in full at a fixed date in the future - Eurobond may be bought and soldn on intern­ational financial markets
the government - gov. lends money to industry to create jobs, offers loans to areas with low employment
hire purchase - the price of an asset is paid in deposits (splátky)
leasing - firm pays for the equipment as long as they need it; the assets will never be theirs
trade credit - a firm buys an assets using invoice and they ralize they need more time to pay for it so they ask the supplier to post-pone their payment, of course with an interest
except borrowing we can also use retained profits and obtain funds from other financial instit­utions - pension funds and insurance companies, building societies, trusts (inves­tment trust) or issuing securities

How trust work?

a form of collective investment
investment trust
PLC purpose is to buy shares in other companies on behalf of their investors, theyy buy shares they think will be profitable and so use the deposited money
investors - trust - buying assets form investors' money
the risk is the initial capital may not be the same as the final since the market prices of assets are constantly changing
when I no longer want them I can sell them
unit trust
doesn't have a fixed form (právnu formu)
they do not emit shares but units
there is no limit to how much units one person can own
they use the money put in trust in different aspects, so there is lower risk of losing everythink you put in
if I no longer want to own units I have to return them (cannot sell them)

Issuing securities

PLC can raise moeny by issuing debentures or loan stock on the SE Market
is an IOU issued by a plc in return for a loan of money
person who lent moeny to a company and holds a debenture receives a fixed rate of interest each year for as long as the loan is designed to last; at the end of the period the loan is fully repaid
if the holder of the debenture wishes to get the money sooner they can sell the debenture on stock exchange market
bought and sold on SEM
ways of selling shares
by prospectus - a firm issues shares and announces an invita­tioin for anyone who wants to buy the shares, it contains the full details about the company, their future plans, etc.
by offer for sale - issuing house buys all the shares and sells it on its behlaf to general public
by placing - issuing house only helps with selling the shares e. g. offers the to its clients, but it does not sell it for the firm
by a rights issue - company offers new shares to owners who already own their shares but in such amount that they will keep the percentage
by tender - people blindy bid on a share up to a certain date and on that day the envelope with the highest amount wins
types of shares
preferance share - owners get repaid a fixed return or dividend
they are paid as the first
the cannot vote
cumulative preferance shares - profits not paid in one year will be paid in later years
partic­ipating preferance shares - receive sum out of profit with a fixed amount after other shareh­olders have been paid the dividend
ordinary shares - shareh­olders receive dividend based upon what is left from profits after debenture holders and preferance shareh­older have been paid their share
they can vote
a wide variety of things influences their cut on bonuses
Government stock
not very popular nowadays

The Stock Exchange

runs markets for bying and selling new and second hand sotcks and shares or securities
the markets for securities
the equity market - deals with buying and selling of securities in thoussands of large plc securi­ties, A listed company is one that has been allowed by the council to sell its shares on the SE
the intern­ational equity market - deals with the shares of intern­ational companies
the quilt-­edged market - deals with g-e securities
fixed interest or bond market - can borrow moeny directly from the public by selling them fixed-­int­erest securities or bonds
the altern­ative investment market - market for shares in small and growing companies

How SE works

is not open to general public
if a member of the public wishes to buy or sell some shares they must contact a share dealing rom which is a member of SE and they will buy and sell shares for the public for a commission
Electronic dealing in the shares of the largest companies
buyer and sellers of shares place their orhers on the computer "­order book" stating shich shares and at what price they wish to buy or sell
if a match is found the transa­ction will be carried out immedi­ately
a limit - buyer states the firm and an exact summ at what they want to buy the share
at best - customers enter their orders and agree to the system to carry out the transa­ction at the lowest price (risky - we don't know the summ)
fill or kill - orders are carried out immedi­ately or rejected by the system
execute and eliminate - similar to 'at best' but the limits are placed on the price range that will be accepted by the traders
bulls - people­/firms who buy shares in hope their price will rise, so they can make more profit
bears - people­/firms who sell shares in the hope their price will fall, so they can buy them cheaper some time later and earn profit
stags - people­/firms who apply to buy up newly issued shares in the hope their price will rise quickly

The growth of firms

types of growth
internal growth
external growth - more firms join together to form a larger enterprise
involves the merger or the takeover (acqui­sition)
take-over (acqui­sition) - one company buys at least 50% of the shares of another company, so it can take over the control; the over-taken company often loses its own identity
merger - two or more firms join together to form a new enterp­rise;it is done by shareh­olders of the two or more companies exchanging their shares for the new ones in the new company
holding companies
a company formed for the sole purpose of buying up the share in the ownership of a number of other companies

Types of interg­ration

horizontal integr­ation
firms engaged in the production of the same or similar ty of Gs&Ss (the same suppliers, production process, etc.)
+ combined business will have a larger market share
+ it will reduce the number of compet­itors
+ integrated firms may have cost advantages due to their combined size
vertical integr­ation
firms engaged in different stages of production combibe
forward integr­ation - when a company takes over a firm which is next in their production process (wine producer takes over the wine shop)
backward integr­ation - when a company takes over a firm which is previou in their production process (wine producer takes over a grapes producer)
lateral integr­ation
firms which are unrelated combine together
this is known as conglo­merate merger to form conglo­merates in order to produce a wide range of different products