Notesale: Turn your study into money

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Week 9 & 10 Financial Reporting: Sources of Finance
External sources of finance:
LONG TERM
- Ordinary shares: higher return = higher risk: Shares depend on how well the business
performs in terms of profits
...
, 2012)/ (Berry, 2011)

Businesses need to be aware of the risk element of long-term financing:
- Sources that are cheap in terms of servicing costs (loans) are riskier than those that
are more expensive (Equities)
- High returns = high risk

ORDINARY SHARES
- The shareholders’ stake in the business
- Shareholders only obtain dividend if profits available for distribution still remain
after other investors and lenders have received their share of the profits
...
, 2011)
- Stake in the business is reflected by the control that they have over the business
...

- Only receive a dividend if profits available for distribution remain after other
investors (preference shareholders) receive their dividend
...
= individual shareholder is taxed on company profit and on
the dividend
...

- ISSUING ORDINARY SHARES:
- Issues to the public are rare
...
, 2011)
- Low risk for shareholders – less than ordinary shares
- Some risk to ordinary shareholders, as preference shareholders are entitled to
dividend before ordinary shareholders if the business performs bad as well as
dividend for the current year before an ordinary share divided can be paid – take
shares before it reaches ordinary shareholder
...

- Cheap for the business, depending on the interest rates and low level of return
expected by investors
- Interest is tax deductible to the business, making it even cheaper for the business,
but taxable in the hands of lenders
...
(ST = paid within a year, Lt = paid after a year)
+ no control is lost
+ Fixed interest rate = can plan future payments = improves financial stability
X High interest rates
CONVERTIBLE LOAN NOTES
- Gives investors the opportunity to exchange loan notes for ordinary shares in the
business = loan notes exchanged for a number of shares (Atnill et al

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