AMF 3660 - Sources of Financing Notes

STUDY UNIT 7 AMF 3660: SOURCES OF FINANCING

Learning Outcomes

  • Describe different types of financial markets.
  • Differentiate between the types of financial institutions.
  • Distinguish between equity, debt-related, and hybrid instruments.
  • Recommend the appropriate form of financing for a given scenario.

Overview

  • The study unit focuses on the investment, financing, and dividend decisions. This section provides an overview of financing.
  • Why do we need money (financing)?
  • Considerations when seeking financing:
    • Categories of financing
    • Cost of financing
    • Mix of debt and equity

Financial Markets

  • Financial markets can be:
    • Informal: SEDA/IDC/NEF/NDA, etc.
    • Formal (local/global):
      • Money Market (shorter term)
      • Capital Market (longer term):
        • Primary
        • Secondary
  • Financial Institutions operate within these markets:
    • Venture capital / private equity

Financial Institutions

  • Examples:
    • IDC (Industrial Development Corporation)
      • Shareholders include Old Mutual and Public Investment Corporation.
    • Commercial banks:
      • Provide several services, e.g., current accounts.
      • Serve as a source of finance, e.g., overdraft facilities.
    • Investment banks:
      • Involved in corporative financing.
      • Offer loans, usually short to medium term.
      • Operate in money markets.
      • Assist companies needing large amounts of financing.
    • Venture capital and private equity:
      • Give investors the opportunity to invest in high-risk portfolios.
      • Costs are usually high.
      • Fewer reporting requirements.
      • Less liquid.
    • Investment Institutions:
      • Insurance companies
      • Institutions that administer pension funds
      • Usually have large sums to invest, e.g., PENSION, OLD MUTUAL

Debt and Equity

  • Equity
    • Ordinary shares
    • Retained income
    • Preference shares
      • Cumulative / non-cumulative
      • Profit sharing
      • Redeemable
      • Convertible
  • Debt
    • Debentures and corporate bills
    • Long-term loans (leasing, mortgages, etc.)
    • Short-term debt (bank overdrafts, etc.)
  • Hybrid Instruments

Debt and Equity – June 2022 Test

  • June Test 2022
  • Question 2(a): Compare and contrast the benefits and disadvantages of GrowCell using debt vs. equity to finance the upgrade project.

Summary

  • A business comprises operations and financing.
  • Financing can be obtained from financial markets.
  • Primary sources of financing are equity and debt.
  • Different factors have to be considered when deciding which financing to use.