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Greetings Tutor I hope you are doing well.
Can you help me with the following questions that relates to Part E (Business Finance) of our Syallabus. I have combined all the questions instead of asking each separately as they all related to ( Capital Structure and Source of Finance).1) As per Study Text Preference Shares are to be treated as Debt, should we treat both Redeemable and Irrdeemable Preference Shares or just Redeemable Preference Shares. And should preference dividend be taken in calculation for Intrest Cover Ratio (as it to be treated as Debt).
2) I have studied FM in the past during my graduation where I studied that the Cost of Retained Earnings is different from Cost of Equity because of (Issue Cost), but for FM examination is it assumed to be the same? (i.e. Cost of Equity = Cost of Retained Earnings).
3) Is Offer for Sale and Offer for Subscription through Tender done through Book Building process (as this involves bidding based upon which prices are set)?
4) As a source of Finance, Kaplan Study Text has mentioned that ” A Company already quoted can raise equity funds through placing” How is it different from private placement that is used by private companies?
5) Under Islamic Finance Ijara is equivalent to Operating or Finance Lease?
6) Can you tell me what is it meant by Project financed by the existing pool of funds?
7) In case of Convertible Loan Notes Redeemable at Current Market Price the position is same as Irrdeemable Derby and the formula for Irrdeemable Debt could be used.. Is there any specific reason (or logic) for this apart from by proving through an example as this hold true using dummy numbers and also as shown in Kaplan Study Text.
Wow what questions!
I hope this clarifies for you :0-)Preference shares are treated differently based on their type. Redeemable preference shares are considered as debt, while irredeemable preference shares are classified as equity. Therefore, only redeemable preference shares should be treated as debt for the purpose of calculating the Interest Cover Ratio. Preference dividends are not included in the calculation of interest cover since they are not considered interest expenses.
In the context of the FM examination, the cost of equity is generally assumed to be the same as the cost of retained earnings. This simplification is made for examination purposes, despite the potential differences due to issue costs in practical scenarios.
Yes, both Offer for Sale and Offer for Subscription through Tender can be conducted through the Book Building process. This method involves bidding, which helps in determining the price based on demand.
Placing refers to the process where a company that is already quoted on a stock exchange issues new shares to a select group of investors, typically institutional investors, without a public offering. This is different from private placement, which is used by private companies to raise funds by offering securities to a limited number of accredited investors, often without the need for a formal stock exchange listing. The key difference lies in the audience and regulatory requirements, as placing involves public companies and is subject to different regulations compared to private placements.
Under Islamic Finance, Ijara is equivalent to a Finance Lease. It involves leasing an asset where the lessor retains ownership, and the lessee pays rent for the use of the asset, with the possibility of purchasing the asset at the end of the lease term.
Project financed by the existing pool of funds means that the financing for a new project is sourced from the company’s current available resources, such as retained earnings or cash reserves, rather than seeking external financing options like loans or new equity.
In the case of Convertible Loan Notes redeemable at the current market price, the position is similar to irredeemable debt because the redemption value is not fixed and can fluctuate based on market conditions. This allows the use of the formula for irredeemable debt, as the cash flows can be treated similarly to those of irredeemable securities, where the value is based on the market price rather than a predetermined redemption amount.
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