Chapter 19 – Financing And Investing

Overview

This chapter takes a rather interesting journey through sources and uses of finance, and – the flip side of the coin – investment. Apart from anything else, it will help you decide how to use a cash surplus or how to finance a deficit. It should also be useful if you are making investments in other companies, from either a corporate viewpoint or as a personal investor.

Mastering financing and investment

After reading this chapter, you should be able to answer the following questions:

• Name three sources of each of short-term, medium-term and long-term finance.
• What are debt instruments? What sets them apart from other borrowing? Why would a company borrow by issuing bonds? Who would lend the funds to the company?
• What happens to the market price of a bond if interest rates fall?
• What is equity? Does it have to be repaid? Where is it traded? What is a stock split?
• How much money would a stock split raise for the company?
• Why might share prices move even when nothing fundamental has changed at the issuing company?
• How do you use share prices to value a company? Why is the price earning ratio important?
• How could one company attain control over another?
• How could one company use an investment in another to cook the books?
• Which involves greater risk for an investor (all things being equal), debt or equity?
• Why is equity more costly than debt for the company receiving the funds?
• How would you calculate your cost of capital?