A more recent version of these Equity Debt Finance notes – written by Cambridge And Oxilp And College Of Law students – is available here.
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Workshop 11 PLP
Equity & Debt Finance Comparison Equity
P.190Equity Finance= allotment of new shares for which Co. receives money (property) in return, which is used in the Co.'s business. Tightly controlled by CA 2006
P.190Debt Finance = borrowing money (3 main types
= overdraft, term loan and revolving credit facility)Risk P.227??
Involvem ent in Co. P.227Income P.228?
Repayme nt of CapitalRestrictio ns on SaleCapital Value of Investme nt??
Contract law (not much legislation). Lightly controlled =
WHAT IT MEANS FOR THE INVESTORP.227 Equity DebtInterest payments are a contractual Buying Shares is more risky than liability which the Co must pay and thus lending to a Co Interests are paid before dividends are Dividends might not be issued paid to investors Payment of dividends is discretionaryLoan can be secured over property or If insolvent, investor loses the capital personal guarantees from the directors value on the sharesSecurity = lender gets paid 1st&
Might be hard to sell shares investors 2nd Member has the right to attend and voteLender is merely a creditor with not say at a GM + influence the Ds' decisions S'holders have liability ltd to their $ of in how the company is to be run sharesAgreed interest must be paid to the Members have no guaranteed income lender Dividends are discretionary and onlyIf not, lender can demand repayment payable out of distributable profits and enforce their security Generally, not repaid unless Co. isAn agreed repayment date will be set wound-up Recoup capital by selling shares to 3rd P Transfer of shares is governed byLender may syndicate or sell his Articles MA26(5) gives Ds absolute freedom to debenture to whomever he wishes refuse any member they don't want Value fluctuates depending on Co.'s or/and Market conditions etc...Value usually remains constant
WHAT IT MEANS FOR THE COMPANYP.228 Equity Debt Payment of Income?
Tax Treatment of Income Involvem ent of investorRepayme nt of Capital?Dividends might not be issued Payment of dividends is discretionary and only out of distributable profitsPayment of dividends is not a deductible expense and is payable after Co. has paid Corp. Tax Member whose name is entered on the register has certain rights and can yield some influence over Ds' decisionsPayment of a debenture interest is a deductible expense and deductible before Corp. Tax is assessed.Has no say in how the company is run
Generally, not repaid unless Co is wound-up Recoup capital by selling shares to 3rd P?
An agreed repayment date will be set Company must set aside money to ensure they can meet their obligations under debt Cost of debt is easy to establish (interest) Interest rate is charged by the lender Vary from lender to lender, economic climate, length of loan, how much borrowed, credit status of the company Tax system favours debt finance because interests unlike dividends are tax deductible High i rate = equity is better Banks, venture capitalists, Ds or?Cost of equity is difficult to establish There are likely returns to members (dividends; capital; share buybacks) More members will decrease return on shares for each member Dividends are not tax deductible unlike debt interests Low i rate = debt is betterWhoever buys the shares?
WhoInterest payments are a contractual liability which the company must pay If no profits, company must use capital
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