Review questionsl This too is quite like a loan secured on the asset concerned and the factors
relating to loan finance also apply to finance leases.Hire purchase
l An arrangement for purchasing an asset by instalments, where possession
passes to the buyer immediately, but the legal ownership does not pass until
the last instalment is paid.Grants from public funds
l Mainly from government or EU.
l Intended to encourage businesses to act in a particular way.
l Schemes change frequently.Arnold (2005) and Brealey, Myers and Allen (2007) give full treatment, from both a theoretical
and practical perspective, of corporate financing.Further
readingThe site for the London Stock Exchange contains a lot of information and statistics about the
exchange.
http://www.londonstockexchange.com
The sites of Moody’s and Standard and Poor’s are, respectively:
http://www.moodys.com
http://www.standardandpoors.com
The site for the Department of Trade and Industry gives information about grants.
http://www.dti.gov.ukRelevant
websites8.1 From the point of view of the borrowing business, loan capital tends to be cheap but
risky. In what sense is it risky?
8.2 Why are retained profits not a free source of finance?
8.3 If retained profits are not a free source of finance, why are they nonetheless such a pop-
ular source of finance?
8.4 Loan notes, listed on the stock market, have a ‘coupon’ rate (interest rate specified in
the contract between the business and the lenders) of 10 per cent. Does this neces-
sarily mean that the current pre-tax cost of the loan notes is 10 per cent?
8.5 What factors tend to affect the market value of particular convertible loan notes?
(Note that the answer to this question is not really provided in the chapter. A combina-
tion of background knowledge and common sense should enable you to come up with
some relevant points, however.)
8.6 In what way can it be said that finance leasing is a source of long-term finance?REVIEW QUESTIONS
Suggested answers to
review questions appear
in Appendix 3.