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Dedicated to providing a definitive guide to financial investment strategies. Sourced from prolific finance academics, spoonfedfinance.com will help you understand and learn to take advantage of your new found knowledge of finance and the financial markets.

Debt Finance and Loans Explained, Long Term Debt Avenues »

Firms should match the maturity structure of their assets (that are funded through debt) with the maturity structure of their liabilities (their debts)
Term loans – Banks
Fixed-term loan periods generally range from 3 to 15 years
Typically used ton finance capital expenditure (building equipment)
Interest may be fixed or variable, and depends upon
–      The credit rating of the borrower
–      Term of the loan repayment schedule
Term loans – Investment and Merchant banks
Loans generally do not exceed 5 years
Interest fixed, but usually divided into a series on interest rate review, or roll-over periods
Loan agreement also …

Debt Finance and Loans Explained, Short Term Debt Avenues »

Short-term debt
Loans and instruments used by companies to raise funds for periods up to one year
Short-term debt is used to finance
–      Working capital requirements
–      Cash flow shortfalls
–      Trade credit
Trade Credit
Supplier of goods and services allows the purchaser a grace period before the account’s settlement date
Often includes discount for early payment (2/10 n/30)
The opportunity cost of foregoing the discount can be calculated as
Opp cost =

% discount
X                                 365

100% – % discount
Days difference b/t early and late settlement

= 2/98 x 365/20
= 17.65%
Intercompany loans
Insurance and finance companies and major retailers with short-term …

Debt Finance and Loans Explained, Introduction to Markets »

Factors affecting supply for credit
Deregulation gave banks grater flexibility in issuing loans
This may have resulted in a greater volume of loans being extended to corporate borrowers
Factors affecting demand for credit
Several factors suggested are
–      1. Changes in portfolio management practices
–      2. Development of risk management procedures
–      3. Interaction of inflation and tax
–      4. Behavioural aspects

Changes in portfolio management practices
–      The introduction of active portfolio management may have led to increased share turnover, and therefore volatility of share prices
–      Consequently, debt may have been viewed as being comparatively more stable
Development of risk …

Stock Investment Strategy, Stock Perfomance Analysis and Strategy, The Sharemarket »

Value Analysis of Share Prices
Share price is determined by supply and demand of a company’s shares
Expectation of bad company performance causes investors to sell their shares, increasing supply and reducing the price
Similarly expectation of good company performance increased demand and leads to an  increase in share price
What causes the shifts in demand and supply of a company’s securities on the secondary market?
Three approaches taken in analysing this question
–      1. Fundamental analysis – bottom up
–      2. Fundamental analysis – top down
–      3. Technical analysis
Fundamental Analysis – Bottom Up
Focuses on ratios and …

Stock Investment Strategy, Stock Perfomance Analysis and Strategy, The Sharemarket »

Potential investors are concerned with the future level of a company’s performance
Company’s performance affects both the profitability and variability of the cash flows
Indicators of company performance
–      1. Capital structure
–      2. Liquidity
–      3. Debt Servicing
–      4. Profitability
–      5. Share Price
–      6. Risk
Capital structure
Proportion of finance (capital) obtained through debt or equity
Measured as
Debt to equity ratio =

Market value of debt/

Market value of equity

Higher debt levels increase financial risk (company may not be able to meet interest payments)
Proprietorship Ratio =

Shareholder’s funds/

Total assets

Indicates long-term stability
A higher ratio indicates less reliance on  external funding
Liquidity
The ability …