August 6, 2023 at 7:44 pm #689481
Hello Sir
In the following question asking to order the sources of finance by the riskiest first
why the loan notes is not riskier than the bank loan
here because they said in the question that the loan notes are secured by non-current assets and the bank loan is secured by a floating charge .
but doesn’t it that the loan notes should be riskier than the bank loan in the normal situation?
Thanks,
August 7, 2023 at 9:58 am #689526
You will have to tell me which question you are referring to, because it depends on the information in the question and also whether it is referring to the risk for the investor or the risk for the company.
August 7, 2023 at 2:50 pm #689530
Hi Sir,
from ACCA mock exam FMSP0005
Q16 mock exam
The loan notes are secured on non-current assets of Par Co and the bank loan is secured by a floating charge on the current assets of the company.
Arrange the following sources of finance of Par Co in order of the risk to the investor with the riskiest first.
1 Ordinary shares
2 Redeemable preference shares
3 Loan notes
4 Bank loan
Thanks
August 11, 2023 at 7:27 am #689719
The bank loan is considered the riskiest because it is secured by a floating charge on the current assets of the company. In the event of liquidation, the bank loan would have priority over the other sources of finance.
Loan notes are secured on non-current assets, making them less risky than the bank loan.
Redeemable preference shares carry less risk than loan notes as they have a higher priority in the event of liquidation.
Ordinary shares are considered the least risky as they have the lowest priority in terms of repayment.
August 13, 2023 at 12:41 pm #689851
Hello ,
I think this the first time I have a reply from you as a tutor.
I think this answer is up side down, because the question is asking risk to the investor,
so the order should be :
1-Ordinary share : because high for getting the dividends
2-Redeemable preference shares
3-Bank Loan :Because it is secured on a floating charge on the current assets of the company
4-Loan notes : because it is secured by Non-current assets
This from sample exam model answer
Also you mentioned that
Ordinary shares are considered the least risky as they have the lowest priority in terms of repayment.
Lowest priority means they are very risky
Thanks,
August 13, 2023 at 9:49 pm #689863
Apologies
To an investor
Redeemable preference shares are considered riskier than other sources of finance because they have a fixed dividend payment and a preferential right to receive a return of capital in the event of liquidation. However, they do not have voting rights and are subordinate to debt holders.
Bank loans are secured by a floating charge on the current assets of the company, which provides some security to the lender. However, they still carry a higher risk compared to loan notes and ordinary shares.
Loan notes are secured on non-current assets of Par Co, which provides a higher level of security to the lender compared to bank loans. They are considered less risky than bank loans but still riskier than ordinary shares.
Ordinary shares represent the highest level of risk to investors as they have no fixed dividend payments and are the last to be paid in the event of liquidation. Shareholders bear the highest risk but also have the potential for higher returns through capital appreciation and dividends.
August 14, 2023 at 10:53 am #689879
Thanks a lot.
By the way are you a new Co-Tutor for FM.
Thanks,
