Sources of Finance and Financial Markets
What the domain tests
Questions test matching finance sources to need (maturity, security, control and cost), issuing securities, and understanding Nigerian primary and secondary markets. Expect rights issues, bond features, leases and Islamic finance.
Core rules and concepts
- Internal funds: retained earnings-cheap but not free; they carry an opportunity cost equal to shareholders' required return.
- Equity: IPO, rights issue, private placement, venture capital and private equity. Rights issues protect pre-emption rights; they may be discounted but dilute percentage ownership if not taken up.
- Debt: bank term loans, overdrafts, commercial paper, corporate bonds, convertible bonds and preference shares. Match asset life to finance maturity: short-term assets with short-term finance, long-term assets with long-term finance.
- Markets: the SEC regulates public offers; NGX lists equities; FMDQ supports fixed income and derivatives. CBN rules affect FX and bank credit.
- Leasing preserves cash and may provide tax benefits; Islamic finance prohibits interest and uses murabaha, ijara, sukuk and musharaka.
Worked example
A company has 4 million shares at N12 cum-rights. It makes a 1-for-4 rights issue at N8. New shares = 1 million; total shares = 5 million. Theoretical ex-rights price = (4m × N12 + 1m × N8) ÷ 5m = (N48m + N8m) ÷ 5m = N11.20. The value of the right = N11.20 − N8 = N3.20. The shareholder who does not subscribe loses value unless the rights are sold.
Traps that cost marks
Do not confuse cum-rights and ex-rights prices; ignore flotation costs and dilution; use short-term finance for long-term assets; treat retained earnings as zero-cost; or overlook regulatory approval and pre-emption rights.