05. CSR & Sources of Finance

Question 1

What is the definition of Corporate Social Responsibility (CSR)?

Answer 1

Corporations have a degree of responsibility not only for the economic consequences of their activities, but also for the ethical, social and environmental implications.

Question 2

What are some Benefits of CSR?

Answer 2

• reduce costs in long-term
• enhance reputation / public image
• customer loyalty
• employee loyalty
• more attractive for investors
• increased competitive advantage

Question 3

What are some Costs of CSR?

Answer 3

• supply costs
• hire additional staff (cost of training)
• distracts from profit maximisation practices
• costs of donations and sponsorships
• investment trade-off

Question 4

What is the definition of Short-term Finance?

Answer 4

The purpose of short-term finance is to deal with temporary cash shortfalls that may arise in the normal course of trading.

Question 5

What are three examples of Short-term Finance?

Answer 5

• Bank overdraft
• Short-term loans
• Supplier credit

Question 6

What is the definition of a Bank Overdraft?

Answer 6

• low risk short-term source of finance
• firm is able to withdraw money from the firm’s bank account in excess of the funds deposited there
• usually up to a pre-determined limit
• interest is only charged on the amount actually outstanding, but the account is usually supposed to be “fully fluctuating”

Question 7

What is the definition of a Short-term loan?

Answer 7

• low risk short-term source of finance
• borrowings from banks or other institutions, such as credit unions and building societies, including borrowings on the short-term money market
• they usually have a fixed rate of interest and are repayable on a set date or dates.

Question 8

What is the definition of Supplier Credit?

Answer 8

• low risk short-term source of finance
• manufacturing or merchandising firms may delay payment for their purchases
• often, for short periods of time (up to a month) the supplier will not charge interest on amounts owing
• some suppliers will offer a discount for cash payments, which means that a firm not availing itself of this discount is in effect incurring an additional cost equivalent to the discount

Question 9

What is the definition of Long-term Finance?

Answer 9

Long-term finance would normally be used to fund the purchase of assets that are expected to generate returns over a long period of time, such as land and plant.

Question 10

What are three examples of Long-term Finance?

Answer 10

• shares
• debentures
• unsecured notes

Question 11

What is the definition of Shares?

Answer 11

• low risk long-term source of finance
• equity investments representing ownership in a company
• a prospectus will need to be published inviting investors to subscribe for shares in the company
• there is no interest or repayment requirement with this option

Question 12

What is the definition of Debentures?

Answer 12

• low risk long-term source of finance
• a loan made to the company by an investor and secured by the assets of the company
• interest is paid by the company to the investor at a fixed rate and the loan is repaid at some future date

Question 13

What is the definition of Unsecured Notes?

Answer 13

• high risk long-term source of finance
• a loan made to the company by an investor
• usually, a higher rate of interest is paid as compared to debentures, but the investor funds are not secured by company assets
• the unsecured notes are repaid at some date in the future