5.2 Sources of Finance

Question 1

What are the two ways businesses can be financed?

Answer 1

Equity - dividends

Debt - interest

Question 2

What is equity finance?

Answer 2

from its owners in return for dividends

Question 3

What is debt finance?

Answer 3

lenders in return for interest

Question 4

b/w debt and equity which one has the highest risk and highest returns?

Answer 4

Debt - low risk & low return

Equity - High risk & high return

Question 5

What is financial intermediation?

Answer 5

deposits from customer and use it to lend money to other customers

Question 6

what are the benefits of financial intermediation?

Answer 6

small amounts by saver are used for bigger loans
short term savings cn be transferredinto log term borrowings
search costs are reduced
risk is reduced - savings not tied up with one individual borrower.

Question 7

what is the clearing system?

Answer 7

time b/w mone despotied and money avilable

Question 8

What are the tyoes of clearing? (5)

Answer 8

General - cheques 3-4 days
EFT/EFTPOS
BACS - same day debited and credited
CHAPS - over 10,000 same day
SWIFT - international

Question 9

What re the tw types of bnks?

Answer 9

Primary - hig street

Secondary - merchant banks

Question 10

Banks are heavilty regulated by the Bank of England? what in the BoE to main aims?

Answer 10

Monetry stability and financial stability

Question 11

What is monetry stability dicated by?

Answer 11

Base rate set my Monetry Poloicy Commitee

Question 12

What is financial stability dictated by?

Answer 12

Financial policy Commitee (FPC) - idependant risk assesmnt in financial system
Prudential regulation Authority (PRA) - BoE supervise and promote the safety and soundness of firms

Question 13

What do the bank duties enclude?

Answer 13

Honour customer cheques
Credit cash/ Cheques
repay on demand
comply with customer intructions
statement
confdentiality
reasonable notice for closing

Question 14

What are the rights of the bank?

Answer 14

reasonable bank charges
use customers money
repaid overdrawn balances on demand
indemnified against possible losses.

Question 15

What is a money market?

Answer 15

wholesale markets buying and selling different forms of money or marketable securities.

Question 16

What are marketable securities?

Answer 16

short term, highly liquid investments that are readily convertible into cash.

ie. companies might use them to invest short term surplus finance.

Question 17

what are the 6 types financial instruments that can be traded in the money markets.

Answer 17

Treasurey bills
Desposits
Certficates f deposits
Gilts
Bonds
Commercial paper

Question 18

treasury bills?

Answer 18

BofE
min 50K, 3 months
highly secure and loquid => low returns

Question 19

Deposits

Answer 19

bank account

higher yeilds than TBs

Question 20

CDs?

Answer 20

Certif of deposit
50K min fix term
sold early inCD market

Question 21

Gilts?

Answer 21

long term govermetn debt

caputal gain advs

Question 22

Bonds?

Answer 22

debentures and loans on Stock Exchange

Question 23

Comercial paper?

Answer 23

IOUs of large companies

Question 24

Inter bank market?

Answer 24

very short term borrowing, overnight, b.w banks

intertes rate LIBOR

Question 25

Differnece between cpital markets and money markets?

Answer 25

Cap >1yrs

MM <1yars

Question 26

capital market?

Answer 26

the national and international market in which a business may obtin the finance it needs for its short/long term plans

Question 27

types of capital market?

Answer 27

Ntional stock markets (LSE)
the bnking system
bond markets
leasing
debit factoring
international markets

Question 28

Raising new long term bus finance means?

Answer 28

issuing securities in the form of shares (equity) or Bonds (debt)

Question 29

Equity?

Answer 29

represents the Ordinary shares of the business. owners of business,

Question 30

perfoamce shares?

Answer 30

divs before Ordinary shares thereforecarry less risk.

return is usually fixed => simailat to debt

Question 31

loan stocks and debentures?

Answer 31

fixed inertets rate borrowings with a set repayment date.

Question 32

what are the 3 methods of rasing equity?

Answer 32

reatning earnings
Rights issues to new shares
new issues of new shares

Question 33

rights issue?

Answer 33

an issue of new shares for cash to exssiting shareholder in proportion to their existing holdings.

Question 34

Legally rights issue mist be made before new issues to public - why?

Answer 34

because current shareholders have pre-emption rights

Question 35

What 4 factors need to be considered whenmaking rights issues?

Answer 35

issue costs
shareholder costs
control (dilution)
unlisted companies

Question 36

perfernced shares?

Answer 36

no voting rights

no right to share i xs profit - FIXED

Question 37

when for preference shares?

Answer 37

compnay looing to

1. raise new captial but avoid addition debt
2. no dilute ordinary shares.

Question 38

how can a compnay list?

Answer 38

LSE

AIM

Question 39

going public advs?

Answer 39

Large sourc of finance
Imporves markejtablility of shares - increase company value
Improves company standing

Question 40

going public disadv?

Answer 40

high cost risk
diltution fo control (25% public)
traded for 3 years
greater scuteny
not successful if worth under 50mil
possibility ofbein taken over

Question 41

Main Sources of Debt finances?

Answer 41

Overdraft
Debt factoring
term loans
loan stock
leasing

Question 42

Other forms of debt?

Answer 42

Money markets
securitisation
public sector grants and loans

Question 43

3 ways to fund a growing business?

Answer 43

Bus Angels and crowd funding (5 mil rev)
Venture capitalist (exit routes)
AIM

Question 44

financial eports come with trading risks for inporter dn exporters over adn above the risks of domestic trade? the are?

Answer 44

political and cultural risks

e.g. tranportion dmage or thfts
customer tastes

Question 45

who can help to reduce risks?

Answer 45

bnks
insurance companies
credit refernce agencies
geovermanet agencies ECGD

Question 46

how to reduce credit risk

Answer 46

vetingcredit worthiness of each customer

grantcredit terms accordling

Question 47

what are the three exmaple of redcing credit risk?

Answer 47

Bills of exchange (signed before payment)
letters of credit (bank middle man)
export insurance (insurance comps)