7: Business finance Flashcards
Businesses are financed by a combination of equity and debt.
“Equity holders face lower risk but lower returns”
Is the above statement true or false?
False.
Debt holders face lower risk but lower returns
As such, equity holders hold higher risk and higher returns
What is one disadvantage of short term financing
Interest rate risk - interest rates can fluctuate
Short term needs should be financed by _____
Long term assets should be financed by _____
Short term funds
Long term funds
What is one example of a long term fund
Debt raising or equity raising
An aggresive position will see a business use more ____-term finance
short
What are the two main roles for the Bank of England
Carrying out monetary policy
Ensuring financial stability
Banks have a ___ relationship which means that they are expected to act in good faith in its relationship with the customer
Fiduciary
What are the two types of financial markets?
Money markets
Capital markets
Are gilts a financial instrument in the money market or capital market?
money market
Is debt factoring a financial instrument in the money market or capital market
capital market
Treasury bills are a minimum investment of £xxx,xxx
£500,000
What are the three main types of financial instruments in capital markets
Equity
Preference shares
Loan stocks / debentures
What are the three main ways of raising equity finance?
Retained earnings (Profits re-invested)
Rights issues of shares
Issue of new shares
In relation to rights issues, what are pre-exemption rights?
The existing shareholders have rights of first refusal (pre-exemption rights) on the new shares
New issue of shares may take the form of Placings. What is the first step in Placings?
Share are sold to an issuing house (investment bank)
What is the downside the issue of shares via Placings?
Shares will be sold to a narrow pool of institutional investors, reducing the efficiency of the market in the shares
When underwriting the issue of shares, will the cost still be payable even if the underwriter does not have to invest?
Yes
Is a finance lease a long term debt finance or a short term finnancial instrument?
long term
Is an operating lease short term or long term
short term
Which would be classified as a source of short term finance?
Factoring; or
Bank loan
Factoring
“To pay for an increase in inventory and receivables as the business grows, and to pay tax on profits earned”
What type of finance should be used to fund this?
immediate, short-term, medium-term, long-term finance?
medium term finance
