7: Business finance

Question 1

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?

Answer 1

False.

Debt holders face lower risk but lower returns

As such, equity holders hold higher risk and higher returns

Question 2

What is one disadvantage of short term financing

Answer 2

Interest rate risk - interest rates can fluctuate

Question 3

Short term needs should be financed by _____

Long term assets should be financed by _____

Answer 3

Short term funds

Long term funds

Question 4

What is one example of a long term fund

Answer 4

Debt raising or equity raising

Question 5

An aggresive position will see a business use more ____-term finance

Answer 5

short

Question 6

What are the two main roles for the Bank of England

Answer 6

Carrying out monetary policy
Ensuring financial stability

Question 7

Banks have a ___ relationship which means that they are expected to act in good faith in its relationship with the customer

Answer 7

Fiduciary

Question 8

What are the two types of financial markets?

Answer 8

Money markets
Capital markets

Question 9

Are gilts a financial instrument in the money market or capital market?

Answer 9

money market

Question 10

Is debt factoring a financial instrument in the money market or capital market

Answer 10

capital market

Question 11

Treasury bills are a minimum investment of £xxx,xxx

Answer 11

£500,000

Question 12

What are the three main types of financial instruments in capital markets

Answer 12

Equity
Preference shares
Loan stocks / debentures

Question 13

What are the three main ways of raising equity finance?

Answer 13

Retained earnings (Profits re-invested)
Rights issues of shares
Issue of new shares

Question 14

In relation to rights issues, what are pre-exemption rights?

Answer 14

The existing shareholders have rights of first refusal (pre-exemption rights) on the new shares

Question 15

New issue of shares may take the form of Placings. What is the first step in Placings?

Answer 15

Share are sold to an issuing house (investment bank)

Question 16

What is the downside the issue of shares via Placings?

Answer 16

Shares will be sold to a narrow pool of institutional investors, reducing the efficiency of the market in the shares

Question 17

When underwriting the issue of shares, will the cost still be payable even if the underwriter does not have to invest?

Answer 17

Yes

Question 18

Is a finance lease a long term debt finance or a short term finnancial instrument?

Answer 18

long term

Question 19

Is an operating lease short term or long term

Answer 19

short term

Question 20

Which would be classified as a source of short term finance?

Factoring; or
Bank loan

Answer 20

Factoring

Question 21

“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?

Answer 21

medium term finance