Business Finance

Question 1

a) Who faces lower risk, debt or equity holders?

b) Who faces higher reward, debt or equity holders?

Answer 1

a) Debt - paid first in pecking order

b) Equity - share of profits. But can forgo divs in times of losses

Question 2

What is usually cheaper, short or long term finance?

Answer 2

LT

Think expensive payday loans

Question 3

What are the two risks to borrowers of short term finance?

Answer 3

1. Renewal risk - Continual need for renegotiation
2. Interest rate risk - cannot guarantee low rates due to constant renewal

Question 4

Match the business position to the definition:

a) Aggressive business
b) Average business
c) Defensive business

1. Sacrifices profitability for stability. Little ST finance. Low risk, low return
2. High profit, high risk. More ST finance than equity
3. ST credit & LT debt

Answer 4

a 2
b 3
c 1

Question 5

The bank of England ensures financial stability through three groups. Name them and indicate whether they are independent

Answer 5

Financial Policy Committee - Independent

Twin Peaks:
Prudential Regulation Authority - Part of BoE

FRC - Independent

Question 6

What are the advantages and disadvantages of an overdraft?

Answer 6

+/ve: Flexible & cost is only paid when used

-/ve: Banks can demand immediate repayment, can be high cost

Question 7

What is debt factoring?

Answer 7

Sell receivables to a third party who chase