Business Finance

Question 1

How is a business financed?

Answer 1

By equity - owners
By debt - lenders

Question 2

What is the risk and return for debt holders and equity holders?

Answer 2

D - lower risk, lower return
Get interest before equity holders get dividends, secured, higher ranking for liquidation
E - higher risk, higher return
Suffer loss

Question 3

What is the cost of short-term finance?

Answer 3

Cheaper - lower risk
Flexible so reduces overall cost
Includes payables

Question 4

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

Answer 4

Renewal risk
Interest rate risk

Question 5

What are 4 examples of costs of running out of cash?

Answer 5

Loss of settlement discount
Loss of supplier goodwill
Delayed wage payments
Payables petition to wind up business

Question 6

What motives do running out of cash costs influence?

Answer 6

Transactions
Finance
Precautionary
Investment

Question 7

What are primary and secondary banks?

Answer 7

P - cheque accounts, internet banking, commercial, retail or clearing banks
S - merchant banks - trade with each other

Question 8

What policies affect banks?

Answer 8

Monetary - interest rate set by MPC
Financial - FPC seek to ensure stability

Question 9

What are the types of clearing system and money transmission?

Answer 9

General clearing
Electronic funds transfer
Banks automated clearing system
Society for worldwide interbank financial telecommunication
Payment gateways
Digital commerce platforms

Question 10

What are the bank/customer relationships?

Answer 10

Debtor/creditor
Bailor/bailee
Principle/agent
Mortgagor/mortgagee

Question 11

What is the bank’s fiduciary relationship?

Answer 11

Act in good faith
Honour cheques
Credit to account
Comply with instructions
Confidentiality
Provide reasonable notice for closure

Question 12

What are the money market financial instruments?

Answer 12

Treasury bills
Deposits
Certificates of deposit
Gilts
Bonds
Commercial paper

Question 13

What finance is on the capital market?

Answer 13

National stock exchange
Banking system
Bond markets
Leasing
Debt factoring
International markets

Question 14

What factors should be considered when making rights issues?

Answer 14

Issue costs
Shareholder reactions
Control
Unlisted companies

Question 15

What are the 2 types of public offers of shares?

Answer 15

Offers for sale - intermediary sells
Direct - to public

Question 16

What is debt-factoring?

Answer 16

If a customer does not pay, the company do not pay back loan

Question 17

What is loan stock?

Answer 17

Debt capital in form of securities - bonds or debentures

Question 18

What are other forms of debt?

Answer 18

Money market borrowing
Securitisation
Public sector grants and loans

Question 19

What are the sources of debt finance?

Answer 19

Overdraft
Debt-factoring
Term loans
Loan stock
Leasing

Question 20

What are the 4 sources of finance for growing businesses?

Answer 20

Business angels - invest in something passionate about
Venture capitalists - high risk, high return
Alternate investment market
Crowdfunding

Question 21

What are the risks involved in trading?

Answer 21

Physical risk - lost or stolen goods
Credit risk - not paid
Trade risk - customer won’t accept goods
Liquidity risk - inability to finance credit

Question 22

How can businesses reduce credit risk?

Answer 22

Bills of exchange
Letters of credit
Export credit insurance

Question 23

What are green bonds?

Answer 23

Finance to be applied to green projects

Question 24

What are the guidelines for issue of green bonds?

Answer 24

Use of proceeds environmental
Process for project evaluation and selection
Management of proceeds - separate account and tracked
Reporting - available information on proceeds