CH8 QB Business finance Flashcards
A family-owned removals company has liquidity problems and needs an injection of funds.
From the following list identify which would be classified as a source of short-term finance
for this company.
A Share capital
B Bank loan
C Factoring
D Commercial mortgage
C Short-term funds are those used to cover normal operations and can be taken to mean
finance available for up to one year. An example is debt factoring (C). Bank loans and
mortgages are debt finance provided for more than one year, while share capital is
equity finance that is also provided for more than one year.
A consultant has made the following statements concerning each possible relationship
between a bank and its customer.
Statement (1) In the fiduciary relationship the bank is expected to act with good faith
towards the customer.
Statement (2) In the mortgagor/mortgagee relationship the bank asks the customer to
secure a loan with a charge over the customer’s liabilities.
Statement (3) In the bailor/bailee relationship the bank accepts the customer’s property
for storage and undertakes to take reasonable care to safeguard it against
loss or damage.
Identify which of the statements about these relationships are true.
A Statements (1) and (2) only
B Statements (2) and (3) only
C Statements (1) and (3) only
D Statements (1), (2) and (3)
C Statements (1) and (3) accurately describe the fiduciary and the bailor/bailee
relationships respectively. Statement (2) is inaccurate as it states that the charge is over
the customer’s liabilities, when in fact it would be over the customer’s assets.
SAMPLE PAPER
The directors at Landsaver plc want to raise long-term finance by issuing shares in the
company. They have been told that the way to do this is ‘by accessing the market’ but they
are not sure what this means. A market where new securities are bought and sold for the
first time is known as:
A a futures market
B a secondary capital market
C a primary capital market
D a money market
C The capital markets consist of primary markets and secondary markets. New securities
are issued on primary markets (C) whilst secondary markets (B) allow investors to buy
existing securities or sell securities that they hold. Futures markets (A) provide
standardised futures contracts to buy or sell a particular commodity or financial
instrument at a pre-determined price in the future. Money markets (D) provide shortterm debt financing and investment.
A consultant has made the following statements about venture capital.
Statement (1) Venture capitalists may realise their investment by selling their shares
following flotation on the stock exchange.
Statement (2) Venture capitalists never sit on the board of a company.
Statement (3) Venture capitalists normally expect a company’s existing owners to bear a
substantial part of the risk.
Which of the statements are true?
A Statements (1) and (2) only
B Statements (2) and (3) only
C Statements (1) and (3) only
D Statements (1), (2) and (3)
C Venture capitalists often will want a place on the board to secure their investment, so
Statement (2) is false. They are very likely however to realise their investment by selling
their shares following flotation on the stock exchange (1), and they would normally
expect a company’s existing owners to bear a substantial part of the risk (3).
SAMPLE PAPER
Any person who brings together providers and users of finance, whether as broker or principal, is known as: A a business angel B a venture capitalist C a merchant banker D a financial intermediary
D Financial intermediary is the general term for anyone who carries out this function.
Business angels, merchant bankers and venture capitalists may all act as financial
intermediaries
The following is a definition of what type of market?
“A short-term wholesale market for securities maturing in one year, such as certificates of
deposit, treasury bills and commercial paper.”
A Capital market
B The London Stock Exchange
C AIM (Alternative Investment Market)
D Money market
D Money market. AIM and the London Stock Exchange are both examples of capital
markets.
Which of the following is an example of an institutional investor? A The Bank of England B The Financial Reporting Council C The Financial Conduct Authority D A unit trust
D A unit trust is an institutional investor, along with pension funds and insurance
companies for example. The Bank of England (A) is the UK central bank, and the
Financial Reporting Council (B) and Financial Conduct Authority (C) are regulators.
In which of the following projects would a venture capital organisation be least likely to
invest?
A A business start-up
B A management buyout
C Renovation of a production facility
D Replacement of an existing production line with a process using a new technology
C Venture capital is generally most appropriate for new investments with above average
risk. Renovation of an existing facility is a part of the ongoing activity of the business,
and is unlikely to have much impact on the overall level of returns. It is therefore
unlikely to be appropriate for a venture capital investment.
Which of the following forms of new share issues would normally be underwritten? A Introduction B Offer for sale by tender C Placing D Rights issue
D Although a rights issue (D) should not need underwriting in theory, since all the shares
are being offered to existing shareholders, in practice it will usually be underwritten.
This is to ensure that sufficient funds are raised from the issue, even if the rights are not
fully exercised. No new shares are issued in an introduction (A) and so there is no need
to underwrite. An offer for sale by tender (B) would not normally need underwriting
since the issue price reflects the value of the shares as perceived by the market.
Underwriting would only be necessary if there is a risk that there will be undersubscription even at the minimum price. It is unnecessary to underwrite a placing (C)
since a purchaser for the shares is arranged in the issue process. SAMPLE PAPER
Grid plc wants to be listed on the London Stock Exchange. An adviser has stated that the following are methods by which a company can obtain a new London Stock Exchange listing for its shares. Method 1 Offer for sale Method 2 Placing Method 3 Rights issue Method 4 Offer for subscription Which of these methods are available to Grid plc? A Methods 1, 2 and 3 only B Methods 2, 3 and 4 only C Methods 1, 2 and 4 only D Methods 1, 3 and 4 only
C A rights issue is the only one of these methods which cannot be used to obtain a new
stock exchange listing.
Which of the following is a function of financial regulators?
A The provision of financial advice and information to businesses
B Reduction of risk for clients via aggregation of funds
C Maturity transformation
D Prudential control of financial institutions
D Prudential control (D) refers to the regulation and monitoring of banks and other
financial institutions by the Bank of England, the Treasury etc. It is financial intermediaries,
not regulators, which provide advice and information to investors on available financial
opportunities and their associated risks and returns (A). Intermediaries reduce investment
risks (B) for individuals by creating an investment portfolio. Maturity transformation (C)
overcomes the problem of matching the time periods for which a company or
individual needs funds with the time periods over which investors wish to invest.
Which of the following is an advantage to the shareholders of a company that is obtaining a
listing on the London Stock Exchange?
A Disclosure requirements are reduced
B Larger dividends can be paid
C Shares become more readily marketable
D The company becomes entitled to put ‘plc’ (public limited company) after its name
C Shares become more readily marketable when they are listed. Listed companies face
increased disclosure requirements (A), not reduced ones. The size of dividend does
not depend on whether a company is listed (B). Not all plcs are listed companies (D)
A consultant has made the following statements about finance leases.
Statement (1) The lessor is responsible for maintenance of the asset.
Statement (2) The agreement may split the lease term into a primary period and a
secondary period.
Statement (3) The capital value of the asset must be shown on the lessee’s statement of
financial position.
Statement (4) The leasing company is normally a bank or finance house.
Which of these statements are true?
A Statements (1), (2) and (3) only
B Statements (2), (3) and (4) only
C Statements (1), (2) and (4) only
D Statements (1), (3) and (4) only
B Under a finance lease, the risks and rewards of ownership are transferred to the lessee,
who will therefore normally be responsible for maintenance
Which of the following is the source of finance which a company can draw on most easily in practice? A Cash generated from retained earnings B New share issues C Rights issues D Bank borrowings
A Cash generated from retained earnings (A) is the source of finance that the majority of
companies prefer traditionally. This is because it is simple, no recourse has to be made to
the shareholders, and the control structure of the company is unaffected. New share
issues (B) are expensive and risky. They are normally only undertaken when large
amounts of new capital are required. Rights issues (C) are cheaper and easier to arrange
than new share issues. However they must be priced attractively to ensure that enough
shareholders will exercise their rights to make the issue a success. Bank borrowings (D)
are a major source of finance since debt finance is generally cheaper and easier to
arrange than equity, but it lacks the simplicity of using cash from retained earnings.
With regard to an operating lease, which of the following statements is true?
A It is only possible to cancel the agreement during the term at significant cost.
B With this type of agreement a company sells assets to a finance house and the finance
house receives regular payments while the company uses the asset.
C It is a short-term lease that can easily be cancelled.
D It is a contract for a specified term, normally equal to the expected asset life.
C An operating lease is a short-term contract which may not last for the full life of the
asset. The lessor owns the asset. A, B and D are all common features of finance leases.
