Chapter 28

Question 1

Why does business activity require finance?

Answer 1

• start up capital

- working capital

Question 2

How do you calculate working capital?

Answer 2

Current assets- current liabilities

Question 3

How much working capital is needed in a business?

Answer 3

Sufficient working capital to prevent a business becoming illiquid and unable to pay its debts.

Yet low enough, to not end up with too much opportunity cost because too much money is tied up in your assets and working capital.

Question 4

What is the working capital cycle?

Answer 4

> cash> materials and stock> production > sell on credit

Question 5

What are internal source of finance?

Answer 5

Sales of assets

Reductions in working capital

Retained profit

Question 6

What are reductions in working capital?

Answer 6

This is when companies reduce their current assets so that working capital is reduced and capital is released to use for financing other things.

Question 7

What are the features of internal finance?

Answer 7

• no direct cost to the business
• doesn’t increase liabilities or debts
• can be slow relying on this for business growth

Question 8

What are external sources of finance?

Answer 8

Short term

• bank overdrafts
• trade credit
• debt factoring
• bank loan

Long term

• hire purchase and leasing
• medium term loan

Long term finance

• long term loans
• bonds or debentures
• grants
• share issue

Question 9

What is trade credit?

Answer 9

Y

Question 10

What is the difference between hire purchase and leasing?

Answer 10

Hire purchase is exactly like leasing except once a final payment is made the hired object becomes yours (the payer now has ownership) whereas this does not apply to leasing.

Question 11

What are bonds and debentures?

Answer 11

Un

Question 12

What are the advantages to equity capital?

Answer 12

• it doesn’t have to be repaid so it is permanent
• dividends dont have to be paid every year
• interest on loans must be paid back when demanded by the lender

Question 13

What details are important to know about grants?

Answer 13

8

Question 14

What finance is there for unincorporated businesses

Answer 14

• debentures are going to be unlikely since they are most likely not well known
• bank overdrafts
• loans
• credit form supplier
• borrowing form people (family, friends)
• savings and profit
• lenders are often reluctant to lend to small businesses
• grants

Question 15

What businesses are unincorporated?

Answer 15

—-

Question 16

What are they features of microfinance?

Answer 16

• interest rates can be quite high
• if the business fails then microfinance encourages taking on large debt that cannot be repaid by people in these conditions

Question 17

What are the features of crowdfunding?

Answer 17

• publicity that comes with this can be positive
• if successful, investors will get their initial investments plus interest
• if successful, investors will get an equity stake in the business and a share in profits

Question 18

Rights responsibilities…

Answer 18

1