FINANCE: Influences

Question 1

What is an internal source of finance?

Answer 1

The profits that are not distributed, but are kept in the business as a cheap and accessible source of finance.

Question 2

What are the 3 short-term external sources of finance?

Answer 2

Overdraft, commercial bills, factoring.

Question 3

What is an overdraft and their advantages?

Answer 3

A bank allows a business to overdraw from their account up to an agreed limit. Their advantages are that interest rates are low and there is no regular repayment schedule so owners can pay the money back when they are able.

Question 4

What is a commercial bill?

Answer 4

Loans issued by other businesses, for larger amounts for a period of generally between 30-180 days.

Question 5

What is factoring and their advantage?

Answer 5

A business sells accounts receivable to a finance company. Business will receive up to 90% of receivables within 48 hours of submitting it which will improve cash flow.

Question 6

What are the 4 long-term external sources of finance?

Answer 6

Mortgage, debentures, leasing, unsecured notes.

Question 7

What is a mortgage?

Answer 7

A loan using property as security with regular repayments.

Question 8

What is a debenture and its advantage?

Answer 8

Loans issued by investors for a fixed rate of interest. Businesses can make cost savings as they don’t have to go through the bank as an intermediatory.

Question 9

What is an unsecured note and its disadvantage?

Answer 9

A loan from investors which do not use assets as security and therefore present the most risk to the investors, thus they attract a higher interest.

Question 10

What is leasing?

Answer 10

Involves the payment for the use of equipment that is owned by another party.

Question 11

What are some advantages and disadvantages of leasing?

Answer 11

Advantages: doesn’t reduce ownership, tax deductible.
Disadvantage: higher interest rates.

Question 12

What is equity finance?

Answer 12

The finance raised through inviting new owners.

Question 13

What are the 4 types of equity finance?

Answer 13

New Issue: first shares offered to investors - IPO.
Rights Issue: existing share holders purchase ‘the right to buy shares’ in the future at discounted prices.
Placements: new shares offered to targeted individuals at a discount.
Share Purchase Plans: shares offered in place of dividends.

Question 14

What is private equity finance?

Answer 14

Funds that are not raised through stock exchange.

Question 15

What are banks?

Answer 15

Accepts deposits at a lower interest rate and lends that money at a higher interest rate.

Question 16

What are investment banks?

Answer 16

They provide services in borrowing and lending, primarily to the business sector.

Question 17

What are finance companies?

Answer 17

Non-banks that provides short and medium term loans and raise money through debentures.

Question 18

What is an implication of finance companies?

Answer 18

Entitled to sell assets to recover the initial loan if the business fails.

Question 19

What are life insurance companies?

Answer 19

Provide cover and a lump sum payment in the event of death with holders paying premiums.

Question 20

What are superannuation funds?

Answer 20

All employers must make a financial contribution to a fund that will provide benefits when employees retire.

Question 21

What are unit trusts?

Answer 21

They take funds from a large number of small investors and invest them in specific types of financial assets.

Question 22

What is the ASX?

Answer 22

A market where shares are bought and sold.

Question 23

How does ASIC influence financial management?

Answer 23

It enforces the Corporations Act 2001 and assists in reducing fraud and unfair financial practices.

Question 24

How does company taxation influence financial management?

Answer 24

All businesses must pay company tax of 25% on profits.

Question 25

What is the global economic outlook?

Answer 25

The projected changes to economic growth throughout the world.

Question 26

How does the global economic outlook influence financial management?

Answer 26

A positive outlook will see an increase in demand so more finance is needed to buy equipment etc.

Question 27

What is the availability of funds?

Answer 27

The ease that businesses can access funds (for borrowing) on the international market.

Question 28

What are interest rates?

Answer 28

The cost of borrowing money. The higher risk the higher the rate.