Finance: Influences on Financial Management

Question 1

what are the two internal sources of finance

Answer 1

retained profits
owners equity

Question 2

what are retained profits

Answer 2

net profit that isnt paid to shareholders(as dividends)

these funds are reinvested into the business

Question 3

what is owners equity

Answer 3

funds invested into the business by owners

for large businesses, this is achieved by issuing shares of the business or sale of assets

Question 4

what are advantages of using owners equity and retained profits

Answer 4

• not indebted to a lender
• no interest
• unlimited access to funds that are available

Question 5

what are disadvantages of using owners equity and retained profits

Answer 5

• owners may potentially dissolve funds
• required careful budgeting and planning

Question 6

what are the two ways of externally sourcing finance

Answer 6

debt
equity

Question 7

how can equity be raised

Answer 7

ordinary shares
private shares

Question 8

is equity or debt financing more risky

Answer 8

debt

Question 9

define bank overdraft

Answer 9

overdraw of an account up to a pre-determined amount of time

high interest

Question 10

define commercial bills + characteristics

Answer 10

issued by institutions other than banks for over $100 000 between 90-180

• highly liquid
• guaranteed paymetn

Question 11

define factoring

Answer 11

selling accounts receivable at a discounted price to a factoring company

last resort

Question 12

define mortgage

Answer 12

loan for a property

Question 13

define debentures

Answer 13

finance companies investing in a business for a fixed rate and period

Question 14

define unsecured notes (bonds)

Answer 14

loan for a set period of time without collateral or assets

high interest rate

Question 15

define leasing

Answer 15

payment of money for use of equipment owned by a third party

Question 16

define operating leases

Answer 16

assets leased for short periods, and business doesn’t gain ownership of good at end of lease

maintenance is carried out by owner

may be cancelled at any time

Question 17

define financial leases

Answer 17

lessor purchases asset on behalf of lessee.

leased for life, fixed payments

is similar to a loan

Question 18

what are the 6 financial institutions

Answer 18

banks
investment banks
finance companies
superannuation funds
life insurance companies
unit trusts
Australian Securities Exchange (ASX)

Question 19

what are banks

Answer 19

Largest provider of funds and financial services.
Receive savings as deposits and makes investments and loans to borrowers.

Question 20

what are investment banks

Answer 20

Mostly available to the corporate sector. Arrange long term finance, project finance, and overseas finance. provide working capital, and portfolio investment services. Advise on mergers and takeovers. not for individuals/large companies.

Question 21

what are finance companies

Answer 21

specialise in smaller commercial finance. Mainly provide short-term and medium-term loans (personal and secured). major providers of lease finance. Some specialise in factoring or cash flow financing.

Question 22

what are life insurance companies

Answer 22

Policyholders pay regular premiums in return for the insurer to pay the beneficiary a sum of money upon death of the insured person (often an employee). Provide both equity adn loans to the corporate sector which provide funds for investment.

Question 23

what are superannuation funds

Answer 23

Invest money received from contributions in company shares, property and managed funds. This provides capital for companies and also earns invest returns for superannuation contributers.

Question 24

what are unit trusts

Answer 24

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

Question 25

what is the ASX

Answer 25

acts as a primary market- enables companies to raise capital through issue of shares.
secondary market- deals with purchase and sale of existing shares.

Question 26

What are ordinary shares

Answer 26

most common, shareholders receive dividends

Question 27

what are primary shares

Answer 27

issued for first time on the public market

Question 28

what are rights issues

Answer 28

privilege given to shareholders to buy new shares within the company

Question 29

what are placements

Answer 29

shares offered to major investors exclusively

Question 30

what are share purchase plans

Answer 30

offer to existing shareholders to buy more shares without fees and maybe at a lower price.

Question 31

what are private shares

Answer 31

Money/shares bought within a company not listed on the ASX.

Question 32

what is Australian Securities and Investment Commission (ASIC)
.influence of government

Answer 32

independent commission who enforces and administers the corporations Act 2001. Assists in reducing fraud and unfair practices in financial markets and financial products.

Question 33

what is company taxation
.influence of government

Answer 33

Companies and corporations are taxed at a flat rate of 30%. Company tax is paid before profits are distributed to shareholders as dividends.

Question 34

what is a global economic outlook

Answer 34

Institutions project changes to the level of economic growth throughout the world.

Question 35

what is availability of funds

Answer 35

The ease with which business can access funds on the international financial markets.

Question 36

what are interest rates

Answer 36

the cost of borrowing money. the higher level risk, the higher level of interest rate.

Question 37

what impact does a positive global economic outlook have on a business

Answer 37

increase in demand for goods and services, which means an increase in production to meet demands, leading to increased sales and profits

Question 38

what impact does a positive global economic outlook have on borrowing money eg. debt

Answer 38

decrease in interest rates on funds borrowed internationally, meaning a decreased level of risk associated with repayments

Question 39

what impact does a negative global economic outlook have on a business

Answer 39

decrease in demand for goods and services, which means an decrease in production to meet demands, leading to decreased sales and profits

Question 40

what impact does a negative global economic outlook have on borrowing money eg. debt

Answer 40

increase in interest rates on funds borrowed internationally, meaning a increased level of risk associated with repayments

Question 41

if you are borrowing money at high risk…

Answer 41

there will be high interest rates