Influences

Question 1

Identify Internal sources of finance

Answer 1

• Retained profits
• Sale of assets
• Owner’s equity

Question 2

Identify External equity finance

Answer 2

Ordinary Shares (ASX)
- New issues --> New shares on ASX (bus. makes money)

• Rights issues –> Shares offered at special price for existing shareholders
• Placements –> Shares offered directly to investors (private)
• Share purchase plans –> Shares bought from bus. directly w/o broker.

Private Equity

Question 3

Identify Extrernal Short-term Debt Finance

FOC

Answer 3

• Overdraft
• Factoring
• Commercial Bills

Question 4

Identify External Long-Term Debt Finance

MUDL

Answer 4

• Mortgage
• Debentures
• Unsecured notes
• Leasing

Question 5

Assess the use of Overdraft

Answer 5

The business has permission to overdraw their savings account up to an agreed amount

Provides flexibility and assists with cash flow and liquidity of the bus. . Quick access to funds to cover day to day expenses (wages, stock, bills, etc.)

However, bus. must pay interest back on the loan and “debt burden”

Question 6

Assess the use of Factoring

Answer 6

The selling of a business’s accounts recieveable to a finance company for a discounted amount

Quick access to funds / cash assisting liquidy of the business. - Assists in Cash Flow

However, Don’t recieve full value of accounts recievable and reduce Working Capital (Cutting Current Assets) in return for immediate cash.

Question 7

Assess the use of Commercial Bills

Answer 7

S/T loans issued by the bus. for periods up to 6 months. Full amount + interest is repaid at the end of the term
- May be used to fund purchase of large amount of stock or technology

• Raises liquidity quickly
• Unsecured loan means high risk which means higher interest rate.

Question 8

Assess the use of a Mortgage

Answer 8

A Loan secured to a property. the bank has the right to possess the property if loan not repaid.

+ Avoid large upfront costs associated with buying assets
+ Pay full amount over a long period of time 15- 20 years
- Debt burden
- Interest needs to be payed

Question 9

Assess the use of a Debenture

Answer 9

Contract that pays a fixed rate of interest on the amount loaned to the bus. - Similar to bank deposits (secured loan) - assets sold to repay lenders if bus. fails

+Raises large amount of funds for expansion / purchase of assets
- Regular payments must be made back to investors (with interest)

Question 10

Assess the use of an Unsecured note

Answer 10

Companies issue unsecured notes to raise money for expansion, however interest rates a much higher due to there being a high risk - If the business closes, the lender loses their money.

Question 11

Assess the use of Leasing

Answer 11

The payment for use of equipment that is owned by another party e.g. Cars, machinery, computers.

+ Avoid upfront costs (Cost is lower to lease than to purchase equipment)
+Leased assets don’t have to be maintained / can be continually updated
-Bus. doesn’t own the equipment at the end of the leasing contract.

Question 12

List Financial Institutions (7)

FIBISUA

Answer 12

1) Bank
2) Investment Banks
3) Finance Companies
4) Superannuation Funds
5) Insurance Companies
6) Unit Trusts
7) Australian Securites Exchange (ASX)

Question 13

Describe the Bank

Answer 13

Banks are the main providers of finance.
-Receive deposits for savers and approve loans to borrowers

E.g. NAB, Commonwealth, ANZ

Question 14

Describe Investment Banks

Answer 14

Banks that specialise in investment banking.
-Provide advice on megers and takeover, and financial services such as provision of finance for working capital and expansion

E.g. Macquarie Bank

Question 15

Describe Finance Companies

Answer 15

• Make loans to consumers + bus.

Usually higher interest rate and less strict criteria to borrow money. Raise money through debentures.
- Loans, Credit cards, leasing, factoring.

Question 16

Describe Superannuation funds

Answer 16

-Invests the contribution of members into a range of investments with the inention of maximising future return. –> Investments in shares

Question 17

Describe Insurance Companies

Answer 17

Cover various risks that people + bus. face

e.g. Property damage, life inssurance, theft

Question 18

Describe unit trusts

Answer 18

Takes funds from a large member of small investors and collectively invests them to receive a larger return on intrest repayments

Question 19

Describe the Australian Securities Exchange (ASX)

Answer 19

Main market for the sales of shares in Australia

• Created by mreger of the Australian Stock Exchange and the Sydney futures Exchange in mune 2006.

Question 20

What are the Government Influences on Finance

Answer 20

1) Australian Securities + Investment Commission (ASIC)

2) Company Taxation

Question 21

Explain how ASIC influences the finance department

Answer 21

The Australian Securities + Investment Commission enforces the CORPERATIONS ACT (2001)

-That protects customers in Areas of banking, investment + insurance.

This ensures that Australia’s financial markets are fair and transparent which contributes the Australia’s economic repuation and wellbeing.

The Finance department must provide ASIC with access to their annual financial reports for investigation. Failure to comply with legal requirements will result in punishment
- Imprisonment, Fines + negative publicity –> decreased profts + less investor confidence

Question 22

How does Company Tax influence Finance

Answer 22

All incorporated businesses in Australia are required to pay company tax on their profits. This means that 27.5% of company proftis are taxed by the government.

This forces bus. to find more ways to increase revenue to compensate for company tax.

Question 23

What would be the benefit of lowering company Tax in Australia?

Answer 23

• Promote smaller businesses to become companies which provides insentive to innovate to create better goods / services which also creates more jobs.
• Insentive for international companies to come to Australia and creates a competitive market which means innovation in products + services.

Question 24

List the Global Market Influences

Answer 24

1) Global Economic Outlook
2) Avaliability of Funds
3) Interest Rates

Question 25

What is the global economic outlook and how would a positive outlook effect Finance?

Answer 25

Refers to projected changes in the world economy

If the outlook is positive (Boom), businesses are likely to have larger markets + more potential buyers –> Consumer confience is high which means increased sales revenue

Question 26

What effect does a negative economic outlook have on Finance

Answer 26

Recessionary periods (such as the GFC in 2007) can lead to signicant loss of sales + revenue --> consumer conficence is low
- Demand for products are low and exporting goods declines therefore profitability declines and growth slows.

Question 27

How does Avaliability of Funds influence finance

Answer 27

Refers to the ease in which bus. can borrow money.

Businesses may chose to borrow funds from internatonal lenders due, however, tighter lending criteria will most likely mean more difficulty in borrowing
- therefore businesses are less likely to borrow /expand.

Question 28

How do Interest rates influence finance

Answer 28

Interest rates in Australia are higher than other parts of the world and therefore Australian businesses seek loans from international sources, as overseas interest may be lower than Australia.

–> However, this can be risky. If exchange rates fluctuates, it may cost more AUS$ to buy the other countries currency and therefore the benefit is outweighed by the exchange rate.