Influences on Financial Management

Question 1

What are the three sources of internal finance?

Answer 1

Owner’s Equity

Retained Profit

Sale of an Unwanted or Unproductive Asset

Question 2

Define retained profit

Answer 2

Net profit that is reinvested into the business

Question 3

What are the sources of debt finance?

Answer 3

Overdraft

Commercial Bills

Factoring

Mortgages

Debentures

Unsecured notes

Leasing

Question 4

Define overdraft

Answer 4

A loan arrangement with the bank to draw more money than is in an account, up to a maximum list

Question 5

When would an overdraft be useful?

Answer 5

An overdraft can provide short term finance for business requirements such as working capital, especially where a business is affected by seasonal fluctuations

Question 6

Define commercial bill

Answer 6

A written order for a loan amount that is guaranteed by the business’s bank and borrowed from other companies with surplus funds

Usual terms are 30 to 180 days

Question 7

When would a commercial bill be useful?

Answer 7

Commercial bills are usually for hundreds of thousands of dollars and are used to finance expenses, such as payment to suppliers of materials and wholesale goods

Question 8

Define factoring

Answer 8

When a business sells its accounts receivable asset to a specialist factoring firm

Question 9

When would a business engage in factoring?

Answer 9

If it needed to obtain cash reasonably quickly to improve cash flow

Question 10

Define Mortgage

Answer 10

A long-term loan for which the asset purchased becomes the security

Question 11

When would a mortgage be useful?

Answer 11

If an entrepreneur wishes to purchase non-current assets such as a factory site or building

Question 12

Define Debenture

Answer 12

A type of long-term debt finance that a business can acquire by offering a prospectus to the general public on the securities exchange

The loans are for a fixed amount, a fixed time period and at a fixed interest rate

Question 13

When would a business offer a debenture

Answer 13

The company would have to be large and established

The loans would be used to buy buildings and equipment

Question 14

Define unsecured note (bond)

Answer 14

A loan that is not secured by the business’s assets, and thus has higher interest rates

Question 15

Why would a business issue an unsecured note?

Answer 15

They are usually issued by finance companies to gain funds

Question 16

Define Lease

Answer 16

A contract allowing the use of another person’s asset for a specific period and at a set fee

Question 17

Why would a business lease?

Answer 17

Leases are favourable because they are usually tax deductible, as they are an expense for the business and therefore included in the income statement

Question 18

What are the sources of equity finance?

Answer 18

Private Equity

Ordinary Shares

New Issues

Rights Issues

Placements

Share Purchase Plans

Question 19

Why would a business choose equity over debt financing?

Answer 19

The cost of the finance can be postponed, as shareholders will not need to be paid dividends immediately - and none at all if the business does not profit

Question 20

Define ordinary shares

Answer 20

These shares provide part-ownership in a public company; shareholders receive dividends as their share of the business’s profits

Question 21

When does a business receive money for issuing shares?

Answer 21

When they are sold on the new (primary) market

Question 22

Define rights issue

Answer 22

Issue of shares that is offered at a special price to existing shareholders in proportion to their current shares of ownership in that company

Question 23

Define placement

Answer 23

An additional share issue that is offered to specific institutions and specific investors to raise up to 15% of the business’s current capital base

Question 24

Define share purchase plan

Answer 24

Companies can offer up to $15,000 in new shares to each existing shareholder at a discounted price

Question 25

What are the financial institutions that a business can source funds from?

Answer 25

Banks

Investment Banks

Finance Companies

Life Insurance Companies

Superannuation Funds

Unit Trusts

Australian Securities Exchange

Question 26

Which type of business would borrow from an investment bank?

Answer 26

Medium-to large size business

Question 27

What types of services can finance companies offer businesses?

Answer 27

Secured & Unsecured Loans

Commercial Bills

Debentures

Factoring

Question 28

How do superannuation funds relate to business?

Answer 28

Superannuation funds earn returns by selling debt securities to businesses, and purchasing company shares

Question 29

How does the government influence businesses?

Answer 29

ASIC and Company Taxation

Question 30

What does ASIC stand for and what does it do?

Answer 30

The Australian Securities and Investment Commission

It is an independent statutory commission that regulates corporations, markets and the provision of financial services covered under the Corporations Act 2001

Question 31

How does the global market influence businesses?

Answer 31

Economic Outlook & Interest Rates

Demand, changing exchange rate etc… idk I’ve forgotten all the economics already

Question 32

How does QANTAS use equity?

Answer 32

High levels of profitability since 2014 have enabled record levels of retained earnings to be re-invested back into the business

Qantas’s last equity raising was in 2009 when it raised $500 million in the issue of shares to combat the GFC

Question 33

How does Qantas use debt finance?

Answer 33

Qantas uses a range of short and long term sources of finance - in 2019 its debt portfolio was $4.7 billion

This year Qantas borrowed $A1.05 billion against seven of its wholly-owned Boeing 787-9s in a bid to ensure it has enough liquidity to get it through the coronavirus outbreak