Sources of Business Finance

Question 1

What is the science and art part of a managing company?

Answer 1

Financial management

Question 2

Which is the art and science part of a managing compnay?

Answer 2

The science part belongs to analyzing data and cash flows. The art part belongs to optimum use of resources

Question 3

Companies use a variety of sources of finance and the aim should be to achieve an efficient capital structure that provides:

Answer 3

· A suitable balance between short-term and long-term funding
· Availability of adequate cash for day to day expenses
· A suitable balance between equity (funds raised through the sale of ownership in the business) and from debt (borrowed funds) in the long-term capital structure.

Question 4

What is the primary goal of a financial manager?

Answer 4

to maximize the value of the company to its owners, measured by the share price or value of stocks.

Question 5

What are key activities of a financial manager?

Answer 5

· Financial planning: Preparing the financial plan for project’s revenues, expenditures and financing needs over a given period.
· Investment (spending funds): Investing the organisation’s funds in projects and securities that provide high returns in relation to their risks.
· Financing (raising funds): Obtaining timely funding for the organisation’s operations and investments and seeking the best balance between debt and equity.

Question 6

What and how many sources of financial funds are?

Answer 6

Debt Capital (financing)
Like individuals, organisations can also borrow money. This can be done privately through bank loans, or it can be done publicly through a debt issue. These debt issues are known as corporate bonds.

Equity Capital (financing)
An organisation can also raise capital by selling its ownership in the form of shares to interested investors, existing or new, which is known as equity funding.

Question 7

What is a benefit of equity capital?

Answer 7

The benefit of this type of capital is that investors do not require interest payments like bondholders do.

Question 8

What is a drawback of debt capital?

Answer 8

The drawback of borrowing money is the interest that must be paid to the lender, where a failure to pay interest or repay the principal can result in default or bankruptcy. But, the interest paid on debt is typically tax-deductible and costs less than other sources of capital.

Question 9

What is a drawback of equity capital?

Answer 9

The drawback is that further profits are divided among all shareholders (including new ones) in the form of dividends

Question 10

Sources of finance can also be classified based on time-duration or maturity. This results in two types of financing:

Answer 10

· Short-term Financing
· Long-term Financing
Examples of short time financing?
· Trade Credit: Accounts Payable
· Bank Loans
· Committed lines of credit
· Operating leases
· Factoring / discounting of receivables

Question 11

Finance Lease is more widespread in the acquisition of assets such as; which become obsolete quicker because of rapid development….

Answer 11

computers and electronic equipment in technology sector.

Question 12

What are two sources of internal financing for a long term requirement?

Answer 12

Equity (selling shares/stock) and retained earning

Question 13

What is debt finance?

Answer 13

When a borrower gets an amount for a specific period of time, acknowledges the obligation and pays the amount when the debt matures.

Question 14

What are examples of debt financing?

Answer 14

· Term loans
· Bonds - highly secured and includes some colletral
· Finance lease

Question 15

Who’s responsible for maintenance in finance lease?

Answer 15

Lessee (user)

Question 16

Who’s responsible for maintenance in operating lease?

Answer 16

Lessor is responsible for cost of insurance and maintenance for the designated terms.

Question 17

What are 5 advantages of long term financing?

Answer 17

1- helps with long term strategy 
2- long term support from investor
3- Lower cost
4- flexibility of payment available 
5- limited interest risk

Question 18

4 Disadvantages of long term finance?

Answer 18

1- comes with certain rules and regulations
2- additional control and supervision
3- fixed rate return for lender, usually high
4- Additional documentation and collateral

Question 19

What is an equity?

Answer 19

Owner’s investment in a business

Question 20

How does owners obtain equity?

Answer 20

Through selling shares and retaining earnings

Question 21

What are dividends?

Answer 21

Dividends are payments to stockholders from a corporation’s profits. Dividends can be paid in cash or in stock.

Question 22

Do you need approval of shareholders before retaining earnings?

Answer 22

No

Question 23

Main difference between private & public companies ?

Answer 23

Public companies can sell their stock to general public through stock, but PC cannot.

Question 24

Who private companies can sell their stocks to?

Answer 24

Family, friends

Question 25

Issuing new shares to a relatively small number of selected investors: this is called a

Answer 25

placing or private placement of shares.

Question 26

Issuing new shares to existing shareholders….

Answer 26

Rights issue

Question 27

What are 6 advantages of issuing shares instead of getting loan?

Answer 27

1- no need to pay back
2- money jesa istemal karna hai karo, np
3- investors ko attractive lagta hai
4- zyada shares = ba assani loan miljayega
5- shareholders cannot force into bankruptcy
6- employees motivate hotay hain jab unko shares beche jate hain

Question 28

Disadvantages of sharing stocks

Answer 28

1- ownership gayi, to profits shareholders ke saath share karne hongay
2- aur, decisions bhi shareholders lengay
3- selling shares is a lengthy process
4- public companies ko zyada info deni hoti hai for share issuance

Question 29

Key difference between Preferred & common stocks?

Answer 29

Preferred stocks has an advantage of a higher priority claim to the assets of a corporation in case of insolvency and receive a fixed dividend distribution.

Question 30

What are some features of a preferred stock?

Answer 30

1- sabse phele inko pay karna hoga after debts agar company khatam hogayi
2- tax profits ke baad dividends di jati hain
3- fixed annual dividends
4- fairly uncommon

Question 31

Which shares have no voting rights and can be converted into common stocks?

Answer 31

Preferred stocks

Question 32

As per the “pecking order theory”, define three types of financing for a company

Answer 32

1- retained earnings
2- through debt
3- through stock issuances