unit 5: chapter 28- business finance

Question 1

give 3 long term sources of finance

Answer 1

share issue, debentures, long term loan, grants

Question 2

give 3 medium term sources of finance

Answer 2

leasing, hire purchase, medium term loan

Question 3

give 3 short term sources of finance

Answer 3

bank overdraft, bank loan, creditors, factoring

Question 4

name 2 internal sources of finance

Answer 4

retained profit, sales of assets, reductions in working capital

Question 5

name 4 external sources of finance

Answer 5

share issue, debentures, long term loans, grants, leasing, hire purchase, medium term loan, bank overdraft, bank loan, creditors, factoring

Question 6

what is an overdraft

Answer 6

bank agrees to a business borrowing up to an agreed limit when required

Question 7

what is factoring

Answer 7

selling of claims over trade receivables to a debt factor in exchange for immediate liquidity, only a proportion of the value of the debts will be received as cash

Question 8

what is hire purchase

Answer 8

an asset is sold to a company that agrees to pay fixed repayments over an agreed time period, the asset belongs to the company

Question 9

what is leasing

Answer 9

obtaining the use of equipment or vehicles and paying a rental or leasing changeover a fixed period, this avoids the need for the business to raise long term capital to buy the asset, leasing company has ownership

Question 10

what is equity finance

Answer 10

permanent finance raised by companies through sale of shares

Question 11

what are long term loans

Answer 11

loans that don’t have to be repaid for at least a year

Question 12

what are long term bonds/ debentures

Answer 12

A bond functions as a loan between an investor and a corporation. The investor agrees to give the corporation a certain amount of money for a specific period of time. In exchange, the investor receives periodic interest payments.

Question 13

define rights issue

Answer 13

existing shareholders are given the right to buy additional shares at a discounted price

Question 14

what is crowd funding

Answer 14

the use of small amounts of capital from a large number of individuals to finance a new business venture

Question 15

define venture capital

Answer 15

risk capital invested in business start ups or expanding small businesses that have good profit potential but can’t gain finance from other sources eg. bank

Question 16

name 3 reasons why businesses require finance

Answer 16

1. setting up a business will require cash injections from owners to purchase equipment and premises
2. finance their working capital
3. expansion requires further finance eg, takeover
4. external factors require greater finance eg. reduction in sales
5. apart from fixed assets it is needed for new product production

Question 17

define start up capital

Answer 17

the capital needed by an entrepreneur to set up a business

Question 18

define working capital

Answer 18

the capital needed to pay for raw materials, day to day running costs, credit offered to customers

Question 19

how do you calculate working capital

Answer 19

current assets- current liabilities

Question 20

define capital expenditure

Answer 20

purchase of assets that are expected to last more than one year eg. machine

Question 21

define revenue expenditure

Answer 21

spending on all costs and assets other than fixed assets and includes wages, salaries, raw materials

Question 22

why is the use of the source of finance and the time period it is required significant

Answer 22

1. very risky to borrow long term finance for short term needs
2. permanent capital may be needed for long term business expansion
3. short term finance can help increase stock or pay creditors

Question 23

why is the cost of a source of finance significant

Answer 23

1. obtaining finance is never free as even internal sources have an opportunity cost
2. loans can be very expensive in high interest rate times
3. stock exchange floatation can cost millions in fees and promotion of the share sale

Question 24

why is the amount of a source of finance required significant

Answer 24

1. share issues and sales or debentures would generally only be used for large capital sums
2. small bank loans or reducing trade receivables payment period could be used to raise small sums

Question 25

why is the legal structure and desire to retain control significant when deciding the correct source of finance

Answer 25

1. share issues can only be used by limited companies and only public companies can sell one the stock market but they will lose some control
2. if owners want to retain costs/ control fully then sales of shares would be unwise

Question 26

why is the size of existing borrowings significant when deciding on a source of finance

Answer 26

1. the higher the existing debts of the business the greater the risk of lending more so banks and other lenders may not help

Question 27

why is flexibility significant when deciding on a source of finance

Answer 27

1. when a firm has a variable need for finance eg, the business has a seasonal pattern of sales and cash receipts then a flexible source of finance is best