Deck 13: Financing the Business

Question 1

The statement concerning ordinary shares that is not correct is:

A) Ordinary shares normally have voting rights.
B) Dividends depend on profits.
C) Limited liability means that the potential for returns is limited.
D) A growth company has the option of not paying a dividend to its shareholders.

Answer 1

C

Question 2

The firm's financial structure relates to how the firm:

A) meets its daily financial payments.
B) finances its assets.
C) manages its debtors.
D) all of the above

Answer 2

B

Question 3

Which of the following is not a type of short-term debt finance?

A) factoring
B) bank overdraft
C) debentures
D) trade credit

Answer 3

C

Question 4

Which of the following is not a reason for a company making a bonus issue of shares?

A) to use cash
B) to reduce its share price when it has become too high
C) as a signal to the market of the company's confidence in its future
D) None of the above, i.e. all are reasons for making a bonus issue.

Question 5

A firm with high business risk should ideally finance using:

A) little debt.
B) high debt.
C) no debt.
D) none of the above.

Question 6

A bonus issue of shares will result in:

A) an increase in cash at bank.
B) an increase in shareholders' equity.
C) an increase in the number of issued shares.
D) all of the above.

Question 7

Select the incorrect statement concerning retained profits as a source of finance.

A) There are no costs associated with retaining profits.
B) There is more scrutiny when profits are retained than when shares are issued.
C) The business does not have to wait to receive the funds.
D) Retaining profits have no effect on who controls the business.

Question 8

Sovereign Ltd has an issued capital of 300,000,000 shares sold at $2 each. Aman holds 6,000 shares. If Sovereign Ltd makes a 3 for 1 bonus issue, how many bonus shares will Aman acquire?

A) 9,000 shares
B) 2,000 shares
C) 1,800 shares
D) 4,000 shares

Question 9

The most important difference between a bonus share issue and a rights issue, from the issuing company's point of view, is that they:

A) have different effects on cash flow.
B) require different accounting practices.
C) benefit different groups.
D) none of the above

Question 10

Venture capital is:

A) capital offered only to owners of established businesses.
B) capital offered only to large companies.
C) capital offered to take advantage of opportunities with greater than normal risk.
D) none of the above.

Question 11

The current market price of a company's shares is $10. The company is planning to make a 1 for 10 rights issue at a subscription price of $8. You hold 100 shares at the time the rights issue is to be made. If you exercise your rights, what is the total number of shares you will now own?

A) 111
B) 110
C) 108
D) 100

Question 12

A type of short-term financing used by many firms is:

A) leasing.
B) unsecured notes.
C) bank overdraft.
D) accounts receivable.

Question 13

Which factor should be taken into account when deciding between debt and equity finance?

A) the security available
B) the purpose of the finance
C) the effect on earnings per share
D) all of the above

Question 14

Which of these is correct concerning the difference between a hire purchase agreement and a finance lease?

A) Under a hire purchase agreement the customer eventually becomes the legal owner of the asset, whereas for a finance lease ownership stays with the lessor.
B) Under a finance lease the customer takes immediate possession of the asset, while under a hire purchase agreement the customer must wait for possession until the full cost is paid.
C) A finance lease is a short-term lending arrangement, while a higher purchase agreement is a long-term arrangement.
D) B and C are differences.

Question 15

A long-term lease that cannot be cancelled and that transfers virtually all the rewards and risks of ownership to the lessee is called:

A) a direct lease.
B) a finance lease.
C) an operating lease.
D) a leveraged lease.

Question 16

The offer of new shares to existing shareholders at a discount on market price, in proportion to the amount of their current holding, is known as:

A) an option.
B) a rights issue.
C) a bonus issue.
D) a preference issue.

Question 17

For an investor, investing in ordinary shares is normally considered riskier than investing in:

A) unsecured notes.
B) preference shares.
C) debentures.
D) all of the above.

Question 18

Which statement about retained profits and dividends is true?

A) In Australia industrial companies, on average, pay out about 30% of their earnings as dividends.
B) On average, dividends are a relatively small component of return on shares compared with capital gains.
C) Dividends and retained profits are two sides of the same coin.
D) All of the statements are true.

Question 19

Which statement regarding preference shares is not correct?

A) Preference shareholders have the right to receive dividends prior to any dividends being paid to ordinary shareholders.
B) Preference shares are a permanent source of capital.
C) Dividends paid on preference shares are normally tax deductible to the business.
D) Preference shares typically do not carry voting rights.

Question 20

Dividend policy is influenced by:

A) the difficulty of obtaining funds from other sources.
B) the perceived preference of shareholders for dividend income.
C) the desire of a company for growth.
D) all of the above.

Question 21

Which of the following businesses may be of most interest to providers of venture capital?

A) businesses starting up
B) the buyout of a business by a new management team
C) young businesses that are expanding rapidly
D) all of the above

Question 22

The underlying rationale of a stock exchange is:

A) to enable stockbrokers to charge commission on buying and selling shares.
B) to enable investors to sell their shares easily.
C) to enable companies to raise new capital.
D) B and C

Question 23

Which of these is not an internal source of finance?

A) a reduction in inventory levels
B) retained earnings
C) an increase in the bank overdraft
D) None of the above, i.e. all are internal sources of finance.

Question 24

It is true that:

A) shareholders have the protection of limited liability.
B) in most insolvent companies, ordinary shareholders receive little or nothing back on winding up.
C) shareholders have a legal entitlement to be paid a dividend once a year.
D) A and B are true.

Question 25

Loan capital which can be converted into equity capital at the option of the holder is known as:

A) convertible loan stock.
B) preference shares.
C) convertible preference shares.
D) warrants.

Question 26

A disadvantage of short-term debt over long-term debt is:

A) a greater likelihood of penalties for early repayment.
B) greater frequency of re-funding.
C) less flexibility.
D) All are disadvantages.

Question 27

Ordinary shareholders:

A) are entitled to discounts on the company's products.
B) have the right to receive arrears of dividends.
C) are the owners of the firm.
D) All of the above are true.

Question 28

A form of debt finance where large companies can obtain funds directly from the public rather than from financial institutions is:

A) convertible loan.
B) lease finance.
C) debentures.
D) shares.

Question 29

The offer of new shares to existing shareholders at no cost, in proportion to the amount of their current holding, is known as:

A) a preference issue.
B) a rights issue.
C) a bonus issue.
D) an option.

Question 30

The use of debt finance by a company (gearing) has a potential impact on which of the following?

A) risk associated with the company
B) the variability of net profit
C) the return obtained by the shareholder
D) all of the above

Question 31

Which statement is correct?

A) Long-term liabilities should be used to finance long-term assets.
B) Short-term assets should be financed by long-term liabilities.
C) Short-term liabilities should be used to finance long-term assets.
D) None of the above

Question 32

Which of these is an advantage of bank overdrafts as a form of finance?

A) They are legally payable on demand.
B) They are easy to arrange.
C) They are a flexible form of borrowing.
D) Both B and C

Question 33

An advantage of financing operations with debt rather than equity is:

A) the tax deductibility of interest expense on debt.
B) the legal requirement to repay the principal.
C) the legal requirement to pay interest.
D) all of the above.

Question 34

A long-term form of finance that is divided into units, is evidenced by a trust deed and is secured by a floating charge over the assets of a company is a:

A) debenture.
B) mortgage.
C) loan.
D) share.

Question 35

The minimum share value a company must have to be listed on the stock exchange is:

A) $1 million.
B) $50 million.
C) $10 million.
D) $5 million.

Question 36

Which of these is a disadvantage of stock exchange listing?

A) the high cost of listing
B) requirements for additional financial disclosure
C) closer monitoring by financial journalists and analysts
D) All are disadvantages.

Question 37

A disadvantage of debt factoring is:

A) it can mean greater time is taken up with the management of debtors.
B) it can create uncertain cash flows.
C) it can be seen as an indication that the business is having financial difficulties.
D) all of the above.

Question 38

Shareholders who exercise their entitlement to a bonus issue of shares will, in theory:

A) reduce their wealth.
B) leave their wealth unchanged.
C) increase their wealth.
D) reduce their proportional ownership in the company.

Question 39

Warrants are:

A) options to purchase a specified number of ordinary shares at a specified price.
B) issued to lenders as part of a package to allow the company to offer lower rates of interest on loans.
C) used as sweeteners to enhance debt issues.
D) all of the above.

Question 40

Which statement in relation to a bonus issue of shares is not true?

A) When there is a bonus issue, there must be a transfer from share capital to reserves.
B) A bonus issue capitalises reserves.
C) The proportion of the company's shares held by a shareholder will not change after the issue.
D) None of the above, i.e. all are true statements.

Question 41

Gearing increases earnings per share when the return on assets exceeds the:

A) firm's return on shareholders' equity.
B) after-tax cost of debt.
C) dividends paid.
D) return on sales.

Question 42

Investors, typically wealthy, successful individuals, who are prepared to make investments in new businesses and provide advice are known as:

A) philanthropists.
B) business angels.
C) godfathers.
D) humanitarians.

Question 43

A form of loan that is secured by a charge over freehold property is called a:

A) share.
B) note.
C) loan.
D) mortgage.

Question 44

An advantage of short-term over long-term borrowing is:

A) no need to repay.
B) flexibility.
C) lower costs.
D) all of the above.

Question 45

When making an issue of shares to the public:

A) if the share price is set too low, the issue will be undersubscribed.
B) it is generally difficult to set the price at which the shares will be issued.
C) if the share price is set too high, the issue will be oversubscribed.
D) it is generally easy to set the price at which the shares will be issued.

Question 46

The debt ratio measures financial gearing and can be determined as:

A) long-term liabilities/(shareholders' equity + long-term liabilities).
B) current liabilities/(shareholders' equity + long-term liabilities).
C) long-term liabilities/(shareholders' equity + current liabilities).
D) current assets/current liabilities.

Question 47

Covenants imposed on a loan may include:

A) limitations on dividend payments.
B) maintenance of a certain level of liquidity.
C) a requirement to submit regular financial information.
D) all of the above.

Question 48

Select the correct statement.

A) To remain competitive it is usually best for a firm to take longer to collect money owing by trade debtors.
B) By lessening control over trade debtors, it may be possible for the firm to make debtors balances available for other purposes.
C) By exercising tighter control over trade debtors, it may be possible for a firm to release funds for other purposes.
D) None of the statements is correct.

Question 49

An advantage of financing through an issue of ordinary shares rather than by borrowing is:

A) it does not dilute proportional ownership.
B) it does not require a fixed periodic repayment.
C) it involves lower transaction costs.
D) All of the above are advantages.

Question 50

The statement concerning invoice discounting that is not true is:

A) it is a more confidential form of finance than factoring.
B) it is currently a more important source of funds to businesses than factoring.
C) it is more expensive that factoring.
D) the responsibility for collecting the trade debts outstanding remains with the business.

Question 51

The current market price of a company's shares is $10. The company is planning to make a 1 for 10 rights issue at a subscription price of $8. You hold 100 shares at the time the rights issue is to be made. What will the ex-rights share price be?

A) $9.46
B) $8.00
C) $8.80
D) $9.82

Question 52

The form of short-term finance where another entity takes over the firm's debtor's accounts for a payment of around 85% of the accounts' balance is known as:

A) discounting.
B) debt factoring.
C) bills receivable.
D) none of the above.

Question 53

Which of the following is not an advantage of lease financing?

A) saving in cash flow
B) flexibility
C) easier accounting treatment
D) ready availability of form of lending

Question 54

Stretching the time taken to pay off accounts payable may do all of the following, except:

A) damage relationships with suppliers.
B) lower the number of discounts foregone.
C) lower the buyer's credit rating.
D) lead to refusal of credit by suppliers.

Question 55

Preference shares are no longer a major source of new finance for companies as:

A) they are too risky.
B) their dividends are not tax deductible.
C) under changes in accounting rules, preference shares are no longer treated as equity.
D) B and C

Question 56

All are ways in which a firm's internal sources of finance can be increased except:

A) cut the dividend rate.
B) delay payments to creditors.
C) increase inventory levels.
D) retain more profits.

Question 57

Gearing refers to the use of:

A) debt financing.
B) equity financing.
C) financing through preference shares.
D) none of the above.

Question 58

Which of the following is a difference between ordinary and preference shares?

A) Preference shareholders receive priority of payment above ordinary shareholders on the winding up of the company.
B) Preference dividends are paid before ordinary dividends.
C) Preference shares offer investors a lower level of risk than ordinary shares.
D) All are differences.

Question 59

A loan provided by a financial institution based on a proportion of the face value of credit sales outstanding is known as:

A) factoring.
B) a secured loan.
C) bank overdraft.
D) invoice discounting.

Question 60

The use of debt finance can lead a business to have returns and risk.

A) higher; lower
B) lower; lower
C) higher; higher
D) none of the above