Deck 20: Financing the Business

Question 1

Which of the following statements is correct? The Alternative Investment Market (AIM) is a market:

A)That deals exclusively with ethically-acceptable investments.
B)In which investments tends to be riskier than those listed on the main market.
C)For companies that have been excluded from the main market listings.
D)For the shares of companies that are based outside the UK.

Answer 1

In which investments tends to be riskier than those listed on the main market.

Question 2

In the following pairs of statements about venture capital and grant finance, one statement is correct and one is incorrect. Venture capital
A.Venture capitalists are interested only in new business ventures
B.Venture capitalists tend to provide both cash, in the form of investment, and expertise
Grant finance
C.Grant finance is advantageous in the short-term but eventually it has to be repaid
D.Grant finance is useful, but is often subject to conditions
Which of the statements are correct?

A)B and C
B)B and D
C)A and C
D)A and D

Answer 2

B and D

Question 3

Which of the following statements is correct? The FTSE 100 index is published by:

A)A consortium of listed companies.
B)The Alternative Investment Market.
C)An organization owned by the FTSE and Russell organizations.
D)The government.

Answer 3

An organization owned by the FTSE and Russell organizations.

Question 4

Which of the following statements about financing is correct?

A)Factoring services are provided by venture capitalists
B)In a leasing arrangement, the lessee pays regular amounts to the lessor
C)The best course of action for a company facing a short-term seasonal cash flow crisis, is to issue more share capital
D)Hire purchase is identical to a short-term leasing arrangement

Question 5

Which two of the following statements about business financing are correct? A.Grant finance is a very popular source of business finance for start-ups because government rules ensure that no more than 3% interest can be charged on the amount granted.
B. From the point of view of the lender, a secured loan is less risky than an unsecured loan.
C. Grant finance normally requires repayment within five years.
D. The guarantor of a loan guarantees that he or she will repay the loan should the borrower be unable to repay it.

A)A + B
B)B + D
C)C + D
D)B + C

Question 6

Which of the following statements about factoring is incorrect? Factoring:

A)Provides a means of speeding up the receipt of cash due from business debts
B)Is a low-cost service provided principally by local government authorities
C)Is useful only to those businesses that supply goods and services on credit
D)Costs money in the form of a handling charge

Question 7

Sandro took out a loan of £35 000 to start a business.The bank manager insisted that the loan should be secured, and Sandro persuaded his mother, Emily, to accept a legal charge of £35 000 on her freehold house.Two years later Sandro's business has failed, and he owes not just the original loan of £35 000 but also a further £10 000 to suppliers who have given him credit.Emily's house is worth £125 000. Which of the following statements is correct?

A)Because the house is worth substantially in excess of £35 000, the bank cannot force its sale to meet the liability.
B)If Sandro and Emily cannot find £35 000 from another source, Emily's house must be sold to pay back that amount to the bank.
C)Emily's house must be sold, in order to pay Sandro's total business debts of £45 000.
D)Provided that Sandro's debts remain unpaid, if Emily sells her house at some point in the future, she will be obliged to pay £35 000 to the bank.

Question 8

One each of the following pairs of statements about company flotation are correct: A placing of shares involves:
A. Placing the shares on the main stock market
B. An arrangement to sell shares to specific investors and institutions
An offer for sale is:
C. An offer to the general public and institutional investors to buy shares
D. An offer to selected institutional investors to buy shares
Which of the statements are correct?

A)A and C
B)B and C
C)B and D
D)A and D

Question 9

Your friend Erik has just bought into a partnership of graphic designers.He is very pleased about his new career move and is keen to discuss it with you.In the course of conversation, he makes the following comments, only one of which is correct:

A)'Paul, one of the other new partners, told me that partners don't pay any tax on their earnings from a partnership.Isn't that brilliant?'
B)'I'm entitled to take cash out of the business for my own personal use - the technical term for this, apparently, is drawings'.
C)'As a partner, I'm both a shareholder and director of the business'.
D)'I'm not worried about liability because these days a partnership is just another name for a limited liability company'.

Question 10

Which of the following statements about financing is incorrect?

A)An overdraft should be regarded as a short-term solution to financing needs
B)The risk/return relationship means that, where risk is high, borrowing will be possible only at high rates of interest
C)A mortgage is an example of a secured loan
D)In lease financing, the lessee is the legal owner of the leased item

Question 11

Which of the following statements about a company prospectus is correct?

A)A company is obliged to prepare a prospectus when it makes an offer for sale of shares.
B)All companies, whether listed or not, must file an annual prospectus with the Registrar of Companies.
C)Companies listed on the Stock Exchange must issue a prospectus annually, to explain their future plans to investors.
D)Despite its name, a prospectus contains no information about a company's future prospects.

Question 12

Which of the following statements about company audit is correct?

A)All large companies are required by law to have an audit of their annual financial statements.
B)The company audit is useful to investors because it guarantees the accuracy of the financial statements.
C)Company audits are carried out by auditors from the government.
D)Companies are not required to have an audit provided that they publish their annual reports on the Registrar of Companies' website.

Question 13

Danila, a friend of yours who is a sole trader, has recently taken out a bank loan of £12 000 to finance a planned expansion of her business.In a discussion about raising finance, she tells you four items of factual information.You realize that only one of them is correct: which one?

A)The bank manager says that by law all loans to sole traders must have a legal charge over them.
B)Unfortunately, this means that the interest rate is a bit higher than it would otherwise be.
C)It also means that this type of lending is riskier for the lender than unsecured lending.
D)However, the bank can get its money back by enforcing the charge if the business goes bust.

Question 14

Which of the following is multiplied by the number of shares in issue to give a company's market capitalization?

A)Average market price of one share over most recent month.
B)Nominal value of one share.
C)Current market price of one share.
D)Annual average market price of one share.

Question 15

Which of the following statements is correct?

A)The primary market allows trading in shares to take place between willing buyers and sellers.
B)The secondary market of the London Stock Exchange is known as the Alternative Investment Market.
C)The primary market function allows institutional investors to sell shares in large quantities.
D)The existence of the secondary market allows for high liquidity in share dealing.

Question 16

Which of the following statements about corporate financial reporting is correct?

A)All listed companies in the UK must file quarterly financial statements with the listing authority.
B)Companies listed on the Alternative Investment Market are required to file only a chairman's statement with the Registrar of Companies.
C)Mostly listed companies are required to file only interim financial statements with the Registrar of Companies.
D)All listed companies are obliged to include a chairman's statement in the annual financial statements.

Question 17

Which of the following statements about takeovers is correct?

A)A takeover bid is launched by initially making a rights issue in the stock market.
B)Takeovers are not permitted on the Alternative Investment Market.
C)A hostile bid is one that is rejected by the target company's directors.
D)Mergers arise only where there has been a hostile bid.

Question 18

Which of the following is one of the rights of shareholders?

A)To decide upon the amount of dividend per share.
B)To vote on the appointment of the company's legal advisers.
C)To vote on the appointment of directors.
D)To determine the price of a rights issue.

Question 19

Your friend, Danuta, has just been to see her bank manager about taking out a loan to start a business.She was told that she must prepare a business plan, and the bank manager also mentioned something about budgeting.She tells you various facts she has gleaned about business plans and budgets, two of which are correct.Which are the correct statements?
A.A business plan is just another name for a budget.
B. Danuta must prepare a business plan because of HMRC rules.
C. A budget for a business start-up shows the projected profit for the first year of operation.
D. A business plan helps both the prospective lender and the prospective borrower.

A)A and B
B)C and D
C)A and C
D)B and C

Question 20

Which of the following statements about borrowing is incorrect?

A)If a loan is secured, the rate of interest charged tends to be lower.
B)Bank overdrafts should be regarded as a source of short-term finance.
C)The greater the risk to a lender, the lower the interest rate tends to be.
D)Unauthorized overdrafts are likely to be charged at very high rates of interest.

Question 21

Cranbury Crenellation plc, a listed company, has a total ordinary share capital of £600 000 in 50p shares, which are currently trading at 102p each.The company needs to raise some more capital, and its financial advisers are proposing a rights issue of 1 for 3 at a price of 95p per share. How much will the company raise if the rights issue is successful?

A)£380 000
B)£190 000
C)£1 140 000
D)£408 000

Question 22

Bannerman Broughton plc is listed on the main market of the London Stock Exchange.The total nominal value of its share capital is £1 300 000 in £1 shares.The company's shares currently trade at a price of 175p.During the last year the highest price of one share has been 209p and the lowest has been 159p.What is the company's current market capitalization?

A)£2 275 000
B)£2 392 000
C)£1 300 000
D)£2 717 000

Question 23

Which of the following statements is correct? A hostile bid is:

A)Made by a minority of the directors of a bidding company's board.
B)Opposed by the Bank of England or another major bank.
C)Also known as a placing of shares.
D)One that is rejected by the target company's directors.

Question 24

Belmarsh and Baylis plc is listed on the main market of the London Stock Exchange.The company has 2 000 000 ordinary shares in issue, with a nominal value of 50p per share.Shares in the company currently trade at 85p, but the average price of one share over the last year has been 95p.The company's directors are planning a rights issue to take place next month at a price of 90p.what is the company's market capitalization?

A)£1 000 000
B)£1 800 000
C)£1 700 000
D)£1 900 000

Question 25

Crayfish Carruthers plc is listed on the Alternative Investment Market of the London Stock Exchange.Its ordinary share capital comprises 1 700 000 shares at a nominal value of 50p.The company's currently quoted share price is 65p per share.Crayfish Carruthers' directors announced last week that a dividend of 5p per share will be payable to shareholders at the end of next month. What is the company's current market capitalization?

A)£850 000
B)£1 190 000
C)£1 105 000
D)£552 500