Deck 5: Business Organisations and the Financing of Business

Question 1

All limited liability companies can issue shares to the public.

Answer 1

False

Question 2

Sole traders are the only form of business organisation that faces unlimited liability for the debts incurred by the business.

Answer 2

False

Question 3

Which of the following statements describe sole traders? Please select all that apply.

A) Separate legal identity.
B) Non-complex operations.
C) All business debts are debts of the owner.
D) One person is in charge of operations.

Answer 3

B,C,D

Question 4

Which one of the following is not a characteristic of limited liability companies?

A) Profits are not distributed to shareholders as drawings.
B) Separate legal identity.
C) Annual reports must be prepared and presented to shareholders.
D) There is no separation of share ownership and management.

Question 5

Which one of the following is not a characteristic of bank overdrafts?

A) Repayable on demand
B) Short term finance
C) A contractual arrangement
D) A limit is imposed by the bank

Question 6

Which types of finance are available to sole traders? Please select all that apply.

A) Bank loans and overdrafts
B) Preference share capital
C) Cash provided from the sole trader's own resources
D) Bonds

Question 7

Which one of the following statements does not describe a bank loan?

A) Regular repayments made up of interest and capital.
B) Repayable immediately if repayments of capital and interest are not made on time.
C) Variable amounts are borrowed for variable periods of time.
D) A contractual arrangement.

Question 8

Debentures, bonds and loan notes are long-term loans with a variable rate of interest and a variable repayment date.

Question 9

Which of the following are characteristics of bonds, loan notes and debentures? Please select all that apply.

A) Fixed term
B) Secured on the assets of the borrowing company
C) Variable rate of interest
D) Long term loans

Question 10

Which of the following are characteristics of share capital? Please select all that apply.

A) A source of very long term finance.
B) Available to all types of business organisation, both incorporated and unincorporated.
C) May be in the form of ordinary shares or preference shares.
D) Shareholders receive dividends in proportion to the size of their shareholding in a company.

Question 11

Payment of interest on borrowings is compulsory whereas dividend payments are optional.

Question 12

Dividends are the cost of borrowing money whereas interest is the cost of raising finance through the issue of shares.

Question 13

Dividends are a share of the profit paid out to the shareholders.

Question 14

Dividends are an expense for limited liability companies.

Question 15

Ordinary shareholders take on the highest risks when they buy ordinary shares in a company.

Question 16

Which one of the following is not a feature of ordinary shares?

A) The right to vote in general meetings.
B) The right to receive a fixed and regular dividend.
C) The potential for the ordinary shares to increase in value many times higher than the price originally paid for them.
D) Issued by all limited liability companies whether public or private.

Question 17

Jessica Limited has total assets of £12,000,000 and total liabilities of £8,000,000 when the company goes into liquidation. The issued share capital of the company comprises of 8,000,000 ordinary shares of 50 pence each and 1,000,000 5% preference shares of £1 each. Jessica Limited's assets are eventually sold for £11,000,000 and this cash is used to pay off the liabilities of £8,000,000 in full. How much money will be divided between Jessica Limited's ordinary shareholders?

A) £2,000,000
B) £3,000,000
C) £4,000,000
D) £11,000,000

Question 18

Which one of the following statements does not describe a characteristic of preference shares?

A) Preference shareholders have no right to vote in company general meetings.
B) Preference shareholders receive their dividends from the company before ordinary shareholders are paid any dividend.
C) Preference shares represent a riskier investment than ordinary shares.
D) Preference shareholders will not receive any dividends if their company does not have any distributable retained earnings.

Question 19

Preference shares are so called because holders of preference shares receive preferential treatment from the issuing company.

Question 20

Tyla Limited has total assets of £15,000,000 and total liabilities of £10,000,000 when the company goes into liquidation. The issued share capital of the company is £20,000,000 which is made up of 18,000,000 ordinary shares of £1 each and 4,000,000 4% preference shares of £0.50 each. Tyla Limited's assets are eventually sold for £10,600,000 and this cash is used to pay off the liabilities of £10,000,000 in full. How much cash will be repaid on each preference share?

A) Nil
B) 15 pence
C) 30 pence
D) 50 pence

Question 21

Folly Limited wishes to raise £300,000 in cash. How many shares will the company have to issue to raise £300,000 if the shares have a par value of 50 pence and the shares are issued at a premium of 25 pence?

A) 300,000
B) 400,000
C) 600,000
D) 1,200,000

Question 22

Duck Limited wishes to raise £1,200,000 in cash. How many shares will the company have to issue to raise £1,200,000 if the shares have a par value of 75 pence and the shares are issued at a premium of 125 pence?

A) 600,000
B) 960,000
C) 1,200,000
D) 1,600,000

Question 23

Paolo Limited is issuing 200,000 ordinary shares with a par value of 50 pence each at a premium of 250 pence per share together with 100,000 preference shares with a par value of 50 pence each at a premium of 10 pence per share. How much cash is Paolo Limited looking to raise from this share issue?

A) £150,000
B) £160,000
C) £560,000
D) £660,000

Question 24

Carola Limited is issuing 250,000 ordinary shares with a par value of 25 pence each at a premium of 150 pence per share together with 150,000 preference shares with a par value of 50 pence. How much cash will Carola Limited raise from this share issue?

A) £137,500
B) £437,500
C) £450,000
D) £512,500

Question 25

Which one of the following statements does not describe a bonus issue of shares?

A) An issue of shares at a discount to the current market price to existing shareholders.
B) A capitalization of distributable reserves by the issue of shares to existing shareholders.
C) A free issue of shares to existing shareholders which raises no new cash for the issuing company.
D) An issue of shares that increases the number of shares in issue while reducing distributable reserves.

Question 26

Timmy Plc is making a bonus issue of 2 new ordinary shares for every 5 already held. The shares have a par value of 5 pence. Timmy plc currently has 500,000,000 ordinary shares in issue. What are the correct entries to record this transaction in the statement of financial position?

A) Increase share capital £10,000,000
B) Increase share capital £10,000,000
C) Decrease share capital £10,000,000
D) Decrease share capital £10,000,000

Question 27

Bonus issues of shares involve the capitalisation of reserves.

Question 28

Bonus shares are issued to existing shareholders at the current market price.

Question 29

Bonus shares are issued to existing shareholders to raise additional cash for an entity.

Question 30

XYZ Plc is making a rights issue. The current market price of the shares is 350 pence and the directors are proposing to make the rights issue at a price of 205 pence per share. The par value of the ordinary shares is 25 pence so the shares are being issued at a premium of 180 pence each. 12,000,000 ordinary shares are to be issued in the rights issue. How much cash will the rights issue raise?

A) £3,000,000
B) £21,600,000
C) £24,600,000
D) £42,000,000

Question 31

Which one of the following statements describes a rights issue?

A) A free issue of shares to existing shareholders which raises no new cash for the issuing company.
B) An issue of shares at a discount to existing shareholders.
C) A distribution of profits to existing shareholders.
D) An issue of shares at a discount to the current market price to existing shareholders.

Question 32

DEF Plc currently has 5,000,000 ordinary shares in issue and is making a rights issue to its shareholders of 2 new shares for every 5 currently held. The current market price of the shares is 400 pence and the rights issue price will be set at a 40% discount to the current market price. The par value of the shares is £1. How much cash will the rights issue raise?

A) £2,000,000
B) £3,200,000
C) £4,800,000
D) £8,000,000

Question 33

Tiddle plc raised £12,000,000 from a recent rights issue. The par value of each share issued was £2.00 and the market price of one share before the rights issue was £6.00. After the rights issue, the share premium account increased by £5,600,000. How many shares were issued in the rights issue?

A) 2,000,000
B) 2,800,000
C) 3,200,000
D) 6,000,000

Question 34

Witter plc raised £42,000,000 from a recent rights issue. The par value of each share issued was £0.60 and the market price of one share before the rights issue was £10.00. After the rights issue, the share premium account increased by £37,800,000. What was the rights issue price of the shares issued?

A) £5.40
B) £6.00
C) £7.00
D) £10.00

Question 35

Existing shareholders have the right of first refusal when a company makes a rights issue of shares.

Question 36

From which one of the following reserves can dividends be paid to shareholders?

A) Ordinary share capital.
B) Retained losses.
C) Share premium.
D) Retained earnings.

Question 37

Molls Limited has issued share capital of £350,000 made up of £100,000 in £1 preference shares and £250,000 in 50 pence ordinary shares. The preference dividend rate is 6% and Molls Limited pays an interim dividend of 4 pence per share and a final dividend of 9 pence per share during the financial year ended 31 August 2020. What is the total dividend that will be deducted from retained earnings for the financial year to 31 August 2020?

A) £32,500
B) £38,500
C) £65,000
D) £71,000

Question 38

JMJ Limited has an issued share capital of £700,000 made up of 200,000 preference shares of £1 each and 500,000 ordinary shares of £1 each. During the financial year ended 31 October 2019. JMJ paid the preference dividend of 5% and an ordinary dividend of 7.5 pence per share. The profit for the year was £105,000 and the retained earnings at the start of the year were a retained loss of £25,000. What is the balance on retained earnings at 31 October 2019?

A) £32,500
B) £42,500
C) £47,500
D) £82,500

Question 39

Although not an expense, dividends paid are still a deduction in the statement of profit or loss.

Question 40

Wither Limited has an issued share capital of £4,000,000 made up of 2,000,000 preference shares of £1 each and £2,000,000 of ordinary share capital. The ordinary shares have a par value of 50 pence each. The dividend rate on the preference shares is 4%. During the financial year ended 31 December 2019, Wither Limited paid total dividends of £300,000. What is the dividend per ordinary share in the year ended 31 December 2019?

A) 5.50 pence
B) 7.50 pence
C) 11.00 pence
D) 15.00 pence