Deck 14: Financing the Business

Question 1

Preference shares which allow the investor to receive dividends in arrears, when the company declares and pays a dividend, are called:

A)cumulative preference shares.
B)redeemable preference shares.
C)participating preference shares.
D)none of the above.

Answer 1

A

Question 2

Select the correct statement.

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

Answer 2

B

Question 3

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

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

Answer 3

A

Question 4

Which of these is not a long-term source of finance?

A)Finance lease.
B)Trade credit.
C)Ordinary shares.
D)Mortgage.

Question 5

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 shares offer investors a lower level of risk than ordinary shares.
C)Preference dividends are paid before ordinary dividends.
D)All are differences.

Question 6

Which statement regarding preference shares is correct?

A)Preference shares typically carry voting rights.
B)Preference shares continue to be a major source of new finance for companies.
C)Preference shareholders do not have the right to receive dividends prior to dividends being paid to ordinary shareholders.
D)Dividends paid on preference shares are not normally tax deductible to the business.

Question 7

Which of the following would decrease a firm's internal sources of finance?

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

Question 8

Which of the following is correct when considering retained profits as a form of financing?

A)Financing is immediate as retained profits are already held by the company.
B)Companies can only pay out 50% of their retained profits on dividends so there is always money available.
C)Businesses either pay out all their retained earnings on dividends or they pay none at all.
D)All of the above statements are correct.

Question 9

Which of the following statements relating to inventory levels and finance is correct?

A)Money tied up in inventories is an opportunity cost.
B)Businesses have to balance money invested in inventory to ensure no missed sales whilst not over-investing.
C)Overstocked businesses may find it is difficult to sell the inventory due to poor buying decisions.
D)All of the above statements are correct.

Question 10

Long-term and short-term finance tends to be differentiated by:

A)the amount of finance raised.
B)the period of time the finance has to be repaid.
C)whether the finance is debt or equity.
D)whether the finance is internal or external.

Question 11

Which of the following could result from paying accounts payable more quickly?

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

Question 12

The statement concerning ordinary shares that is not correct is:

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

Question 13

Which statement about retained profits and dividends is true?

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

Question 14

Dividend policy is influenced by:

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

Question 15

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)interest rates over the past few years have been at an all-time low.
D)Both B and C.

Question 16

Which of these is not an internal source of finance?

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

Question 17

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

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

Question 18

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)Both A and B.

Question 19

Ordinary shareholders:

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

Question 20

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

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

Question 21

Covenants imposed on a loan may include:

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

Question 22

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 leveraged lease.
C)a finance lease.
D)an operating lease.

Question 23

Which statement is correct?

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

Question 24

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

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

Question 25

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

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

Question 26

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

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

Question 27

A mortgage is a form of loan that is secured by a charge over:

A)freehold property.
B)inventories.
C)accounts receivable.
D)none of the above.

Question 28

A form of debt finance which pays low or zero interest is called a:

A)eurobond.
B)deep discount bond.
C)financial derivative.
D)convertible loan.

Question 29

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

A)Bank overdraft.
B)Factoring of accounts payable.
C)Invoice discounting.
D)None of the above.

Question 30

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 31

The statement concerning invoice discounting that is not true is:

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

Question 32

Which of the following is an advantage of lease financing?

A)Flexibility.
B)Reasonable cost.
C)Saving in cash flow.
D)All of the above.

Question 33

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

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

Question 34

Which of the following statements is false with respect to debt factoring?

A)it can be seen as an indication that the business is in healthy financial shape.
B)it outsources control of accounts receivable to specialists in collection and credit.
C)it provides a quicker source of cash than waiting for customers to pay.
D)all of the above.

Question 35

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

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

Question 36

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

A)the legal requirement to repay the principal.
B)the tax deductibility of interest expense on debt.
C)the legal requirement to pay interest
D)none of the above.

Question 37

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

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

Question 38

Equity finance differs from debt finance as:

A)dividends are tax deductible, unlike interest on debt.
B)its claim on assets has priority over debt.
C)it is permanent financing whereas debt is not.
D)all of the above are differences.

Question 39

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

Question 40

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

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

Question 41

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

Question 42

Which of the following is not an illiquid asset used as backing for bonds?

A)Inventory.
B)Music royalties.
C)Ticket sales to sporting events.
D)Credit card receipts.

Question 43

Which of the following best describes the 'trade-off' theory?

A)Maintaining the cost of borrowing at the same level as the cost of equity.
B)Balancing the WACC and the cost of borrowings.
C)Balancing the benefits received from interest being a taxable expense with the cost of possibly going bankrupt.
D)None of the above is a good description.

Question 44

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

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

Question 45

Which of the following businesses would probably not be of interest to providers of venture capital?

A)Mature businesses that are not expanding rapidly.
B)Businesses promising low returns but which are low-risk.
C)Businesses which are suffering declining sales.
D)All of the above.

Question 46

Gearing refers to the use of:

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

Question 47

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

Question 48

A firm with low business risk could safely consider finance using:

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

Question 49

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

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

Question 50

Which of the following statements about securitisation is incorrect? Securitisation:

A)capitalises the future cash flows arising from illiquid assets.
B)does not have any inherent problems to make it problematic.
C)is an illegitimate business practice for raising finance.
D)may also be used to assist in managing risk.

Question 51

If a shareholder in a public company purchases shares on the Australian Securities Exchange, the capital of the company will:

A)decrease by the amount obtained for the shares.
B)remain the same.
C)decrease by the fair value of the share.
D)increase by the amount obtained for the shares.

Question 52

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

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

Question 53

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

Question 54

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)$9.82.
D)$8.80.

Question 55

Which of these is correct concerning the difference between an operating and a finance lease?

A)Under a finance lease, the customer takes immediate possession of the asset, while under an operating lease, the customer must wait for possession until the full cost is paid.
B)Under an operating lease, the lessee carries the risks and rewards, whereas with a finance lease, these are transferred to the lessor.
C)A finance lease is a long-term lending arrangement, while an operating lease is a short-term arrangement.
D)The asset will be carried and depreciated on the books of the lessee in an operating lease, and on the books of the lessor in a finance lease.

Question 56

Discuss the advantages and disadvantages of a company issuing long-term debt, e.g., debentures, compared to raising funds through an issue of shares.

Question 57

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

A)The return obtained by the shareholder.
B)The variability of net profit.
C)Risk associated with the company.
D)All of the above.

Question 58

The underlying rationale of Australian Securities 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)Both B and C.

Question 59

Venture capital is:

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

Question 60

Evidence suggests that:

A)Businesses tend to follow the 'trade-off' theory.
B)Most businesses are financially geared.
C)Few businesses appear to be highly geared.
D)All of the above.

Question 61

Purple Ltd has 10 million ordinary shares which were issued at 80 cents each. The shares are currently valued on the stock exchange at $1.60 per share. The directors of Purple Ltd have decided to make a one-for-eight rights issue at $1.50 per share.
REQUIRED:
a)Calculate the price of a share following the rights issue.
b)Calculate the value of the rights offer on a per share basis.

Question 62

A tender issue of shares is one in which:

A)the investors must state in advance the amount they are willing to pay for the shares.
B)the investors must state in advance the number of shares they are willing to purchase.
C)the issuer must state in advance the amount it expects to receive for the shares..
D)Both A and B are correct.

Question 63

The minimum share value a company must have to be listed on the Australian Securities Exchange is:

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

Question 64

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

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

Question 65

Why might small businesses prefer backing from business angels? Business Angels:

A)may be prepared to accept lower returns on their investment.
B)generally have little to offer in the way of business experience, so they will not interfere with the running of the business.
C)are often in a position to make financial decisions quickly.
D)Both A and C.

Question 66

When making an issue of shares to the public:

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

Question 67

Which of these is a disadvantage of Australian Securities Exchange listing?

A)Requirements for additional financial disclosure.
B)Closer monitoring by financial journalists and analysts.
C)The high cost of listing.
D)All are disadvantages.

Question 68

Small businesses are more likely to obtain long-term finance from:

A)private equity.
B)ASX listing.
C)debentures.
D)none of the above.