Deck 11: Financing a Business

Question 1

Which of the following statements is false?

A) Borrowing is a more expensive source of finance than issuing ordinary shares
B) Borrowing can increase returns to the shareholder
C) Borrowing is a cheaper source of finance than issuing ordinary shares
D) Shareholders expect a higher rate of return because they take more risk than lenders

Answer 1

A

Question 2

The total figure for equity on the balance sheet includes all of the following except:

A) Share capital
B) Share premium
C) Retained profits
D) Preference share capital

Answer 2

D

Question 3

A company can reduce its share capital by buying back some of its own shares

Answer 3

True

Question 4

Which of the following statements is false?

A) In times of rising prices, companies should retain profit to maintain the same level of operation
B) Investors prefer to see steady increase in dividend instead of receiving large dividend pay outs in profitable years and smaller pay outs in less profitable years
C) Shareholders expect companies to pay out very large dividends in profitable years
D) There are often good reasons for not paying out a dividend

Question 5

The three main sources of funds for companies are:

A) Share capital, fixed assets and revenue
B) Share capital, borrowing and retained earnings
C) Share capital, dividends and net assets
D) Share capital, borrowing and operating profit

Question 6

Large company agrees to pay £1,750,000 to take over small company.Large company's shares have a market value of £1.75.The £1,750,0000 is paid by the issue of 1 million £1 shares.
What share premium will Large report?

A) £1,750,000
B) £1,000,000
C) £750,000
D) £0

Question 7

An easy way for companies to raise additional funds is to issue bonus shares

Question 8

Retained earnings do not contribute towards financing an increase in net assets

Question 9

Which of the following statements is correct?

A) The value of a company's share will decrease unless a dividend is paid every year
B) The value of a company's share will increase if a regular dividend is paid
C) If a company can earn a better rate of return, by investing retained profits, than shareholders can earn themselves, then dividends should be paid
D) If a company can earn a better rate of return, by investing retained profits, than shareholders can earn themselves, then there is a case for dividends not to be paid

Question 10

Preference shares are excluded in the calculation of earnings per share

Question 11

A business can raise finance by selling assets that it owns and then leasing them back again

Question 12

If receivables are increased and the time taken to pay trade receivables is reduced,then funds are freed up to use for other purposes

Question 13

Which of the following is not a source of raising finance?

A) preference shares
B) scrip issues
C) loans
D) retained earnings

Question 14

Large company agrees to pay £1,750,000 to take over small company.Large company's shares have a market value of £1.75.The £1,750,0000 is paid by the issue of 1 million £1 shares.
What additional share capital will Large report?

A) £1,750,000
B) £1,000,000
C) £750,000
D) £0

Question 15

Which of the following statements is correct?

A) Preference shares carry additional voting rights
B) Preference shares carry a fixed rate of interest
C) Preference shares are more risky than ordinary shares
D) If no dividend is paid on preference shares, dividend can be still paid on ordinary shares

Question 16

High Voltage plc has 1 million ordinary shares with a nominal value of 50 pence and a market value of £4.00 each.The company makes a rights issue,offering existing shareholders one share for every 5 they already hold at a price of £3.50.After the rights issue,what is the theoretical value of the shares?

A) £3.50
B) £3.92
C) £4.70
D) £3.96

Question 17

A "rights issue" refers to the issue of shares which give the owners of these shares additional voting rights at the Annual General Meeting

Question 18

Which of the following statements is false?

A) Preference shareholders take less risk
B) A shareholders liability is limited
C) Dividends are allowable as an expense to be charged against taxation
D) Companies usually pay an interim dividend part of the way through the year

Question 19

Which of the following statements is false?

A) Investors may view companies with high levels of debt as too risky
B) It is not easy to borrow money secured on land and buildings
C) The more a company gets into debt, the more difficult it becomes to borrow
D) High levels of borrowing can effect the share price

Question 20

There is no requirement for a company to pay a dividend on ordinary shares

Question 21

Dividend Policy decides what proportion of the profits to pay out as dividends.
Which of the following is the best policy?
(i) Pay out all profits as dividends
(ii) Pay out no profit as dividend,but use all the profit to expand the company
(iii)Pay out the same £ value as dividends every year

A) (i) is the best, as it rewards shareholders for their investment.
B) Something between (i) and (ii) is the best, as it allows shareholders to receive some dividend and the company to retain earnings to grow. (ii) is unfair to the shareholder.
C) (iii) is best, as it allows shareholders to plan for the dividend received.
D) None of them are "best". It depends upon what shareholders prefer.

Question 22

A company which has been trading for 4 years has made £10,000 in the last financial year and pays £8,000 in dividends.
The Statement of Financial Position shows the following:
Financed by:
Formula: $$\begin{array} { l r } \text { Ordinary } £ 1 \text { shares } & £ 20,000 \\\text { Retained Earnings } & £ 8,000 \\\text { Revaluation Reserve } & £ 12,000\end{array}$$
What is the meaning of "Retained Earnings"?

A) It is the £8,000 that is paid as dividends
B) It is the difference between the revaluation reserve and the shares
C) It is a pot of £8,000 cash that the company can use for finance
D) It is the profits made over the life of the company that were not paid out as dividends

Question 23

If a business has both Ordinary Shares and Preference Shares,which of the following statements are correct?
(i)Ordinary Shareholders have the right to vote at the AGM,but Preference Shareholders do not
(ii)Ordinary Shareholders will always get higher dividends
(iii)Preference Shareholders receive the same dividend year on year
(iv)Ordinary Shareholders are paid first upon liquidation of the company

A) All of them are true
B) (i), (ii) and (iii) are true
C) (i) and (iii) are true
D) (ii) and (iv) are true

Question 24

If a company needs to find money,which of the following methods could it use?
(i)Sell unused non-current assets
(ii)Sale and lease-back of a non-current asset
(iii)Lease a new asset instead of buying it
(iv)Outsource activities such as cleaning,payroll and accounting
(v)Reduce or stop paying dividends
(vi)Ask debtors to pay sooner
(vii)Pay creditors later
(viii)Take out or extend a bank overdraft

A) None of them
B) (i) - (iv) only
C) (v) - (viii) only
D) All of them