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Questions and Answers
What is considered an external source of finance?
What is considered an external source of finance?
- Retained earnings
- Depreciation funds
- Issuing shares (correct)
- Owner's contributions
Which of the following is a characteristic of internal sources of finance?
Which of the following is a characteristic of internal sources of finance?
- Often requires equity dilution
- Does not affect ownership structure (correct)
- Involves repayment with interest
- Usually involves bank loans
What is a limitation of relying solely on internal sources of finance?
What is a limitation of relying solely on internal sources of finance?
- Dilution of control
- High cost of borrowing
- Possibly limited funds available (correct)
- Increased operational risk
Which of the following best describes a short-term external source of finance?
Which of the following best describes a short-term external source of finance?
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Which financing option generally involves the highest risk for the investor?
Which financing option generally involves the highest risk for the investor?
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Study Notes
External Sources of Finance
- External sources of finance are funds obtained from outside the business, such as banks, investors, or suppliers.
Internal Sources of Finance
- Internal sources of finance are funds generated from within the business, such as retained earnings, depreciation, or sale of assets.
Limitations of Internal Sources
- Relying solely on internal sources of finance can limit the growth and expansion potential of the business, as it restricts access to larger sums of capital.
Short-Term External Sources
- Short-term external sources of finance typically have a maturity of less than a year and are used to finance short-term needs, such as working capital or seasonal fluctuations in demand.
Financing Options and Risk
- Equity financing, where investors purchase ownership in the company, generally involves the highest risk for the investor, as they have no guaranteed return on their investment.
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