Finance Sources and Characteristics Quiz
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Questions and Answers

Which of the following is NOT considered a short-term source of finance?

  • Short-term loans
  • Venture capital (correct)
  • Overdrafts
  • Trade credit

    • What is the main benefit of overdrafts for businesses?

  • Guaranteed repayment schedule
  • Fixed interest rates
  • Flexibility in borrowing amounts (correct)
  • Low minimum loan requirements

    • What typically influences the limit of an overdraft facility?

  • Credit history of the account holder
  • Known income of the account (correct)
  • Current inflation rates
  • Amount of fixed assets owned

    • How is interest typically calculated on an overdraft?

    <p>Only on the amount overdrawn at a base rate plus margin</p> Signup and view all the answers

    Which of the following characteristics applies to overdrafts?

    <p>Technically repayable on demand</p> Signup and view all the answers

    What type of finance includes sources like debt finance and equity finance?

    <p>Long-term sources</p> Signup and view all the answers

    What is one of the costs associated with share issues in the stock market?

    <p>Stock market listing fee</p> Signup and view all the answers

    What is a common feature of lease finance as a long-term source?

    <p>Periodic payments without ownership transfer</p> Signup and view all the answers

    Which of these is a consideration when choosing a source of finance?

    <p>Flexibility and payment terms</p> Signup and view all the answers

    Which statement best describes the nature of a rights issue?

    <p>It offers existing shareholders the opportunity to buy more shares at a discounted price.</p> Signup and view all the answers

    What advantage of a rights issue helps maintain existing shareholders' voting rights?

    <p>Relative voting rights remain unaffected if all shareholders take up their rights.</p> Signup and view all the answers

    How can the finance raised through a rights issue impact gearing?

    <p>It reduces gearing by increasing share capital and/or paying off long-term debt.</p> Signup and view all the answers

    Which of the following is NOT an advantage of a rights issue?

    <p>They are more expensive than initial public offerings (IPOs).</p> Signup and view all the answers

    What is a term loan primarily characterized by?

    <p>A loan for a fixed amount for a specified period.</p> Signup and view all the answers

    Which of the following best describes trade credit?

    <p>An interest-free short-term loan for purchasing current assets.</p> Signup and view all the answers

    What is a significant disadvantage of trade credit?

    <p>It may result in the loss of discounts for early payments.</p> Signup and view all the answers

    What type of lease is primarily considered a short-term source of finance?

    <p>Operating lease.</p> Signup and view all the answers

    In a lease, who retains ownership of the asset?

    <p>The lessor.</p> Signup and view all the answers

    What is a common payment term for trade credit?

    <p>Between 30 to 90 days.</p> Signup and view all the answers

    How does leasing benefit businesses seeking short-term finance?

    <p>It allows the use of an asset without upfront capital costs.</p> Signup and view all the answers

    Which of the following statements about finance leases is true?

    <p>They are considered a long-term source of finance.</p> Signup and view all the answers

    What is the primary difference between a lessor and a lessee?

    <p>The lessor owns the asset while the lessee has possession.</p> Signup and view all the answers

    Which of the following correctly defines debentures?

    <p>A form of loan note acknowledging a debt incurred by a company.</p> Signup and view all the answers

    What characterizes convertible bonds?

    <p>They allow conversion to other securities at a predetermined rate.</p> Signup and view all the answers

    Which factor does NOT influence the choice of debt finance?

    <p>The weather conditions in the market.</p> Signup and view all the answers

    What is venture capital commonly used for?

    <p>Investment in private companies for equity stakes.</p> Signup and view all the answers

    What is a characteristic of bonds?

    <p>Interest is often paid half-yearly at a fixed rate.</p> Signup and view all the answers

    Which of the following is an example of a venture capital firm?

    <p>British Venture Capital Association.</p> Signup and view all the answers

    What type of ventures do venture capital firms typically invest in?

    <p>Business start-ups.</p> Signup and view all the answers

    What is a management buyout?

    <p>Acquiring all or part of a business by its managers.</p> Signup and view all the answers

    What rights do ordinary shareholders typically have?

    <p>They can attend general meetings and vote on important matters.</p> Signup and view all the answers

    What is equity finance primarily raised through?

    <p>Issuing ordinary shares to investors.</p> Signup and view all the answers

    What is the significance of a company's nominal share value?

    <p>It has no relationship with the market value of shares in Ghana.</p> Signup and view all the answers

    What is an Initial Public Offer (IPO)?

    <p>The first time a company sells shares to the public.</p> Signup and view all the answers

    What might a venture capitalist provide for a business looking to invest in new products?

    <p>Development capital for expansion.</p> Signup and view all the answers

    What happens to ordinary shareholders during liquidation?

    <p>They receive a share of any remaining assets.</p> Signup and view all the answers

    What does rights issue allow existing shareholders to do?

    <p>Acquire additional shares at a discounted price.</p> Signup and view all the answers

    What is a key difference between an IPO and a placing?

    <p>A placing generally involves less disclosure than an IPO.</p> Signup and view all the answers

    Which of the following is considered an advantage of having a stock market listing?

    <p>Enhanced public image.</p> Signup and view all the answers

    What are the likely implications of a placing for company control?

    <p>Institutional shareholders may control more shares.</p> Signup and view all the answers

    What is NOT a characteristic of a placing?

    <p>Faces more public scrutiny than an IPO.</p> Signup and view all the answers

    Which of these is a primary consideration when choosing between an IPO and a placing?

    <p>The cost and time involved in the process.</p> Signup and view all the answers

    What is a commonly perceived disadvantage of a stock market listing?

    <p>Increased accountability and regulations.</p> Signup and view all the answers

    In a stock placing, which institutions are most likely to be the primary buyers?

    <p>Institutional investors like pension funds.</p> Signup and view all the answers

    What happens to shares during an IPO in relation to market availability?

    <p>All shares, both existing and new, are made available.</p> Signup and view all the answers

    Study Notes

    Introduction to Business Finance

    • Course Code: BCPC 203
    • Level: 2000
    • Focuses on the introduction to business financing, decision-making, and sources of finance.

    Week 2: Sources of Finance

    • Sub-topics:

      • Types of source finance
      • Debt and Equity Finance Compared
      • Criteria for choosing between sources of finance

    • Short-term sources of finance:

      • Overdrafts
      • Short-term loans
      • Trade credit
      • Lease finance

    • Long-term sources of finance:

      • Debt finance
      • Leasing
      • Venture capital
      • Equity finance

    Week 2: Sources of Finance – Short Term

    • Overdrafts:

      • Used when current account payments exceed income

      • Bank finances the deficit

      • Important short-term source for businesses

      • Flexible borrowing amount

      • Interest only paid when overdrawn

      • Features:

        • Amount: Limited to known income,
        • Margin: Interest at base rate + margin, charged quarterly
        • Purpose: Short-term needs (deficits)
        • Repayment: On demand
        • Security: Varies by facility size
        • Benefits: Flexibility in short-term borrowing

    • Short-term loan:

      • Fixed amount for a specified period.
      • Often from a bank.
      • Specific purpose, like asset purchase
      • Interest and principal repayments predetermined.

    • Trade credit:

      • Major source of short-term finance for businesses.
      • Purchase of current assets (raw materials) on credit with payment terms (30-90 days).
      • Interest-free short-term loan.
      • Helpful in high inflation to keep down costs
      • Important to consider loss of discounts for early payment.

    • Lease:

      • Lease is a contract between lessor and lessee.
      • Lessor retains ownership, lessee has possession and use.
      • Payments of specified rentals over a period.
      • Types of lease:
        • Operating lease: short-term finance for non-current assets
        • Finance lease: long-term source of finance
        • Sale and lease back: company sells premises, rents it back. Long term.

    Week 2: Sources of Finance – Long Term

    • Debts:

      • Medium-term, long-term loans, debentures, and bonds
      • Debentures: Loan note, written acknowledgement of a debt
      • Bonds: Long-term debt for interest payments (usually half-yearly, fixed rate)

    • Convertible bonds: Bonds that give the holder the right to convert to other securities.

    • Factors influencing choice of debt finance:

      • Size of the business
      • Loan duration
      • Interest rate preference
      • Security offered
      • Debt covenants.

    • Venture Capital:

      • Risk capital, provided in exchange for equity stake

      • Investments in private companies

      • Examples of Venture Capital firms: British Venture Capital Association, Investors in Industry plc, Venture Capital Trust Fund (VCTF), Ghana

      • Investment types:

        • Business start-ups
        • Business development
        • Management buyouts
        • Helping a company with owner investment issues.

    • Equity:

      • Funding through selling ordinary shares to investors.

      • Ordinary shareholders are ultimate risk-bearers.

      • Ordinary shares may have a nominal value ('face' value)

      • Shareholders' Rights: Can attend meetings, vote on matters, receive dividends, annual reports, and remaining assets after liquidation.

    • Methods for stock market listing:

      • Initial Public Offer (IPO)

        • Selling shares to the public.

      • Placing

        • Shares offered to a small number of investors (usually institutional).

      • Choice between IPO and Placing:

        • Placings: are more cheaper and quicker, involve less disclosure.
        • IPO: gives wider pool of finance

    • Advantages of stock market listing:

      • Access to wider finance pools
      • Easier to seek growth by acquisition
        • Shares sales to obtain funds for other projects
      • Enhanced public image
      • Improved marketability of shares

    • Disadvantages of stock market listing

      • Greater public scrutiny
        • Greater public regulations, accountability, and scrutiny
      • Wider investor aims
        • Wider investors with different aims will hold shares
      • Other potential costs
        • Issues costs, brokerage fee, underwriting fees

    • Costs of share issues on the stock market:

      • Underwriting costs
      • Stock market listing fees
      • Issuing house, solicitors, auditors fees
      • Prospectus printing and distribution fees
      • Advertising costs

    • Rights issue: an offer to existing shareholders to buy more shares at a lower price than current market value.

    • Advantages of a rights issue:

      • Is cheaper than an IPO to the general public
      • Provides existing shareholders with preference
        • Benefits from a lower market price
      • Keeps the relative voting rights unaffected
      • Reduces gearing (financial leverage) through increase in share capital or repayment of long-term debt

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    Introduction To Business Finance BCPC 203 - Lecture Slides PDF

    Description

    Test your knowledge on short-term and long-term sources of finance, including overdrafts, rights issues, and lease finance. This quiz covers key concepts and benefits associated with various financing options used by businesses. Sharpen your understanding of how financial decisions impact operations and shareholder value.

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