Sources of Finance: Short-term Options
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Questions and Answers

What is the primary purpose of trade credit for a business?

  • To purchase current assets without upfront payment (correct)
  • To secure long-term financing options
  • To reduce employee costs
  • To pay for fixed asset investments

    • What is a characteristic of an operating lease?

  • It provides long-term financing
  • The lessee gains ownership of the asset
  • It always requires a down payment
  • It can be used for non-current assets (correct)

    • Which of the following represents an advantage of using trade credit during times of high inflation?

  • It keeps costs down by delaying payment (correct)
  • It helps maintain operational liquidity more efficiently
  • It guarantees price reductions from suppliers
  • It allows for immediate asset purchase without cost

    • In a lease agreement, who retains ownership of the leased asset?

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

    What is a potential disadvantage of using trade credit?

    <p>Discounts for early payment may be lost</p> Signup and view all the answers

    What is a common duration for payment terms under trade credit?

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

    What distinguishes a finance lease from an operating lease?

    <p>Finance leases are long-term agreements</p> Signup and view all the answers

    What is meant by a 'sale and lease back' arrangement?

    <p>Selling an asset and leasing it back for continued use</p> Signup and view all the answers

    What is the primary characteristic of an overdraft as a source of short-term finance?

    <p>Interest is charged only on the overdrawn amount.</p> Signup and view all the answers

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

    <p>Venture capital</p> Signup and view all the answers

    What is the typical repayment condition for an overdraft?

    <p>Repayable on demand.</p> Signup and view all the answers

    When considering short-term loans, which factor is most typically fixed?

    <p>Repayment duration specified in the terms.</p> Signup and view all the answers

    In terms of interest calculation, how is it typically structured for overdrafts?

    <p>Base rate plus margin on the daily overdrawn amount.</p> Signup and view all the answers

    What is a common benefit of using an overdraft?

    <p>Flexibility in borrowing amounts as needed.</p> Signup and view all the answers

    Which source of finance is characterized by short-term deficits coverage?

    <p>Overdrafts.</p> Signup and view all the answers

    What is the maximum limit for the overdraft determined by?

    <p>Known income and projected earnings.</p> Signup and view all the answers

    What is the primary advantage of convertible bonds for investors?

    <p>They can be converted to equity at a predetermined rate.</p> Signup and view all the answers

    What type of capital is typically associated with venture capital investments?

    <p>Risk capital in exchange for equity.</p> Signup and view all the answers

    Which of the following factors influences the choice of debt finance?

    <p>Whether a fixed or floating interest rate is preferred.</p> Signup and view all the answers

    What is a characteristic of bonds as a source of finance?

    <p>They typically require payment of interest half yearly.</p> Signup and view all the answers

    Which statement correctly describes the relationship between lessor and lessee?

    <p>The lessor has ownership of the asset and the lessee pays for use.</p> Signup and view all the answers

    Which type of business might a venture capital firm invest in?

    <p>A startup seeking initial funding.</p> Signup and view all the answers

    Which of the following is NOT a form of debt finance?

    <p>Equity stake.</p> Signup and view all the answers

    What factor is most likely to limit a public company's ability to issue bonds?

    <p>The size of the business.</p> Signup and view all the answers

    What is one primary purpose of venture capital in relation to business development?

    <p>To offer development capital for investing in new products or markets.</p> Signup and view all the answers

    In a management buyout, who purchases the business?

    <p>The company's managers.</p> Signup and view all the answers

    What distinguishes ordinary shares from other types of shares?

    <p>They are the ultimate bearers of risk in a liquidation scenario.</p> Signup and view all the answers

    Which of the following is NOT a right of shareholders?

    <p>To receive a guaranteed salary from the company.</p> Signup and view all the answers

    What is an Initial Public Offer (IPO)?

    <p>A tool for raising funds through selling shares to the public.</p> Signup and view all the answers

    Which method is NOT commonly associated with stock market listing?

    <p>Private placement</p> Signup and view all the answers

    What is typically the face value of ordinary shares in many countries?

    <p>They typically have a nominal value, such as $1 or 50c.</p> Signup and view all the answers

    What is a common characteristic of equity finance?

    <p>It is raised primarily through the sale of ordinary shares.</p> Signup and view all the answers

    What is the main characteristic of a placing in the context of share issuance?

    <p>Most shares are bought by a few institutional investors.</p> Signup and view all the answers

    Which of the following is NOT an advantage of a stock market listing?

    <p>Increased public regulations and scrutiny</p> Signup and view all the answers

    What is one primary reason placings are typically favored over IPOs?

    <p>They are generally faster to execute.</p> Signup and view all the answers

    What does a rights issue enable existing shareholders to do?

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

    Which of the following is a common cost associated with share issues on the stock market?

    <p>Underwriting costs and listing fees.</p> Signup and view all the answers

    Which of the following statements regarding institutional shareholders in placings is true?

    <p>They typically hold a large percentage of the shares.</p> Signup and view all the answers

    What effect does the presence of wider investors have on a stock market listed company?

    <p>Diverse aims and expectations from shareholders.</p> Signup and view all the answers

    What is typically a disadvantage of obtaining a stock market listing?

    <p>Higher costs associated with compliance and reporting.</p> Signup and view all the answers

    Study Notes

    Sources of Finance

    • Short-term finance sources can be used to cover temporary shortfalls and include:
      • Overdrafts - These are short-term loans provided by banks when an account's payments exceed its income. They are flexible and allow businesses to borrow specific amounts, paying interest only when overdrawn.
        • Overdraft amounts are typically limited to a specific amount, usually based on income.
        • Interest may be charged at a base rate plus an extra margin on the daily amount overdrawn.
        • Overdrafts are generally used to bridge temporary gaps in finances.
      • Short-term loans - These are loans for a fixed amount over a determined period, typically from banks. They can be used for specific purposes, like asset purchases.
        • Repayments are predetermined and include both interest and capital.
      • Trade credit - This is a major source of short-term financing where current assets such as raw materials are purchased on credit with payment terms ranging from 30 to 90 days.
        • Trade credit essentially offers an interest-free short-term loan.
        • It can help mitigate costs during periods of high inflation.
        • It's important to consider potential discounts for early payments from suppliers.
      • Leasing - This involves a contract between a lessor (owner) and a lessee (user) for the hire of a specific asset.
        • The lessor holds ownership, while the lessee possesses and uses the asset in exchange for regular payments.
        • Leases are a common short-term financing method for non-current assets.
        • Operating leases are short-term, while finance leases are long-term.
        • Sale and leaseback allows businesses to sell their property to insurance companies or pension funds and rent it back at a fixed price, securing immediate funds.

     Long-term Finance

    • Debt finance
      • This involves medium-term loans, long-term loans, debentures, and bonds.
      • Debentures are written acknowledgements of a company's debt, typically outlining interest payments and capital repayment terms.
      • Bonds represent long-term debt capital raised by a company, with interest payments usually made twice yearly at a fixed rate. Bondholders are considered long-term payables for the company.
      • Convertible bonds allow the holder to convert them into other securities, usually ordinary shares, at a predetermined price, rate, and time.
      • Factors influencing the choice of debt finance:
        • Company size (public bond issues are usually restricted to large companies).
        • Loan duration.
        • Interest rate preference (fixed rates are more expensive, but floating rates are riskier).
        • Security offered.
        • Debt covenants (specific conditions imposed by lenders).
    • Venture Capital
      • This is risk capital often provided in exchange for an equity stake in a private company.
      • Venture capital can be supplied by wealthy individuals or venture capital firms managing investment funds.
      • Examples of Venture Capital firms include The British Venture Capital Association, Investors in Industry plc, the 3i group, and the Venture Capital Trust Fund (VCTF) in Ghana.
      • Types of ventures that venture capital firms might invest in:
        • Business start-ups.
        • Business development.
        • Management buyouts.
        • Companies where owners seek to realize their investments.
    • Equity finance
      • It is obtained through the sale of ordinary shares to investors via a new issue or a rights issue.
      • Ordinary shares are issued to the company's owners and represent the ultimate risk-bearers, as they are last in line in a liquidation scenario.
      • Shares may have a nominal or face value but in Ghana and other countries, shares have no face value.
    • Rights of Shareholders
      • Attendance at general shareholder meetings.
      • Voting on important company matters.
      • Entitlement to a share of agreed dividends.
      • Receipt of annual reports and accounts.
      • Receipt of a share of assets remaining after liquidation.
      • Participation in new share issues.
    • Methods for stock market listing
      • Initial Public Offer (IPO) - Public offering of shares in a company based on information outlined in a prospectus. IPO involves an issuing house, typically a merchant bank, acquiring a large block of shares and then offering them to the public and institutional investors.
      • Stock Exchange Introduction - Granting of a quotation by the stock market without the sale of new or existing shares. This applies to companies with widely held shares where a market already exists.
      • Placing - Arranging for shares to be bought by a limited number of investors, usually institutional investors, rather than being offered publicly.
    • Comparison of IPO and Placing:
      • Placings are significantly cheaper and faster.
      • Placings involve less information disclosure.
      • Institutional shareholders have greater control with placing, as most shares are not freely traded.
    • Advantages of Stock Market Listing
      • Access to a broader pool of finance.
      • Easier growth through acquisitions.
      • Shareholders can sell holdings to obtain funds for other projects.
      • Enhanced public image and marketability of shares.
    • Disadvantages of Stock Market Listing
      • Increased public regulations, accountability, and scrutiny.
      • Diverse investors with different objectives hold shares.
      • Costly listing process with underwriting, brokerage, and other fees.
    • Costs of Share Issues on the Stock Market:
      • Underwriting costs.
      • Stock market listing fee.
      • Fees for issuing houses, solicitors, auditors, and public relations consultants.
      • Printing and distribution costs for the prospectus.
      • Advertising costs in national newspapers.
    • Rights Issue:
      • An offer made to existing shareholders to purchase more shares at a price lower than the current market price.

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    BCPC 203: Introduction To Business Finance Lecture Slides PDF

    Description

    Explore the various sources of short-term finance including overdrafts, short-term loans, and trade credits. This quiz will test your understanding of how these financial instruments can help businesses manage temporary cash flow gaps. Get ready to enhance your financial literacy and apply these concepts in real-world scenarios.

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