UNIT 2.

3: Management of Funds
SOURCES OF FUNDS 1) What are the two main sources of funds? Internal sources include OE and retained profit. Internal Funds from within the biz & in the form of OE and retained earnings. External Funds from people or institutions other than the owners called debt financing or borrowings. Debt finance ranges from short-term borrowings to long-term borrowings. 2) What is equity? Who provides equity in the case of a) a company & b) a sole trader of partnership?

3) What is included in equity finance for a company?

4) Suggest 2 risky biz ventures where shareholders may be wary of investing.

5) What is capital in the accounting sense (as opposed to the economic sense)?

Retained Profit 6) Define retained profit

7) What is a dividend?

8) What percentage of their after-tax profit do Austn companies tend to keep for biz operations?

9) Why is payment of dividends also seen as important?

10) What are 2 advantages of companies retaining profit?

11) Figure 2.11 is a good summary of the sources of funds.

External Sources of Funds 12) What is the attraction of external funding?

13) What are the risks of using debt finance? 14) Under what overall heading do debts come in the balance sheet? How are they classified (time period)? 15) When would short-term borrowing be used? 16) State the 2 forms of short-term borrowing. 17) Make a note on these 2 forms of borrowing i.e. overdrafts & bank bills. Consider term, interest security etc.

Long Term Borrowing 18) Make basic points on the nature of long-term borrowing. E.g. consider repayment periods (>than 1 yr or < 1 yr); the purchase of non-current assets; finance for takeovers; dangers such as the cost of the loan vs. the earning capacity of the biz 19) Make similar points on mortgage loans and debenture loans Other Sources of Borrowing - Leasing 20) What is a lease? 21) What are the 2 types of leases? 22) Make a few points on operating and finance leases. 23) What is factoring? 24) What is venture capital?

FINANCIAL CONSIDERATIONS 25) What are grants? Who gives them? Why? 26) Copy Fig. 2.15 to summarise sources and types of finance.

Matching Term and Source to Biz Structure 27) Why would a biz be unwise to fund new machinery and plan with an expected life of 20 years by using an overdraft or bank bill? 28) Why would an oil exploration company use a capital structure based mostly on equity? 29) Why would a biz with predictable cash flow benefit from high lvls of debt capital?

COMPARING EQUITY AND DEBT FINANCING 30) What is the cost of debt finance? (N.B. Interest paid by the borrowing company is a tax deductible expense). 31) Explain the advantages for a company when the rate of return from a new project is greater than the cost of implementing the project. (Consider issues like sales revenue, profit, share price and the value of the company). 32) For what purposes are retained profits used? AGAIN, note that debt financing has the advantage of taxdeductibility; unlike equity financing, the interest paid by the borrowing company is tax deductible.

Risk 33) What is financial risk? 34) How could financial risk make debt financing a less attractive proposition?

Gearing 35) What is gearing? 36) What is gearing called in the USA? N.B the higher the lvl of borrowing compared with the equity finance in the company, the higher the gearing. 37) What would be regarded as a high lvl of gearing? Explain.

38) Under what economic circumstances (external environment) could high gearing be dangerous? 39) Fig. 2.17 is a good summary 40) What is one major advantage of using debt financing as opposed to equity? 41) How could debt vs. equity issue be handled by various biz legal structures?