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Unit 04
Business Finance
Part 01
- Scope and sources of finance; Lease financing
- Cost of capital and time value of money
- Capital structure
- Capital budgeting decisions: Conventional and scientific techniques of capital budgeting analysis
- Working capital management; Dividend decision: Theories and policies
- Risk and return analysis; Asset securitization
- International monetary system
- Foreign exchange market; Exchange rate risk and hedging techniques
- International financial markets and instruments: Euro currency; GDRs; ADRs
- International arbitrage; Multinational capital budgeting
MCQs on
Business Finance
MCQ 01: In finance, we refer to the market where new securities are bought and sold for the first time?
a.Money market
b.Capital market
c.Primary market
d.Secondary market
Answer: Primary market
Primary market: is where the firms sell (float) new stocks and bonds to the public for the first time. An initial public offering, or IPO, is an example of a primary market
Money market: basically refers to a section of the financial market where financial instruments with high liquidity and short-term maturities are traded.
Capital market: is a financial market in which long-term debt (over a year) or equity-backed securities are traded.
Secondary market: is the marketplace where already issued securities – both shares and debt - can be bought and sold by the investors.
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MCQ 02: Which of the following is an internal source of finance?
a.Over draft
b.Trade credit
c.Retained earnings
d.Debentures
Answer: Retained earnings
Profits that are retained by the company after paying taxes/dividends that the company can use. Also referred to as “internal profits” or “ploughed-back profits”
Overdrafts:
When a company temporarily overdraws money from its account, it is known as an overdraft
Trade Credit:
Also referred to the term ‘buy now and pay later’, trade credit occurs when the seller or credit provider does not receive the actual payments until much later
Debentures:
Known as a long-term loan, debentures are similar to share but a certificate is issued to those who hold debentures
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MCQ 03: Which of the following is an external source of finance?
a.Lease financing
b.Venture capital
c.Hire purchase
d.All of the above
Answer: all of the above
Leasing
Known as a form of hiring in which a contract is agreed upon a by a leasing company and the customer. The customer usually pays rental income (the source of finance here) to hire such assets from the leasing company who still remains as the legal owner
Venture Capital
Venture Capitals are high risk loans or shares and are often invested by venture capital firms in the beginning of a business idea
Hire Purchase
Also known as the procedure in which the business pays for the items bought in installments
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MCQ 04: Primary goal of financial management
a.To maximize the return
b.To minimize the risk
c.To maximize the wealth of owner
d.To maximize profit
Answer: to maximize the wealth of owner
Financial management may be defined as planning, organizing, directing and controlling the financial activities of an organization.
The primary goal of the financial management is to maximize the wealth of owners. All businesses aim to maximize their profits, minimize their expenses and maximize their market share.
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MCQ 05: A company may raise capital from primary market through
a.Public issue
b.Right issue
c. Bought out deal
a.All of the above
Answer: all of the above
Public Issue - a stock exchange lists the securities and the corporation raises funds through Initial Public Offering (IPO)
Rights Issue - existing shareholders are offered more shares at a discounted price and on a pro-rata basis.
Bought out deal - is a process in which a company offers securities or shares to the public, through a sponsor. The sponsor can be a bank, any financial institution or even an individual
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