Sources of Finance Test

Q1. Select the following factors to the appropriate statements, which can influence the choice of financing sources for any company? (P&D)
Equity is expensive as compared to Debt Sources for raising finance may be limited to a company Long-term finance may be expensive but secured The liquidity position of any company cost time accessibility gearing.
(2 marks)

Q2. A company is considering paying some of its debts using a short-term source of finance but is unable to decide which one to choose. The following statements are given by the company finance director. Select the appropriate short-term source of finance according to the statements. (HA)

• “The company has to pay interest only on the overdrawn amount” loan overdraft both
• “The finance will be documented by the finance provider indicating how much the company will pay each month” loan overdraft both
• “If any covenants are breached the amount will instantly be repayable in full with interest” loan overdraft both
  (2 marks)

Q3. Kofi Co. has $15,000 loan taken from the bank at 12% interest over five years. What will be the amount of each payment if the payments are made half yearly and loan agreement allows gradual repayment? The answer to the nearest $. (FIB)

• 4419601841500$
  (2 marks)

Q4. Barney Co. has a current share price of $2.7/share & has 8,000 ordinary shares. Barney is offering its shareholders two shares for every six ordinary shares at a 30% discount rate. What is the theoretical ex-rights price if assumed that all existing shareholders take up the share?

• (MCQ)
• $2
• $2.3
• $2.5
• $2.7
  (2 marks)

Q5. Christmas Co. is currently in need of finance. The cash will be raised through three for every five right issue at 25% discount to its current share price which is $4.5. Christmas Co has in total issued 1 million shares with a $375,000 issue cost. Calculate the theoretical ex-rights price per share? (MCQ)

• $3.56
• $3.94
• $4.08
• $4.31
  (2 marks)

Q6. Church Co. wants to invest in a project having a positive NPV. The company has no restriction to its sources of finance and has decided to issue one for every four right issue to its existing shareholders at a subsidized rate of 63% of the current share price of $6.2. The company has to issue 1 million shares with a $0.906 issue cost per share. Calculate the theoretical ex-rights price per share? (MCQ)

• $3.96
• $4.28
• $5.23
• $5.56
  (2 marks)

Q7. Duero Co. is offering 1 for 5 right shares at a 20% discount to the current share price of $5.4/share. The company has in total 10,000 ordinary shares & one of the shareholders Zing holds 2,000 ordinary shares of Duero Co. What should Zing not do? (MCQ)

• Take up the share
• Sell the right issue
• Do nothing
• Do everything
  (2 marks)

Q8. Saco Co. has offered its current shareholders two for every four right shares at 26% discount to its current share price of $8.1/share. The company has in total 3,000 ordinary shares. Calculate the value of right? (FIB)

• 4216405778500$
  (2 marks)

Q9. Rues Co. is a listed company on the stock market. The Board of directors just agreed to acquire Fuse Co a competitor for $3 million and have agreed to buy using only equity finance. You are the head of the Treasury Department and the directors want an advice on which of the following sources of finance can be used? (MRQ)

• Using last years retained earnings reserve of $3.7m
• Issuing a right issue to its shareholders at 10% discount
• Issuing scrip dividends of $3.3m
• A bank loan of $4m at 5% interest paid annually
  (2 marks)

Q10. Which of the following reasons would be for a newly listed company to obtain finance from the general public? (MRQ)

• Access to a wider pool of finance
• Enhancement of company image
• Marketability of shares
• Possible future growth
  (2 marks)

Q11. Which of the following equity sources of finance will be selected if the following factors are taken into consideration? (HA)

• Cost (Cheapest) PLACING RIGHTS ISSUE PUBLIC OFFER
• Control (No loss) PLACING RIGHTS ISSUE PUBLIC OFFER
• Price of shares (Highest) PLACING RIGHTS ISSUE PUBLIC OFFER
  (2 marks)

Q12. Which of the following is a key feature of debt as a source of finance? (MCQ)

• Interest must be paid irrespective of the level of profits
• Debt holders are repaid last in the case of liquidation
• Debt holders hold full voting rights
• Debt holders have high levels of risk, compared to providers of other sources of finance, and therefore debt attracts the highest return
  (2 marks)

Q13. The following statements indicate which sources of bonds? (HA)

• A debt instrument backed by the reputation of the issuer debentures deep discount zero discount
• A bond which requires no interest debentures deep discount zero discount
• A bond sold lower than its face value debentures deep discount zero discount
  (2 marks)

Q14. Which of the following characteristic differentiates Loan notes with a warrant with Convertible loan notes? (MCQ)

• The minimization of the negative investor interpretation
• The option to subscribe a number of shares at maturity
• An option to subscribe predetermined shares at a predetermined cost
• The option is hidden in the loan notes
  (2 marks)

Q15. What does the term Riba refer to in Islamic sources of finance? (MCQ)

• A lease contract
• A sale on credit
• A partnership agreement in which any profit/loss is divided equally
• A predetermined percentage set by the lender received above the principal amount
  (2 marks)

Q16. Select the appropriate option. (HA)

• In a Mudaraba contract, the Rabb-ul-mal will bear all the losses true false
• In Musharaka contract, all parties must provide equal work true false
• In Ijara contract, the lessor can gift the asset to the lessee without any documentation true false
  (2 marks)

Q17. Which of the following is the best statement to describe a Sukuk bond? (MCQ)

• An equity in Islamic finance where profits are pre-agreed
• A lease in Islamic finance where lessor retains ownership of the asset
• A trade credit in Islamic finance where pre-agreed on markup is agreed in advance for the convenience of paying later
• A bond in Islamic finance where bondholder owns the asset and its risk & reward
  (2 marks)

Q18. Which of the following is/are handicaps faced by the small-medium entities? (MRQ)

• The business has no history available nor any long track record
• Banks are hesitant to invest in these entities due to limited securities
• Maturity Gap
• Shares can be placed privately
  (2 marks)

Q19. Any wealthy individual or a particular group can directly invest in a small business. Which of the following does the above definition belong to? (MCQ)

• Owner Financing
• Equity Financing
• Business Angel Financing
• Supply chain Financing
  (2 marks)

Q20. Which of the following relates to a government aid given to small-medium entities? (MCQ)

• Loan Schemes
• Crowd Funding
• Peer to Peer Funding
• Venture Capital
  (2 marks)

Q21. The statements given below relate to small-medium entities. Are statements true or false? (HA)

• A funding gap is a common problem for SME’s true false
• The medium-term loan is difficult for SME’s due to maturity gap true false
  (2 marks)

Q22. “It is a series of tax relief to encourage investments in small unquoted companies carrying a qualifying trade”. The definition above relates to? (MCQ)

• Enterprise investment scheme
• Venture capital
• Share incentive scheme
• Loan guarantee scheme
  (2 marks)

Sources Of Finance (answers)

Q1.

• Equity is expensive as compared to Debt COST
• Sources for raising finance may be limited to a company ACCESSIBILITY
• Long-term finance may be expensive but secured TIME
• The liquidity position of any company GEARING

Q2.

• “The company has to pay interest only on the overdrawn amount” OVERDRAFT “The finance will be documented by the finance provider indicating how much the company will pay each month” LOAN “If any covenants are breached the amount will instantly be repayable in full with interest” BOTH

Q3. $2,655

• 12% annuity factor for 10 repayments = 5.650
  Payment amount = 15,000 ÷ 5.650 = $2,655

Q4. C

• Issue price = $2.7 × 70% = $1.89
• TERP = [(6×2.7) + (2×1.89)] ÷ (6+2) = $2.5

Q5. B

• Issue price = $4.5 × 75% = $3.375
• Issue cost = $375,000 ÷ 1,000,000 = $0.375
• Issue price = $3.375 – $0.375 = $3
• TERP = [(5×4.5) + (3×3)] ÷ (5+3) = $3.94

Q6. D

• Issue price = $6.2 × 63% = $3.906
• Issue price = $3.906 – $0.906 = $3
• TERP = [(4×6.2) + (1×3)] ÷ (1+4) = $5.56

Q7. C

• Issue price = $5.4 × 80% = $4.32
• TERP = [(5×5.4) + (1×4.32)] ÷ (1+5) = $5.22
• Take up the share
• Wealth (2,400 shares × $5.22) = $12,528
• Payment (400 shares × $4.32) = ($1,728)
• Total = $10,800
• Sell the share
• Wealth (2,000 shares × $5.22) = $10,440
• Payment (400 shares × $0.9) = $360
• Total = $10,800
• Do nothing
• Wealth (2,000 shares × $5.22) = $10,440

Q8. $0.702

• Issue price = $8.1 × 74% = $5.994
• TERP = [(4×8.1) + (2×5.994)] ÷ (2+4) = $7.398
• Value of right = $8.1 – $7.398 = $0.702

Q9.

• Using last years retained earnings reserve of $3.7m (Equity)
• Issuing a right issue to its shareholders at 10% discount (Equity)
• Issuing scrip dividends of $3.3m (Dividend policy)
• A bank loan of $4m at 5% interest paid annually (Debt)

Q10. All reasons

Q11.

• Cost (Cheapest) PLACING Control (No loss) RIGHTS ISSUE Price of shares (Highest) PUBLIC OFFER

Q12. A

Q13.

• A debt instrument backed by the reputation of the issuer DEBENTURES A bond which requires no interest ZERO DISCOUNT
• A bond sold lower than its face value DEEP DISCOUNT Q14. C
• The minimization of the negative investor interpretation (Advantage)
• The option to subscribe a number of shares at maturity (Feature of Convertible loan note)
• An option to subscribe predetermined shares at predetermined cost (Amount to be paid in Loan notes with a warrant)
• The option is hidden in the loan notes (Hidden in Convertible loan notes)

Q15. D

• A lease contract (Ijara)
• A sale on credit (Murabaha)
• A partnership agreement in which any profit/loss is divided equally (Musharaka)
• A predetermined percentage set by the lender received above the principal amount (Riba)

Q16.

• In a Mudaraba contract, the Rabb-ul-mal will bear all the losses TRUE In Musharaka contract, all parties must provide equal work FALSE
• In Ijara contract, the lessor can gift the asset to the lessee without any documentation FALSE

Q17. D

• An equity in Islamic finance where profits are pre-agreed (Mudaraba)
• A lease in Islamic finance where lessor retains ownership of the asset (Ijara)
• A trade credit in Islamic finance where pre-agreed on markup is agreed in advance for the convenience of paying later (Murabaha)
• A bond in Islamic finance where bondholder owns the asset and its risk & reward (Sukuk)

Q18.

• The business has no history available nor any long track record (Handicap)
• Banks are hesitant to invest in these entities due to limited securities (Handicap)
• Maturity Gap, Mismatching of maturity of assets & liabilities (Handicap)
• Shares can be placed privately (Advantage)

Q19. C

• Owner Financing, Finance from personal resources
• Equity Financing, Finance via privately placed shares
• Business Angel Financing
• Supply chain Financing, Financing by selling invoices at a small discount in order to obtain the cash in advance of the invoice due date

Q20. A

• Loan Schemes, Some governments may provide loan schemes to facilitate lending to viable businesses that have been turned down for a normal commercial loan due to a lack of security or a proven track record
• Crowd Funding, Raising money from a large number of people
• Peer to Peer Funding, the Alternate name for Crowd Funding
• Venture Capital, Funding by private companies

Q21.

• A funding gap is a common problem for SME’s TRUE The medium term loan is difficult for SME’s due to maturity gap TRUE The funding gap is the shortfall in the capital during its operations which is a common problem for SME’s. Mismatching of maturity of assets ; liabilities is known as maturity gap which does not provide suitable security for a medium-term loan.

Q22. A