Chunk 2

Question 1

What are internal sources of finance?

Answer 1

Funds from the outcomes of business activities, primarily retained profits

Retained profits are reinvested into the business instead of being distributed to shareholders.

Question 2

What are external sources of finance?

Answer 2

Funds provided from sources outside the business, including debt and equity

Crucial for businesses seeking to expand operations or invest in new projects.

Question 3

What is debt financing?

Answer 3

Short term and long term borrowing from external sources

Involves obligations to pay interest and principal.

Question 4

Define short term borrowing.

Answer 4

Funds that need to be repaid within 1 year

Includes overdrafts, commercial bills, and factoring.

Question 5

What is an overdraft?

Answer 5

A financial arrangement allowing account holders to withdraw more money than available, up to an agreed limit

Often subject to high interest rates and provides flexibility for temporary cash shortfalls.

Question 6

What are commercial bills?

Answer 6

Short term loans borrowed from banks or financial institutions, typically for large financing needs

Used for buying inventory or managing cash flow.

Question 7

What is factoring?

Answer 7

Selling receivables to a factor at a discount to obtain immediate cash

Improves cash flow but reduces profit due to purchasing invoices at a discount.

Question 8

What is long term borrowing?

Answer 8

Funds borrowed for periods longer than 1 year

Includes mortgages, debentures, unsecured notes, and leasing.

Question 9

Define a mortgage.

Answer 9

A loan secured against a property, allowing the borrower to purchase it

Typically long term, used for financing real estate purchases.

Question 10

What are debentures?

Answer 10

Debt securities issued by public companies to raise funds, offering periodic interest payments

Secured by company assets and do not grant ownership or voting rights.

Question 11

What are unsecured notes?

Answer 11

Debt instruments not backed by specific collateral assets

Investors rely on the issuer’s creditworthiness.

Question 12

What is leasing?

Answer 12

Renting an asset for a specific time period, typically with regular payments

Considered long term debt financing and conserves working capital.

Question 13

What is equity as a source of external finance?

Answer 13

Involves giving ownership of the business in return for funds

Includes ordinary shares, new issues, right issues, placements, and private equity.

Question 14

Define ordinary shares.

Answer 14

Shares representing equity ownership in a public company

Holders have voting rights and may receive dividends.

Question 15

What is a new issue of shares?

Answer 15

The process of a company issuing additional shares to the public

Must comply with regulations set by ASIC and ASX.

Question 16

What is a rights issue?

Answer 16

A method for companies to raise capital by offering existing shareholders the opportunity to purchase more shares at a discounted price

Ensures existing shareholders can maintain their proportional ownership.

Question 17

What are share placements?

Answer 17

Issuing new shares directly to selected institutional investors or high net-worth individuals

Bypasses traditional public offering system.

Question 18

What are share purchase plans (SPP)?

Answer 18

Allows existing shareholders to buy additional shares directly from the company at a discounted price

Participation is limited and avoids traditional market transactions.

Question 19

What is private equity finance?

Answer 19

Financing obtained by private companies in exchange for ownership or stake

Involves investment funds provided by individuals or institutional investors.

Question 20

What role do financial institutions play?

Answer 20

Provide access to funds through services such as loans, investments, and financial products

Support individuals, businesses, and governments in managing financial needs.

Question 21

What influences government financial policies?

Answer 21

ASIC, company taxation, and global market influences

Includes economic outlook, availability of funds, and interest rates.

Question 22

What are financial institutions?

Answer 22

Organizations that provide access to funds through services such as loans, investments, and financial products.

Financial institutions support individuals, businesses, and governments in managing their financial needs.

Question 23

What services do banks offer?

Answer 23

Comprehensive array including:
* Savings accounts
* Personal loans
* Credit cards
* Mortgages
* Investment banking services

The Big Four banks in Australia are CBA, Westpac, ANZ, and NAB.

Question 24

What are investment banks specialized in?

Answer 24

Advisory and financial services including:
* Underwriting
* Capital raising
* Mergers and Acquisitions
* Asset management
* Sales and trading
* Market research
* Risk management

Examples include Macquarie Bank and JP Morgan.

Question 25

What distinguishes finance companies from banks?

Answer 25

They do not accept deposits and often provide high-risk loans with higher interest rates. ## Footnote Finance companies specialize in smaller commercial finance.

Question 26

What is the role of life insurance companies?

Answer 26

Provide insurance in the event of death and invest premiums in: * Equity loans * Shares * Bonds * Real estate ## Footnote This helps them earn returns on the collected premiums.

Question 27

What do superannuation funds do?

Answer 27

Provide retirement benefits by investing contributions in: * Shares * Government securities * Property ## Footnote Employers must contribute 11.55% of earnings.

Question 28

What are unit trusts?

Answer 28

Collective investment schemes where investors pool money to buy units in a trust managed by a professional fund manager. ## Footnote They enhance returns and provide companies with a reliable source of capital.

Question 29

What is the Australian Securities Exchange (ASX)?

Answer 29

Australia's leading securities exchange for trading equities, derivatives, and bonds. ## Footnote It facilitates capital raising and ensures market integrity, transparency, and liquidity.

Question 30

What are the three main types of traded categories on the ASX?

Answer 30

* Equities (shares) * Fixed Income Securities (corporate bonds) * Derivatives (financial contracts) ## Footnote Derivatives allow investors to purchase based on the future price of underlying assets.

Question 31

What is the primary market?

Answer 31

Market between companies and shareholders for new share issues. ## Footnote It contrasts with the secondary market where existing shares are traded.

Question 32

Define retained profits.

Answer 32

Internal source of finance generated from a company's net income that is reinvested in the business. ## Footnote Retained profits are used for growth and expansion.

Question 33

What are external sources of finance?

Answer 33

Include: * Debt * Short-term borrowing (overdrafts, commercial bills, factoring) * Long-term borrowing (mortgages, debentures, unsecured notes, leasing) * Equity (ordinary shares, private equity) ## Footnote These sources provide funding from outside the company.

Question 34

What is company taxation?

Answer 34

Tax that companies pay on their profits, with rates based on eligibility: * Standard rate: 30% * Base rate entity: 25% (if turnover < $50 million and 80% or less is passive income) ## Footnote As of February 2025, these rates apply in Australia.

Question 35

What is the role of ASIC?

Answer 35

Oversees and monitors companies, financial markets, and financial institutions to ensure compliance with corporate legislation. ## Footnote ASIC aims to protect investors and maintain market integrity.

Question 36

What does the Australian Prudential Regulation Authority (APRA) do?

Answer 36

Supervises financial institutions to promote financial stability and ensure they meet obligations to customers. ## Footnote APRA covers banking, insurance, and superannuation sectors.

Question 37

What are global market influences?

Answer 37

Factors affecting demand, supply, and pricing of goods and services in international markets. ## Footnote These influences can significantly impact local financial management.

Question 38

Define economic outlook.

Answer 38

Projected changes in global economic growth based on indicators like: * Growth * Inflation * Employment * Consumer spending ## Footnote Financial managers assess these factors to understand market conditions.

Question 39

What is the significance of interest rates in finance?

Answer 39

They determine the cost of borrowing and influence: * Spending decisions * Investment decisions * Availability of funds ## Footnote Changes in rates can encourage or restrict borrowing.