Finance

Question 1

What are some strategic roles of financial management

Answer 1

1. setting financial objectives and ensuring the business achieves its goals
2. sourcing finances
3. preparing budgets and forecasting future finances
4. maintaining sufficient cash flow

Question 2

what are the objectives of financial management

Answer 2

• profitability - the earning performance of the business and indicates its capacity to use its resourcces to maximise profits
• growth - the ability of a business to increase its size in the longer term
• efficiency - the ability of a business to minimise its costs and manage its assets so that maximum
• liquidity - is the extent to which a business can meet its financial obligations in the short-term
• solvency - the extent to which a business can meet its financial obligations in the long term

Question 3

difference between long term and short term goals

Answer 3

long term - strategic goals of the business
short term - tactical goals of a business (1-2 years)

Question 4

What are the influences on financial management

Answer 4

• internal sources of finance - retained profits
• external sources of finance (debt and equity)
• financial institutions
• influence of government
• global market influences

Question 5

What are retained profits

Answer 5

the total cumulative amount of profits that the company has retained in the business rather than distributed as dividends

Question 6

what are external influences

Answer 6

refers to the funds provided by sources outside the bsuiness including banks, other financial insitutions, government suppliers, or financial iintermediaries

Question 7

What are the short term debt finances

Answer 7

1. Factoring
2. Overdraft
3. Commercial bill

Question 8

external sources of finance - short term sources of debt

What is an overdraft

Answer 8

Overdraft =
this is when the bank allows a business to overbraw their accounts up to an agreed limit for a specified period of time to overcome a temporary cash shortfall
- high interest rates
- allows businesses to have a negative account balance for immediate funds to meet short term liabilities

Question 9

external sources of finance - short term sources of debt

**What is a Commercial bill **

Answer 9

Primarily short-term loans issued by financial institutions for larger amounts (over $100,000) for a period of generally 30-180 days
- Commercial bills are secured against the business’ assets, meaning it is a secured loan

Question 10

external sources of finance - short term sources of debt

What is factoring

Answer 10

When the business sells its accounts receivables to a specialist factoring firm to create cash inflows for the business
- allows immediate access to funds which improves cash flow and gearing
- relatively expensive source of finance as the business is responsiible for any unpaid debts

Question 11

external sources of finance - long term sources of debt

What are the external long term sources of debt

Answer 11

1. mortgage
2. unsecured note
3. leasing
4. debenture

Question 12

external sources of finance - long term sources of debt

what is a mortgage

Answer 12

A loan that is secured on the property of the borrower and include interest payments, however the loan is repaid over a significantly long period of time (30-40 years).

Question 13

external sources of finance - long term sources of debt

What is a debenture

Answer 13

loans issued by a company for a fixed interest and for a fixed period of time
- business profits have no effect on the interest as it is fixed
- debenture products must have aprospectus in which businesses may raise funds through debenture issues to the public via the ASX.

Question 14

external sources of finance - long term sources of debt

What is an unsecured note

Answer 14

A loan from investors for a set period of time and is not secured against a business’ assets. Interest rates are higher due to the increased risk to the investor.

Question 15

external sources of finance - long term sources of debt

What is leasing

Answer 15

Involves the payment of money for the use of equipment that is owned by another. The business borrows funds and uses the equipment without the large capital outlay. Provides long term financing without reducing control of ownership. Lease payments are tax deductible and permits 100% financing of assets.

Question 16

external sources of finance - equity finance

What are the types of equity finance

She Picks New Rights

Answer 16

Ordinary shares:
1. New issues
2. rights issues
3. placements
4. Share purchase plans

Private equity

Question 17

external sources of finance - equity finance

What is equity (ordinary shares)

Answer 17

An external source of finance raised by a company through inviting new owners into the business
- When individuals and businesses purchase ordinary shares, they become part owners of a public com[any, There are 4 main types of ordinary shares:
1. Rights issues
2. New issues
3. Placements
4. Share purchase plans

Question 18

external sources of finance - equity finance

What is a new issue

Answer 18

Is a security that has been issues or sold for the first time and is referred to as primary shares, new offering or an Initial public offering (IPO). The business must issue a prospectus.

Question 19

external sources of finance - equity finance

What is a rights issue

Answer 19

The privilege granted to shareholders to buy new shares in the same company
- Occurs after the IPO and provides existing shareholders with the opportunity to purchase more shares
- Gives current shareholders the right to purchase new shares in proportion to the number of shares they currently own

Question 20

external sources of finance - equity finance

What is a placement

Answer 20

An allotment of shares made directly from the company to investors. They are additionaly shares offered at a discount to special investors (the discount is to persuade investors to invest)

Question 21

external sources of finance - equity finance

What is a Share purchase plan

Answer 21

Shares offered to existing shareholders to purchase more without brokerage fees. Can be offered at a discount and without a prospectus. Shareholders can purchase new shares upt to a maximum cap of $15,000

Question 22

Case study for debt finance

Answer 22

Qantas uses both short term and long term sources of debt financing to fund its activities. In 2017, its debt portfolio amount to $5.2 billion. However, Qantas has taken advantage of low interest rates and higher credit rating in order to save significant sums of money on interest repayments

Question 23

Case study for equity finance

Answer 23

Qantas uses equity finance by selling shares through the ASX. Qantas’ last equity raising was in 2009 when it raised $500million in an issue of new shares to combat the effects of the GFC.

Question 24

external sources of finance - equity finance

What is private equity

Answer 24

Money invested in a company that is not listed on the ASX (private COY)
- aim is to raise capital to finance investment
- adv = finance costs are postponed and shareholders do not need to pay dividends immediately
- disadv = inviting more owners causes the business’ control to become diluted.

Question 25

What are the financial institutions

Answer 25

1. Banks (retail banks) 2. Investment banks ($millions) 3. Finance companies ($Thousands) 4. Superannuation Funds (invested in shares) 5. Life isurance companies (invested) 6. Unit trusts (money pooled together by multiple individuals) 7. ASX (Australian securities Exchange)

Question 26

How does the government influence Finance management

Answer 26

The government influences business' financial decision making through its economic policies such as monetary and fiscal policy, legislation, and government bodies who monitor and control the business environment. - Dont through ASIC (Australian securities and investment commission) and Company Tax

Question 27

# Govt inflience What is ASIC

Answer 27

ASIC is an independent statutory commission who is accountable to the Commonwealth parliament. It enforces and administer the Corporations Act 2001 (cwlth) while protecting consumers and investors in areas such as the investment, life insurance, banking, superannuationm and general insurance in Australia. - Aim of ASIC = assist in reducing fraud and unfair practices in financial markets and ensure companies adhere to corporation laws such as the Corporations Act 2001 (cwlth).

Question 28

What is company tax

Answer 28

Australian businesses need to pay 30% of net profits as part of company tax. *The reform of the federal tax system by the Aus govt has improves Aus int. comp., making Aus an attractive place to invest and driving long term sustainable economic growth. This growth will allow for great business expansion as well as a significant increase in employment and wage growth in Australia.*

Question 29

What are The global market influences

Answer 29

Global market influences are unpredictable by businesses. Therefore, they must implement appropriate financial management strategies in order to mnimise any negative effects. One significant influence in recently years has been globalisation which has created more interdependence between economies and their business sectors. The influences include: 1. Global economic outlook 2. availability of funds 3. interest rates

Question 30

# Global market infl. What is the global economic outlook

Answer 30

Refers specifically to the project changes to the levels of economic growth throughout the world.

Question 31

# Global market infl. how does the availability of funds influence businesses

Answer 31

refers to the ease with which businesses can access funds (for borrowing) on the international financial markets - affects a business' financial management as it determines whether they can obtain adequate funds requires for a successful expansion.

Question 32

# Global market infl. How do interest rates influence businesses

Answer 32

interest rates are the costs associated with borrowing money. - the higher the risk = higher interest rates - Australia generally has higher interest rates compared to other developing economies and therefore businesses may choose to borrow from overseas to take adv of lower int rates. However, they may be suseptible to volatile fluctuations in ex rates and may increase debt repayments and reduce profits.

Question 33

Case study for global market influences

Answer 33

economic outlook: - before 2009 Qantas benefitted from globalisation (increased d for their services) with an all time hgih NP of $970mil in 2008. - however, after the GFC = decreased d for services = decreased int. rev by 88% - Therefore they cut their flying capacity and paused orders for new planes Availability of funds: - Since GFC the supply of funds has decreased in Aus and overseas due to the closure of financial institutions and stricter lending criteria - Qantas was assessed to be riskier to lenders due to their reduced profits in 2014 when their credit rating became higher and their interest increased. Interest rates: - Qantas has shifted most of its operations overseas as it is more cost effective to fund them from overseas banks due to the lower interest rate.