Financial Management: practice questions

6 questions · 12 marks · free, no account · Read the notes first

1. Question 1Multiple choice · 1 mark

   Which of the following is a short-term source of financing?

   A

   Debentures

   B

   Ordinary shares

   C

   A bank overdraft

   D

   A mortgage loan

2. Question 2Multiple choice · 1 mark

   From the company's point of view, which of the following is an advantage of issuing ordinary shares rather than debentures?

   A

   There is no obligation to pay a fixed return.

   B

   Dividends are tax-deductible.

   C

   Existing owners' control is not diluted.

   D

   The money must be repaid on a fixed date.

3. Question 3Multiple choice · 1 mark

   Actual selling and distribution expenses were $45 000 against a budget of $40 000. The variance is

   A

   $5000 favourable.

   B

   $5000 adverse.

   C

   $45 000 adverse.

   D

   nil.

4. Question 4Multiple choice · 1 mark

   A project costs $100 000 and brings in a net cash inflow of $40 000 a year. Its payback period is

   A

   2 years

   B

   4 years

   C

   0.4 years

   D

   2.5 years

5. Question 54 marks

   A shop expects the following for next month: opening cash balance $10 000, cash receipts $50 000 and cash payments $65 000.

   (a) Calculate the expected closing cash balance.

   (b) Suggest TWO ways the shop could deal with the result.

   Show worked solution

   (a) Closing cash balance = 10 000 + 50 000 − 65 000 = −$5000, a cash deficit. (2)

   (b) Any TWO (1 mark each):

   • Arrange a bank overdraft in advance.
   • Ask suppliers for a longer trade credit period.
   • Speed up collection from customers, e.g. offer cash discounts.
   • Delay purchases of non-current assets or other non-urgent payments.
6. Question 64 marks

   From the company's point of view, explain TWO advantages of issuing debentures rather than ordinary shares to raise long-term funds.

   Show worked solution

   Any TWO (2 marks each):

   • Control is not diluted: debenture holders are creditors with no voting rights, so existing shareholders keep control.
   • Tax saving: debenture interest is a tax-deductible expense, whereas dividends are paid from after-tax profit.
   • Lower cost: debenture holders bear less risk, so the interest rate is usually lower than the return shareholders expect.
   • Temporary: debentures are repaid on maturity, so the company does not carry a permanent increase in share capital.