Sources Of Corporate Finance! Trivia Quiz

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  • 1/13 Questions

    Credit extended in connection with goods purchased for resale is called:

    • Bank Overdraft.
    • Mortgage Finance.
    • Commercial Bills.
    • Trade Credit.
    • Unsecured Notes.
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About This Quiz


Sources of corporate finance trivia quiz. A business needs some capital in order to function or start up and this capital can either be in the form of equity of debt. Long terms loans are a go to for many businesses. The quiz below is perfect for testing out just how well you know the different sources of capital and how they differ from each other. Do give it a shot!

Sources Of Corporate Finance! Trivia Quiz - Quiz

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  • 2. 

    The main advantage of an inter-company loan would be:

    • The high level of security offered by the borrowing company.

    • Borrowing is over a long term period at a very high interest rate.

    • At any one time a company which has a surplus of funds is matched with a company which has a deficiency of funds.

    • It is very convenient if the two companies are located near each other.

    • Can only be achieved if the borrowing company is a private company.

    Correct Answer
    A. At any one time a company which has a surplus of funds is matched with a company which has a deficiency of funds.
    Explanation
    The type of company and its location are irrelevant. A high level of security and high-interest rates would not be an advantage to the borrower.

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  • 3. 

    Debt capital is different from equity capital because of debt:

    • Has a deferred claim on assets.

    • Costs are tax deductible while cost of equity is not.

    • Costs are significant while equity costs nothing.

    • Costs are an appropriation of profits.

    • None of the above.

    Correct Answer
    A. Costs are tax deductible while cost of equity is not.
    Explanation
    Debt capital is different from equity capital because the costs associated with debt are tax deductible, while the cost of equity is not. This means that a company can deduct the interest payments on its debt from its taxable income, reducing its overall tax liability. On the other hand, the cost of equity, which refers to the return expected by equity investors, is not tax deductible. This fundamental difference in tax treatment makes debt capital more attractive for companies as it provides a tax shield, reducing their overall cost of capital.

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  • 4. 

    Which of the following best describe trade credit:

    • Trade credit has an implicit interest cost.

    • Large firms tend to use trade credit more than small firms.

    • The total trade creit owed by a company at any point of time is termed "accounts receivable".

    • Trade credit arises from the time differential between receipt and payment for goods purchased by the business.

    • Trade credit is usually secured by a floating charge over the company's assets.

    Correct Answer
    A. Trade credit arises from the time differential between receipt and payment for goods purchased by the business.
    Explanation
    Trade credit may or may not have explicit interest conditions attached to amounts not paid on time, but this is not implicit in the original trading terms. Although security or personal guarantees can be negotiated during the approval process, trade credit is usually given unsecured to businesses with an acceptable credit rating. Trade credit is available to both large and small firms and there is no correlation between the size of the business and its relative use of trade credit. Account receivable is not a source of funds for a business.

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  • 5. 

    A sale and leaseback arrangement:

    • Allows the lessee to obtain cash for an asset but still retain title to the leased asset.

    • Allows the lessee to obtain cash for an asset but still retain use of the leased asset.

    • Is almost always an operating lease.

    • Provides a tax shield to the lessor.

    • Is a form of residual lease.

    Correct Answer
    A. Allows the lessee to obtain cash for an asset but still retain use of the leased asset.
    Explanation
    A sale and leaseback arrangement allows the lessee to obtain cash for an asset by selling it to a lessor and then leasing it back from the lessor. This means that the lessee can still use the asset even though they no longer own it. This arrangement is beneficial for the lessee as it provides them with immediate cash flow while still allowing them to use the asset for their business operations.

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  • 6. 

    Which of the following would be classified as a finance decision:

    • Spending money on revenue expenditure.

    • Raising equity finance or long term borrowings to buy non-current assets.

    • Selling off a segment of the business because it is unprofitable.

    • Raising short term finance to improve working capital.

    • Determining what proportion of profits will be retained by the company.

    Correct Answer(s)
    A. Raising equity finance or long term borrowings to buy non-current assets.
    A. Raising short term finance to improve working capital.
    Explanation
    Determining revenue expenditure and retained earnings comes under the ambit of the Dividend (or Operating) decision. Disinvestment would be part of the investment decision.

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  • 7. 

    A long term borrowing NOT backed by a legal charge over the assets of the borrower is called a(n):

    • Debenture.

    • Mortgage.

    • Unsecured Note.

    • Bank Bill.

    • None of the above.

    Correct Answer
    A. Unsecured Note.
    Explanation
    A Bank bill would be a short term source of funds. Debentures are normally secured by a floating charge over the company's assets, whilst the real property is the security given for a mortgage.

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  • 8. 

    Which of the following describe the characteristics of short term liabilities:

    • Represent contractual claims on a firms income and assets.

    • Can arise spontaneously from a firm's operations.

    • Are sources of funds for a firm.

    • Grow in line with an increase in trading operations.

    • Should be used to finance temporary movements in current assets.

    Correct Answer(s)
    A. Represent contractual claims on a firms income and assets.
    A. Can arise spontaneously from a firm's operations.
    A. Are sources of funds for a firm.
    A. Grow in line with an increase in trading operations.
    A. Should be used to finance temporary movements in current assets.
    Explanation
    Short-term liabilities are contractual claims on a firm's income and assets, meaning they represent obligations that the firm must fulfill. They can arise spontaneously from a firm's operations, such as accounts payable or accrued expenses. They are also sources of funds for a firm, as they provide the necessary capital for day-to-day operations. Short-term liabilities grow in line with an increase in trading operations, reflecting the firm's increased financial obligations. Additionally, they should be used to finance temporary movements in current assets, such as inventory or accounts receivable.

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  • 9. 

    Some advantages of factoring finance are:

    • Prompt payment by the factoring company.

    • Insignificant cost of factoring

    • Loss of contact with the firm's customers.

    • Reduction of the firm's doubtful debts.

    • Higher sales

    Correct Answer(s)
    A. Prompt payment by the factoring company.
    A. Reduction of the firm's doubtful debts.
    Explanation
    Factoring does not drive increased sales. Factoring costs are significant and surely loss of customer contact is not an advantage to the business.

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  • 10. 

    A lease arrangement in which the lessor borrows a large percentage of the purchase price of the asset to be leased is precisely termed:

    • A financial lease.

    • An operating lease

    • A residual lease

    • A sale an leaseback

    • A leveraged lease.

    Correct Answer
    A. A leveraged lease.
    Explanation
    The most precise term would have to be a leveraged lease, even though it is a form of finance lease.

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  • 11. 

    Which of the following is NOT a source of short term finance:

    • Trade Credit

    • Accounts Receivable

    • Accrued Wages

    • Commercial Bills

    • Factoring of Accounts Receivable

    Correct Answer
    A. Accounts Receivable
    Explanation
    Accounts Receivable represents uncollected sales. By selling goods on credit, the business is providing a source of finance to the customer and not to itself.

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  • 12. 

    Long term debt can be obtained with ALL BUT which of the following:

    • Term Loan

    • Convertible Notes

    • Mortgage Debentures

    • Preference Shares

    • Commercial Bills

    Correct Answer(s)
    A. Preference Shares
    A. Commercial Bills
    Explanation
    Commercial bills would be a short term source of funds, whilst shares would be classified as equity financing.

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  • 13. 

    Which of the following parties is NOT involved in a Bill of Exchange:

    • Underwriter.

    • Holder

    • Drawee/Acceptor

    • Drawer

    • Discounter

    Correct Answer
    A. Underwriter.
    Explanation
    An underwriter is not involved in a Bill of Exchange. A Bill of Exchange is a financial instrument used in international trade to facilitate payment between parties. The holder is the person who possesses the bill and is entitled to receive payment. The drawee/acceptor is the party who agrees to pay the bill. The drawer is the party who creates the bill and orders the drawee to pay. The discounter is a financial institution that purchases the bill at a discounted rate. However, an underwriter is not directly involved in the creation, negotiation, or payment of a Bill of Exchange.

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  • Current Version
  • Mar 20, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Oct 25, 2010
    Quiz Created by
    Hdtchr
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