Sources of Finance
Two classifications of sources of finances
Internal / External
Debt financing / Equity financing
Break-even happens when...
Business makes no profit / loss. TR = TC
The title for balance sheet should be
Balance sheet for company x as of date
Examples of cash inflows.
sales revenue, sources of finance
State the 3 investment appraisal methods. (1 is HL only!)
Payback period
Average rate of return
Net Present Value (HL only)
List 3 current assets
The curves that must be drawn on a break-even chart include
TR, TC, TFC
Opening stock + purchases - closing stock =
Cost of goods sold
Opening balance
The ARR for an investment project is 3%. The interest rates in the economy is 0.25%.
Should a business go for this investment project? Why?
Yes. 3% is higher than 0.25%, meaning it should be a worthwhile investment
Why will a business choose to use leasing?
If it is a fixed asset that they do not foresee to use for a long period of time.
Formula for break-even (not on the formula sheet!)
TFC/(P-AVC)
Which type of profit is a more accurate representation of a firm's trading activities?
Net profit - taking into account expenses too
Cash flow problems arise because of...
Cash inflows < Cash Outflows
Formula for payback period
Cost of investment / Contribution per month or per year
Explain how debt factoring works.
A financial service provided to businesses that are struggling to collect money from their debtors so face liquidity problems.
Mr Icy is a popular shop in a small town, selling tubs of frozen yoghurt. Mr Icy needs to sell 8,000 tubs of frozen yoghurt each month to break-even. Last month Mr Icy sold 9,500 tubs. Using this information, calculate Mr Icy’s margin of safety.
1,500
Cash, debtors, stock... this order shows decreasing...
liquidity
What is the difference between profit and cash flow?
Profit = value of sales revenue after all costs have been accounted for.
Cash flow = movement of cash in and out of a business. Refers to sources of finance too.
Chrissy Cards considers purchasing a new commercial printer at a cost of $160,000. The business expects total revenue for the next five years to be $360,000.
Calculate the average rate of return for the new printer.
Annual net profit = ($360,000 - $160,000) ÷ 5 = $40,000.
Hence, the ARR = (40,000 ÷ $160,000) × 100 = 25%.
Therefore, the correct answer is 25%.
Explain one suitable source of finance for ESF if they wanted to open a new campus.
long-term finances e.g. bank loan, retained surplus,
A limitation of break-even analysis.
Assumption that the figures for fixed costs and variable costs will not change.
Differentiate between a patent and a copyright.
Patent = official rights given to a business to exploit an invention or process for commercial purposes.
Copyrights = legal rights to creative pieces of work.
Explain 1 strategy to improve cash flow for any businesses.
Reduce outflows
Increase inflows
Seek alternative sources of finance
HL only:
For what time frame (SR, MR, LR) of projects is NPV a more suitable method of investment appraisal? Why?
Medium to long-term.
Takes into consideration time value of money.