Sources of Financing: Practice Questions

Which of the following is a long-term external source of financing for a limited company?

When comparing debt financing with equity financing, which of the following statements is correct?

A listed company has a very high gearing ratio compared to the industry average. It needs to raise funds for a new expansion project that will not generate cash inflows for at least three years. Which of the following financing strategies would be most appropriate to maintain financial stability?

Which of the following is a short-term external source of financing typically used by businesses to manage temporary cash shortages?

A firm needs to acquire a new delivery truck costing \( \$600,000 \). It currently has a high debt-to-equity ratio and limited liquid assets. Which of the following factors would be the most important non-financial consideration when choosing between leasing the truck and buying it with a bank loan?

Explain why a company might prefer equity financing over debt financing when it already has a very high level of existing liabilities and wishes to avoid further increasing its financial risk.

Compare short-term financing and long-term financing in terms of the matching principle for acquiring non-current assets and the relative flexibility they offer to a business for adjusting its funding levels.

A mature, stable public company is considering two long-term external financing options: issuing redeemable debentures or a rights issue of ordinary shares. Under what specific financial conditions would the company opt for redeemable debentures to prioritise a lower cost of capital and increased financial leverage, and what is the primary financial risk introduced by this choice?

A newly established small business, 'QuickFix IT Solutions', needs \(HK\$200,000\) to cover its initial operating expenses, purchase essential tools, and build up inventory for the first six months. The owner wants to secure this funding quickly and without giving up any ownership in the business.

Identify and briefly explain two suitable short-term external financing options that QuickFix IT Solutions could consider. For each option, state one characteristic that makes it appropriate for this scenario.

Mega Tech Co. is planning a major expansion project that requires $$HK\$5,000,000$$ in capital. The management is considering either securing a long-term bank loan or issuing new ordinary shares.

(a) Explain two characteristics of a long-term bank loan as a source of financing.

(b) Explain two characteristics of issuing new ordinary shares as a source of financing.

(c) Based on the above, briefly discuss one factor Mega Tech Co. should consider when choosing between these two financing options.