Influences on Financial Mgmt

Internal sources of finance are recorded under equity in the balance sheet. This money can be from the business owners or from the business activities.

• • • • 1. · Owner’s equity- the funds contributed by owners or partners to establish and build the business.

        2. ·Retained profit - It is net profit that has been reinvested in the business. It is added as equity and it increases the owner’s claim. 50% of profits are reinvested. 

Private Equity- Where investors have to have a specific relationship with the company rather than buying ownership via the stock market. 

Some types are:

• • Venture capital- Capital acquired from a specialist venture financial institution that seeks to become a part owner in the business (valley of the boom)

  • Private equity- when a business invites people/organisations to invest in the business. Shareholders do not need to be paid instantly and the owners do have some control depending on % of ownership. 

  • Grants- financial gifts provided by government to assist businesses to establish or expand. They need to meet strict criteria. 

Public equity- when anyone can invest in the business. They include:

• • Ordinary shares -  shares to the public through securities exchanges.  Shares can be issued with or without the right to vote at the annual general meeting. These shares also offer dividends.

  • New issues - a security that has been issued and sold for the first time on a public market; sometimes referred to as primary shares or new offerings. A prospectus (a document that describes financial security) is issued through a stockbroker and shares are made on the securities exchange. This is known as an initial public offering (IPO) where shares are issued for the first time.  This gets the business more money 

  • Rights issue - the privilege granted to shareholders to buy new shares in the same company. An issue of shares offered at below market price (discount) to its existing shareholders in proportion to their holding of old shares. Shareholders do not have to purchase.  Cash-strapped companies can turn to rights issues to raise money when they really need it.

  • Share purchase plans - an offer to existing shareholders in a listed company the opportunity to purchase more shares in that company without brokerage fees. They are at below normal prices and permission is required from ASIC. They can only issue a maximum of $15 000 in new shares to each shareholder. If they are not sold they will dilute the company's share price. 

  • Placements - to offer additional shares at a discount to specific institutions and specific investors.The company does this without a formal prospectus. These funds may be used to expand activities or to acquire businesses and are offered to persuade specific investors to invest in a company. 

Complete the Snapshot questions pg 310. 

• Businesses can also acquire finance from international financial markets and overseas stock exchanges.

• Financial institutions often seek debt security (Any type of loan that a business obtains that is issued by a promise of repayment on a certain date at a specific rate of interest.)

•  Some financial institutions include banks, investment banks, finance companies, superannuation funds, life insurance companies, unit trusts and the Australian Securities Exchange. (BIFULS ASX)

1.  Banks - Banks accept deposits from the general public and provide funds for loans and, in turn, make investments. They also provide services like: legal and taxation advice and risk management. Examples include CBA, NAB, Westpac etc. 

2.   Investment banks - Investment banks deal with businesses and governments in raising large amounts of capital by underwriting share issues. They arrange any type of finance that is needed. Examples include JPmorgan, Macquarie Bank, HSBC, Goldman Sachs, UBS

 3.   Finance and life insurance companies - Finance and life insurance companies are non-bank financial intermediaries that specialise in smaller commercial finance. They provide loans to businesses and individuals through unsecured and secured loans. Finance companies raise capital through share issues. Insurance companies provide loans through ongoing insurance premiums. Generally, interest rates would be higher. 

Examples include: 

• • • • 1. TAL Life Limited: Ranks 1st, with a market share of 17.8%

        2. AIA Australia Limited: Ranks 2nd, with a market share of 15.6%

        3. MLC Limited: Ranks 3rd, with a market share of 11.7%

        4. AMP Limited: Ranks 4th with a market share of 11.0%

        5. OnePath Limited: Ranks 5th, with a market share of 10.0%

        6. Comminsure: Ranks 6th, with a market share of 7.9%

        7. BT Financial Group: Ranks 7th, with a market share of 7.8%

        8. Suncorp Life: Ranks 8th, with a market share of 5%

 4.  Superannuation funds - These organisations provide funds to the corporate sector through investment of funds received from superannuation contributions and fees.  Superannuation funds earn returns by selling debt securities to businesses, which repay these loans with interest. Examples include: HOST Plus, REST, Industry Super, Australian Super

 5.   Unit trusts - Unit trusts (also known as mutual funds) take funds from a large number of small investors and invest them in specific types of financial assets. A trustee controls and manages the trust. 

Unit trusts are the pooled resources of thousands of investors who have entrusted their money to a fund management company. The management company buys shares on the ASX on behalf of the investors. The trust does not give the shares to the investor, but combines them in a portfolio. The management then divides the portfolio into many equal “units”.

The investor receives a certain number of units for the money she has entrusted to the company that manages the unit trust—hence “unit trusts”. Unit trusts are also known as collective investment schemes.

Units are offered to the public for investment. There are 4 main types a property trusts, equity trusts, mortgage trusts,  and fixed-interest trusts. They can be listed on the ASX.  

Examples include MG Unit Trust set up by the Murray Goulburn Co-operative and MLC masterkey unit trust. 

6. Australian Securities Exchange (ASX) -  a market that brings together buyers and sellers to exchange shares. Once approved by the ASX businesses can issue shares to the general public on the primary market (IPO) or initial pubic offering. Buyers and sellers can exchange shares on the secondary market (normal way). 

o   The government influences a business’s financial management decision making with economic policies such as those relating to the monetary and fiscal policy. 

o   The monetary policy is steps taken by the Reserve Bank of Australia (RBA) to affect the finance market and assist the federal government to achieve its goal of low inflation and economic growth.  Securities and loans are sold and bought to put pressure on interest rates to alter the economic cycle. 

 Two important government influences on financial management are:

o   The Australian Securities and Investments Commission (ASIC)- This was formed to regulate corporations markets and the provision of financial services covered under the Corporations Act 2001 (Cth). The aim of ASIC is to assist in reducing fraud and unfair practices in financial markets and financial products. ASIC ensures that companies adhere to the law, collects information about companies and makes it available to the public. 

Company taxation (set by fiscal policy) - Companies and corporations in Australia pay company tax on profits. Company tax is paid before profits are distributed to shareholders as dividends. Company tax is presently 30% of net profit.  The government plans to lower taxes to foreign investment, and create new jobs 27.5% tax rate for small businesses with turnover (sales revenue) of less than $10 million. 

Using the textbook plus your own research determine how the government might also influence finance. You might look at things like the Coalition's plan to lower the company tax rate or the effects of banking royal commission on lending. 

o   Financial risks associated with global markets are greater than those encountered but such risk taking is necessary for a business strategy. Largely uncontrollable influences include the availability of funds, interest rates and the global economic outlook.

o   The availability of funds- the ease with which a business can access funds (for borrowing) on the international financial markets. The availability of funds demand on the risk, demand and supply and the domestic economic conditions.

 o   Interest rates - the cost of borrowing money. The higher the level of risk involved in lending to a business, the higher the interest rates.

o   Exchange rates - The fluctuation of the exchange rate can also affect the ability to pay back money borrowed from overseas. 

Global economic outlook- the projected changes to the level of economic growth throughout the world. It may increase the demand for products/services and the interest rates on funds borrowed internationally. 

Further information on page 447. Please add these to your notes. 

Complete question on page 451- 455 as revison as well as the HSC questions below

2012

Question 27 (20 marks)

How can different sources of funds help a business achieve its financial objectives?

2014

14 Why would a business choose debentures as a source of funding? 

(A) To reduce financial risk 

(B) To provide security over assets 

(C) To retain ownership and control 

(D) To obtain cheap, short-term finance 

24 (b)   Explain government influences on the financial management of businesses. 4 marks

Q25 Emu Uniform Manufacturers Pty Ltd are a successful business based in NSW. They currently supply a range of school, sport and work uniforms to a large number of customers throughout Australia. They are known for their outstanding customer service and high quality products. 

Sales have been increasing for many years and they have recently received a large long-term contract to supply uniforms to a major company. 

This will require them to significantly expand their output. To do this, the business will have to outsource overseas or spend $5 million to expand its existing factory in NSW. 

You have been hired as a consultant to write a report to the management. In your report: 

• • recommend a source of finance for the factory expansion 

2015

Q6 What  is a source of new capital for a public company?

(A) Primary market of the Australian Securities Exchange

(B) Secondary market of the Australian Securities Exchange 

(C) Primary market of the Australian Securities and Investment Commission 

(D) Secondary market of the Australian Securities and Investment Commission 

10  What is a characteristic of external equity finance?

(A) Specific maturity date 

(B) Low interest payments 

(C) Fixed returns to owners 

(D) Diluted business ownership

2016

Q14 Which of the following is an example of a unit trust?

(A) An investor purchases shares in a public company. 

(B) Investors lend money directly to businesses and receive interest in return. 

(C) Investors pool their money together and it is invested in the property market. 

(D) An investor deposits money with a financial institution and receives a fixed rate of interest.

21 Sue is a sole trader whose business is growing rapidly as sales are increasing. As a result of the growth, she needs to purchase stock worth $10000.

(b) Discuss ONE internal and ONE external source of finance for Sue’s purchase of stock. 6 marks

2017

6  A sole trader invests $500 000 into her business. 

What is this an example of? 

A.  An overdraft 

B.  Retained profits 

C.  Internal debt finance

D.  Internal equity finance 

13 Why would a business factor its accounts receivables? 

A.  To improve cash flow 

B.  To increase owner’s equity 

C.  To increase the value of current assets 

D.  To improve the value of the business

18    Which organisation ensures that Barb’s Batteries Pty Ltd operates in a financially responsible manner? 

A.  Australian Securities and Investments Commission 

B.  Australian Prudential Regulation Authority 

C.  Australian Securities Exchange 

D.  Reserve Bank of Australia 

2018

7    In which of the following are both sources of funds appropriate for a business purchasing extra stock before a busy trading period? 

A.  Debentures and factoring 

B.  Retained profits and unsecured notes 

C.  Debentures and bank overdraft 

D.  Retained profits and bank overdraft 

Question 24

(c) A business has decided to expand into a larger factory and is now considering its financial options. 

Discuss the use of leasing and the use of mortgages as a source of long-term finance for this business. 5 marks

2019

2 A business is purchasing a new property. Which source of finance would be the most appropriate?

 A. Shares 

B. Mortgage 

C. Debenture 

D. Letter of credit 

4 A business requires new manufacturing equipment.

Which of the following would provide leasing for this equipment?

A. Unit trusts

B. Property trusts

C. Finance companies

D. Superannuation funds

12 Which of the following allows shareholders of a public company to acquire additional

shares at a discount?

A. New issues

B. Placements

C. Private equity

D. Unsecured notes 

16 Which independent federal body ensures that businesses adhere to government regulations,

maintain appropriate financial information and provide consumer protection?

A. Reserve Bank of Australia

B. Australian Securities Exchange

C. Australian Prudential Regulation Authority

D. Australian Securities and Investment Commission

2021

18  When a business uses factoring, they improve their

A. cash flow by increasing their revenue.

B. cash flow but reduce their profitability.

C. working capital by reducing their costs.

D. working capital but increase their liabilities.

2022

13 Which combination of global market influences would support a business’s decision to expand globally? 

A. A depressed economic outlook and low interest rates 

B. A depressed economic outlook and high interest rates 

C. An improved economic outlook and low interest rates 

D. An improved economic outlook and high interest rates 

2024

19 A private company wants to expand its operations. To raise funds, it intends to become a public listed company. What name is given to this form of equity finance? 

A. Private equity 

B. Commercial bill 

C. New issue of shares 

D. Share purchase plan 

24 a) ii)

Explain the influence of ONE financial institution on the financial management of this business.  4 marks