QCM : Financial Strategies for Business Success — 9 questions

Questions et réponses du QCM

1. How do internal and external finance primarily differ in their sources?

Internal finance is only short-term, while external finance is only long-term
Internal finance involves borrowing money, while external finance involves reinvesting profits
Internal finance always involves issuing shares, while external finance always involves loans
Internal finance is generated from within the business, while external finance is obtained from outside sources

Internal finance is generated from within the business, while external finance is obtained from outside sources

Explication

The source content clearly states that internal finance is generated within the business, such as retained profits and sale of assets, whereas external finance involves funds obtained from outside sources like loans, overdrafts, or issuing shares. The primary difference is thus about where the funds originate, making option 0 the correct choice.

2. What is a primary advantage of internal finance over external finance?

It involves less risk of damaging the company's credit reputation.
It always provides a larger amount of funds.
It is quicker to acquire for large projects.
It requires no consideration of opportunity costs.

It involves less risk of damaging the company's credit reputation.

Explication

Internal finance, such as retained profits or asset sales, often involves less risk and fewer external dependencies. While it may provide less immediate funding for large projects compared to external sources, its advantage is that it avoids additional costs like interest or dilution of ownership.

3. Who is credited with proposing the concept of internal finance?

Adam Smith
John Maynard Keynes
Milton Friedman
The concept of internal finance was developed within the field of business financial management

The concept of internal finance was developed within the field of business financial management

Explication

The concept of internal finance as a business funding source is a development within business financial management theory, and no specific individual is credited with proposing it. It is generally accepted as a fundamental concept in financial management.

4. Which of the following correctly describes external long-term finance?

Loans and share capital used for investment and expansion.
Bank overdrafts used for short-term operational costs.
Sale of unused assets to generate immediate cash.
Trade credit used for long-term investment.

Loans and share capital used for investment and expansion.

Explication

External long-term finance includes loans and issuing share capital, both used for significant investments or expansion, whereas bank overdrafts and trade credit are short-term sources.

5. According to the revision sheet, which external finance method involves sellers allowing delayed payments?

Trade credit.
Bank overdraft.
Loan from financial institutions.
Share issue.

Trade credit.

Explication

Trade credit allows businesses to delay payments to suppliers, improving cash flow in the short-term; this is explicitly mentioned in the revision sheet.

6. What key factor influences a business's decision to choose internal over external finance?

Opportunity costs related to retained profits.
The interest rate offered by banks.
The company's need for short-term cash flow solutions.
Regulatory restrictions on share issuance.

Opportunity costs related to retained profits.

Explication

Opportunity cost is a crucial factor, as retaining profits means shareholders receive less profit overall; this influences the decision to use internal finance.

7. Who is credited with the concept of internal finance?

Adam Smith.
H. R. T. O’Hare.
John Maynard Keynes.
Milton Friedman.

H. R. T. O’Hare.

Explication

The revision sheet credits H. R. T. O’Hare with proposing the concept of internal finance, particularly analyzing retained profits and asset sales as sources of funding.

8. Which of the following is a disadvantage of internal finance?

Opportunity costs for shareholders.
High interest payments required.
Dilution of ownership.
Difficulty in obtaining sufficient funds.

Opportunity costs for shareholders.

Explication

A disadvantage of internal finance is opportunity costs—when profits are retained, shareholders may receive less profit, and the opportunity to distribute dividends is lost.

9. What distinguishes short-term external finance from long-term external finance?

Short-term is used for immediate needs like working capital, long-term for investments or expansion.
Short-term involves issuing shares, long-term involves bank overdrafts.
Short-term always involves less risk.
Long-term funds are typically unsecured.

Short-term is used for immediate needs like working capital, long-term for investments or expansion.

Explication

Short-term external finance, such as bank overdrafts and trade credit, addresses immediate operational needs, whereas long-term finance is used for investment or expansion plans.

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Raising Finance Types — categories?

Internal and external sources of funding.

Internal Finance — definition?

Funds generated within the business, e.g., retained profits.

Internal Finance — main sources?

Retained profits and sale of assets.

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