Financing Operations 1.What forms of financing would a company pursue in phase 2

Question

Financing Operations 1.What forms of financing would a company pursue in phase 2 of the Financing life cycle? 2.List an advantage and disadvantage of obtaining funds from “Angel Investors” 3.Companies continue to receive funds in the Secondary Market? T F 4.Identify a primary difference between common and preferred stock. 5.Which financing life cycle phase would a company pursue an IPO? Breakeven Analysis 6.Fixed Expenses do not change in total when there is a modest change in sales. TRUE FALSE 7.An example of a fixed expense would be a 5% sales commission. TRUE FALSE 8.Property taxes and rent are often fixed expenses. TRUE FALSE 9.Variable expenses change in total as volume changes. TRUE FALSE 10. If a company requires a profit of $30,000 (instead of breaking even), the $30,000 should be combined with the fixed expenses in order to compute the point at which the company will earn $30,000. TRUE FALSE 11.The contribution margin per unit is the selling price per unit minus the fixed expenses per unit. TRUE FALSE

Explanation / Answer

Financing Operations

1. What forms of financing would a company pursue in phase 2 of the Financing life cycle?

Answer: Phase 2 is the growth phase. In the initial period of this phase, firms can opt for Venture capital, loans from banks. As it is a growth stage the cash flows from operations might be able to provide some amount of required funds, for the rest the company can opt for debts. When the company/firm is in the later stage of this phase and is successful enough, it can consider going for an IPO. Please note that the financing methods would change depending on the growth, success and operations of the company.

2. List an advantage and disadvantage of obtaining funds from “Angel Investors”

Advantage: Angel investors need not be paid back in case the business fails. Firms do not have to pay angel investors any regular interest (as it is done in case of debt) as they get part of profit from the business when it becomes successful.

Disadvantage: When a firm opts for angel investing it has to let go certain amount of control and ownership. Angel investors also invest so that certain amount of profit (which is agreed at the beginning) is shared with them. In case of external debt, firms have the complete control on operations and have full ownership, but with angel investing this gets compromised.

3. Companies continue to receive funds in the Secondary Market? True or False

Answer: False

Explanation: Secondary market is a place where investors who own stocks of a particular company buy and sell amongst each other without the company’s interference. Hence any profit or loss incurred during these transactions is borne by the investors and the company has no monetary benefit. The only advantage of this is that if the stock price increases the company’s market capitalization increases and it can opt for more equity financing.

4. Identify a primary difference between common and preferred stock.

Common Stock: Common stocks pay dividends only when the management decides to give away dividend. Also in case of liquidity, common stock holders have the last right to claim the outstanding from the company.

Preferred stock: Preferred stock holders receive dividends at regular intervals as decided during the sale of stock. They have the right to claim any outstanding from the company before common stock holders but after debenture/bond holders.

5. Which financing life cycle phase would a company pursue an IPO?

A company will pursue and IPO at the Growth stage (later stage of this phase) of financing life cycle. If the company is witnessing a huge growth and is expected to grow at a very large scale or if it is about to introduce some significant product in the market it can opt for IPO depending on its previous success.

Breakeven Analysis

6. Fixed Expenses do not change in total when there is a modest change in sales. TRUE FALSE

True

Explanation: Fixed expenses are fixed for a given amount or level of sales. They tend to change only when there is a significant amount of change in sales, hence slight change in the sales will not affect the fixed expenses.

7. An example of a fixed expense would be a 5% sales commission. TRUE FALSE

False

Explanation: Fixed expense are expenses which are fixed for a given level of sales, they do not vary as per volume of sales up to a level. Examples are rent on office premises, salary to workers etc. However when it comes to commission on sales, it varies as per the volume of sales. Commission is paid to increase sales, hence higher the sales, higher the commission, therefore it is Variable expense.

8. Property taxes and rent are often fixed expenses. TRUE FALSE

True

Explanation: Property taxes are based on the property owned by the business; they do not vary as per sales. Tax needs to be paid on the value of the assets hence it is a fixed expense. Rent on office is paid on the basis of the prevailing rates of rents in the market as per the locality, they do not depend on sales, as rent is fixed and needs to be paid irrespective of the volume of sales. Hence both are cases of fixed expenses.

9. Variable expenses change in total as volume changes. TRUE FALSE

True

Explanation: Variable expenses like commission on sales, labor cost, raw material cost etc. vary depending upon the volume of sales. Higher the sales volume, higher is the variable cost.

10. If a company requires a profit of $30,000 (instead of breaking even), the $30,000 should be combined with the fixed expenses in order to compute the point at which the company will earn $30,000. TRUE FALSE

True

Explanation: Breakeven sales are where the company is at a no loss, no profit situation. Combining the $30,000 with total fixed cost will provide us with the volume of sales required to cover all the expenses and achieve the profit of $30,000.   

11. The contribution margin per unit is the selling price per unit minus the fixed expenses per unit. TRUE FALSE

False

Explanation: Contribution margin per unit = Selling price per unit – Variable cost per unit

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.