Day: February 14, 2025

Which of the following in practice is the source of finance that a company can draw upon most easily?

Select ONE answer:

1. Cash generated from retained earnings
2. New share issues
3. Rights issues
4. Bank borrowings

Show your workings to arrive at your answer, and explain and justify your reasons:

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This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. Correct == > Cash generated from retained earnings is the source of finance that most companies prefer traditionally. – it is simple, no involvement of the shareholders is required, and the control structure of the company is unaffected. New share issues are expensive and risky – they are normally only undertaken when large amounts of new capital are required. Rights issues are cheaper and easier to arrange than new share issues – however they must be priced attractively to ensure that enough shareholders will exercise their rights to make the issue a success. Bank borrowings are a major source of finance since debt finance is generally cheaper and easier to arrange than equity, but it lacks the simplicity of using cash from retained earnings.
2. Not correct
3. Not correct
4. Not correct

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