Business Finance Flashcards

Venture capital typically provides funding to:

Answer: Early-stage, high-growth companies in exchange for equity

Venture capital funds invest in early-stage or high-growth companies that lack access to public markets, providing capital and expertise in exchange for an equity stake.

Which of the following best describes systematic risk?

Answer: Market-wide risk that cannot be eliminated through diversification

Systematic (market) risk affects all investments and cannot be reduced through diversification; examples include interest rate changes, economic recessions, and geopolitical events.

A share buyback generally signals that:

Answer: Management believes shares are undervalued and wishes to return excess cash

Companies typically buy back shares when management believes the shares are undervalued or when there is excess cash with no better investment opportunities, returning value to remaining shareholders.

Which ratio measures how efficiently a company collects its receivables?

Answer: Receivables days (debtor days)

Receivables days = (trade receivables / revenue) × 365. It measures the average number of days it takes to collect payment from customers; a lower figure indicates faster collection.

The term 'dilution' in equity finance refers to:

Answer: A reduction in the market value of existing shares due to new share issuance

Dilution occurs when new shares are issued, reducing existing shareholders' proportional ownership and, if issued below market price, reducing earnings per share and the value of existing holdings.

Which of the following hedging instruments locks in an exchange rate for a future transaction?

Answer: Forward exchange contract

A forward exchange contract obligates both parties to exchange currencies at a pre-agreed rate on a specified future date, eliminating uncertainty about the transaction rate.