Question
Question 15 Which of the following is not an example of sources of finance? (1) Corporate bonds (ii) Issue of shares (iii) Bonus shares (iv) Preference shares Bonus Shares Corporate bonds Issue of shares 4 pts
Answer
4.1
(238 Votes)
Norman
Professional · Tutor for 6 years
Answer
Bonus shares (if interpreting from a liquidity perspective).
Explanation
Finance sources are ways in which a company can raise funds to perform its activities, such as expanding business or acquiring new assets. Let's go through these one by one:(i) Corporate bonds - These are bonds issued by a corporation to finance its projects. It falls under as an external or debt finance as it involves raising money from investors in return for a promise of interest payments and the return of capital invested.(ii) Issue of shares - Again, these are sources of finances external to the company as the actual funds are generated from the purchase of the company's stock from stockholders. They are equity finances as they award ownership stakes to various shareholders.(iii) Bonus shares - Bonus shares are additional shares given to existing shareholders without any additional cost. They do not bring money into the company as they are issued to shareholders in proportion to their existing holdings. So, generally they are an internal form of financing. Note: From the company's perspective, no cash inflow occurs.(iv) Preference shares - Preference shares refer to the shares that have both the features of equity as well as debt. Paid from after-tax profit, these are again external as they involve offering a piece of the company to outside investors in return for cash and are considered a part of equity financing.Therefore, all four are technically sources of finance. Corporate bonds, issues of shares, and preference shares are external sources since they bring money from outside the business. Despite being distributed to shareholders, the honor of bonus shares actually does not bring cash into the firm from the moment it is distributed, while, for accounting reasons, it won't reduce a firm's retained profits reserve.So if you are strictly considering the ability to bring in money instantly or the liquidity of the financing method, then bonus shares are least likely to do so.(but it still technically a source of finance)