Saturday, December 10, 2016

Business Studies - Class 11: Source of Business Finance

Unit – VIII: Source of Business finance
Very Short answer Question (One mark each):
Q.1. In Which year IDBI was established?                                             2009
Ans: 1964
Q.2. Name the first public financial institution set up in India.
Ans: IFCI (Industrial Finance Corporation of India)
Q.3. Write the full form of IDBI and SIDBI.
Ans: IDBI: Industrial Development Bank of India.
SIDBI: Small Industries Development Bank of India
Q.4. What do the debentures represent?
Ans: Borrowed Capital of the company.
Q.5. What is the source of raising the Public Deposits?
Ans: The Public.
 Q.6. What is equity shareholders called?
Ans: Owners of the company.
Q.7. What is the maturity period of Commercial Papers?
Ans:  The maturity period of commercial paper ranges from 90-364 days.
Q.8. From where internal source of capital is generated?
Ans: - It is generated within the business.
Q.9. Funds required for purchasing current assets comes under which head?
Ans: Working capital Requirement

Q.10. Define the term convertible debentures.
Ans: Convertible debentures are when the debenture holders get the right to convert equity shares into debentures at the time of issue of debenture.
Q.11. What is a commercial paper?
Ans: Commercial paper is an unsecured promissory note issued by the company with maturity period varying from 90 days to 364 days .It is issued by one firm to other firm’s insurance companies, banks. It is issued by creditworthy and reputed companies.
Q.12. Define fixed capital.
Ans: According to Wheeler "Fixed Capital is invested in fixed or long run assets”. The amount of fixed capital needed mainly to acquire fixed assets by the business.
Q.13. What is meant by working Capital?
Ans: Working Capital is required for day to day operations of the business. Working capital is computed when the current liabilities are deducted by Current Assets.
Q.14. What is factoring?
Ans: Factoring: It has emerged as a popular source of short term finance. It is a financial service where by the factor responsible for all credit control and debt collection from the buyers and provides protection against any bad debt losses to the firm.
Q.15. Dividend is Paid only to the Shareholders on the FACE VALUE of the shares.
Short answer type Questions (Two/Three/five marks each):
Q.1. Define Business Finance. Why do business needs funds? Mention its merits.
Ans: According to Howard and Upton, “Business Finance involves a set of administrative functions in an organisation which relate with the arrangement of cash and credit so that the organisation may have the means to carry out its objectives as satisfactorily as possible”.
Need of Business finance: Business needs funds to purchase assets and to run day to day operations of the business for the smooth functioning. The needs of the business can be classified as:
a) Fixed capital needs to acquire fixed assets.
b) Working Capital Needs for day to day management of the company.
Merits of Business Finance
a.       Finance helps the firm to meet its liabilities on time.
b.      Smooth flow of business activities.
c.       Use of Business opportunities.
Q.2. What are the sources of Business Finance? Explain them briefly.
Ans: There are two sources of finance:
a)      Owner’s Fund.
b)      Borrowed Fund.
Owner’s Fund: Owner’s fund consists of funds contributed by owners and accumulated profits.
Features of owner’s fund:
A) Source of permanent capital.
B) No security.
C) Provision of risk capital.
Merits of Owner’s Fund:
A) Permanent capital.
B) No security is required to raise capital.
C) Improve credit-worthiness of the company.
Demerits of owner’s fund:
A) Diffusion of control
B) Under-utilisation of capital
Borrowed Fund: It refers to the borrowings of the firm. It is mainly in the form of debentures, loans from financial institutions.
Features of Borrowed fund:
A) Finance for fixed time
B) Security required
C) Regular payment of interest.
Merits of Borrowed Fund:
A) No interference in decision making.
B) Interest as an expense.
C) Fixed rate of interest.
Demerits of Borrowed fund:
A) Adequate security required
B) Fixed liability
C) Regular interest payment irrespective of profits.
Q.3. What is the difference between Owners Capital and Borrowed Capital?

Ans: - The difference between Owners Capital and Borrowed Capital is given here:
It is for a specific time only.
It is permanent source of capital.
It requires assets of the company.
It does not require any security.
Borrowed capital is not risky.
Ownership capital is subject to risk.
No control over management.
It has right to control over management.
Interest is the return.
Profit is the return.
Q.4. What is the source of Long term & short term finance?
Ans: Sources of Long term Finance:  a) Equity Shares and Preference shares, b) Debentures, c) Retained Shares, d) Loan from Banks and Financial institutions
Sources of Raising Short term Finance: a) Trade credit, b) Factoring, c) Loan from Banks, d) Commercial paper.
Q.5.Define Shares and Share capital. What are two types of Share?
Ans: When the capital of a firm is divided into certain number of units these units are called shares. The share of a company is a movable property, transferable in the manner provided by the articles of the company.
The capital of a company is divided into shares which are collectively called ‘Share Capital’. The share capital is regarded as owned capital. It is permanent source of finance.
Shares may be of two types:
a)      Preference Shares
b)      Equity Shares
Q.6. Define Equity Shares. Mention its features, merits and demerits.
Ans: According to Indian Companies Act 1956 " an equity share is share which is not preference share". An equity share does not carry any preferential right.
Features of Equity shares:
a)      Primary risk-bearers
b)      Control over management
c)       Higher profits available for equity share holders.
Merits of equity shares:
a)      Permanent source of capital
b)      No charge over assets
c)       Huge funds can be raised
Demerits of equity shares:
a)      Risk of fluctuating return.
b)      Depends on market conditions.
c)       Low Dividend on equity shares
Q.7. Define Preference Shares. Mention its features, merits and demerits.
Ans: Preference shares are those which carry a preference over dividend and return on capital. The dividend rate on preference shares is fixed. The preference shareholders get the dividend on fixed rate and out of net profits of a company prior to distribution of dividend on equity shares.
Following are the basic features of preference share:
a)      Fixed rate of dividend
b)      Preferential payment of dividend

c)       Preferential right in redemption of capital in case of winding up of a company.
d)      Absence of voting rights
Merits of Preference shares:
a)   Helps to collect huge funds.
b)   No fixed liability.
c)    No charge over assets.
Demerits of Preference shares:
a)      Risk of Fluctuating return.
b)      Dividend not treated as an expense.
c)       No voting rights.
Q.8. What are various types of Preference shares?

Ans: a) Cumulative and Non-Cumulative Preference shares. b) Participating and non-participating preference shares. c) Convertible and non Convertible preference shares. d) Redeemable and Irredeemable preference shares.
Q.9. Define Debentures. Mention its features, merits and demerits.
Ans: Debenture: It constitutes the borrowed funds of the company. It is an acknowledgement of debt. Debenture capital may be called DEBT CAPITAL.
Features of Debentures:
a)      Debenture holders are the creditors of the company.
b)      Debenture is redeemed after a fixed period of time.
c)       Debentures may be either secured or unsecured.
d)      Debenture holders do not enjoy any voting right.
a)      Regular return
b)      Safety of investment
c)       Economic sources
d)      Tax relief
a)      Charge on assets
b)      No voting rights
c)       Permanent burden of interest
Q.10. What are various types of debentures?
Ans: a) Simple and Mortgage Debentures. b) Registered and unregistered (bearer) Debentures c) Convertible and non Convertible Debentures. d) Redeemable and Irredeemable Debentures.
Q.11. What is the difference between Share & Debenture?
Ans: - The difference between Share & Debenture is given here:
Shareholder is an owner of the company.
Debenture holder is a creditor of a company.
A shareholder receives dividend.
A debenture holder receives interest.
A share is not secured by any charge of assets.
A debenture is secured by a floating charge of assets.
Share Capital cannot be repaid.
Debentures can be repaid by the company.
A shareholder has control over the company.
A debenture holder does not have right to control or vote.
Q.12. Distinguish between preference and equity shares.
Ans: Difference between Preference Share and Equity Share are given below:
Basis of Difference
Preference Share
Equity Share
1.Right of Dividend
Preference shares are paid dividend before the Equity shares.
Equity shares are paid after the dividend paid to preference shareholders.
2. Rate of Dividend
Rate of dividend is fixed.
Rate of dividend is not fixed.
3. Convertibility
Preference Shares may be converted into Equity shares.
Equity shares are not convertible.
4. Voting Right
Preference shareholders do not carry the voting right. They can vote only in special circumstances.
Equity shareholders have voting rights.
5. Redemption of Share Capital
Preference shares may be redeemed.
A company may buy-back its equity shares.
Q.13. Explain the trade credit & bank Credit as a source of short term finance?
Ans: Trade credit is the credit extended by one trader to another for the purchase of goods and services. There are various merits of trade credit as a source of short term finance which are mentioned below:
a)      It is readily available according to the customs
b)      It is flexible source of finance
c)       It is an economical source of finance.
Its limitation is that only limited amount of funds can only be generated
Bank credit is provided by the banks in many ways like cash credits, overdrafts, term loans discounting, of bills. There are various merits of bank credit as a source of short term finance which are mentioned below:

a)      Bank finance can be raised as and when required
b)      Banks keep the information of bank finance secret
c)       A company can rely upon the amounts up to credit limit sanctioned for it.
The limitation is that it is subject to many terms and conditions.
Q.14. Explain public deposits as a source of finance.
Ans: Public deposit refers to the unsecured deposits invited by companies from the public. It can invite for a period of six months to 3 years. Public deposit cannot exceed 25% of its share capital & resources.
Merits of Public Deposits:
a)      Simple: The system is very simple in raising the loans.
b)      Economical: It is cheap method of raising working capital.
c)       Elasticity in capital structure: Public deposits keep the capital structure elastic.
d)      No security Requirement Deposits are usually unsecured.   
Demerits of Public Deposits:
a)      Unsuitable for new concerns: It is very difficult for the new companies to rely on Public deposits.
b)      Unreliable- It is very uncertain and unreliable.
c)       Unhealthy for Capital Market.
Q.15. Discuss the financial instruments used in international financing?
Ans: The financial instruments used in international Financing are given here:
a)      ADR i.e. American Depository Receipts can be issued only to the American citizens and can be listed and traded on a stock exchange of America.
b)      GDR i.e. Global Depository receipts can be issued abroad and can be listed and traded on stock exchange of any country other than America.
c)       FCCB i.e. Foreign Currency Convertible Bonds are equity linked debt securities that are to be converted into equity receipts after a specific period. They are similar to convertible debentures.
Q. 16. Write a brief note on various types of loans from commercial banks and financial institutions.
Ans: Loans From Commercial Banks: Business can raise finance from commercial banks in the following ways
a)      Term Loan: For medium term
b)      Cash Credit: Interest is charged on the amount actually withdrawn.
c)       Overdraft:  Current Account holders are allowed to overdraw his A/c.
d)      Discount of bill:
e)      Banks provide short term finance in exchange for bill.
Loans from financial Institutions: Institutional finance means finance arranged from financial institutions other than commercial banks like IFCI, ICICI, IDBI, SFI etc.
Q.17. What points should be kept in mind before choosing the source of finance?
Ans: The following points should be kept in mind before selecting the source of finance:
Long term finance is raised through shares and debentures.
Short term finance is raised through trade credit, commercial paper, etc.
There is least risk on Equity shares as the capital need not be repaid. But in case of loan, interest has to be paid
Issue of equity shares may lead to dilution of control but debt involves no dilution of control.
Stability of earnings are important because loan should be raised only when earning are sufficient.
Interest on debenture is tax deductible.
Dividend is not tax deductible.