Plus One Bussiness Studies Chapter Wise Questions and Answers Chapter 8 Sources of Business Finance

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Kerala Plus One Bussiness Studies Chapter Wise Questions and Answers Chapter 8 Sources of Business Finance

Plus One Sources of Business Finance One Mark Questions and Answers

Question 1.
Equity shareholders are called
(a) Owners of the company
(b) Partners of the company
(c) Executive of the company
(d) Guardians of the company
Answer:
(a) Owners of the company

Question 2.
Fund required for purchasing current assets is an example of __________
Answer:
Working capital

Question 3.
Under the lease agreement, the lessee get the rights to __________
Answer:
Use the asset for a specified period.

Question 4.
Under the factoring agreement, the factor
Answer:
Collects the client’s debt or account receivables.

Question 5.
Internal sources of capital are those that are
Answer:
generated within the business.

Question 6.
Preference shares abd equity shares are called ____________ securities.
Answer:
Ownership Securities

Question 7.
Equity shareholders are called
(a) Owners of the company
(b) Partners of the company
(c) Executives of the company
(d) Guardians of the company
Answer:
(a) Owners of the company

Question 8.
Equity share capital is called ________ capital
Answer:
Risk

Question 9.
Which of the following is not a characteristic of equity shares?
(a) Voting rights
(b) Ownership security
(c) Fixed rate of return
(d) Residual owners
Answer:
(c) Fixed rate of return

Question 10.
Which source is called as permanent source of capital?
Answer:
Equity Share Capital

Question 11.
__________ shareholders have the right to control the company.
Answer:
Equity Shareholders

Question 12.
Which source is called as permanent source of capital?
Answer:
Equity Share Capital

Question 13.
Sumesh an NRI is interested to invest in companies, but he is not ready to take up more risk. Which type of security he should buy?
Answer:
Preference shares.

Question 14.
_________ shareholders have the right to get dividend at a fixed rate .
Answer:
Preference shareholders

Question 15.
This source of finance is called ‘internal source of financing’ and ‘self financing’. Identify the source of finance and mention its three merits.
Answer:
Ploughing back of profit

Question 16.
Retained earnings are parts of __________ capital.
Answer:
Ownership Capital

Question 17.
Employment of corporate savings use of accumulated saving in the business in the form of reserves is called
Answer:
Ploughing back of profits

Question 18.
___________ are the cheapest source of finance.
Answer:
Retained earnings

Question 19.
___________ are called creditorship securities
Answer:
Debentures

Question 20.
Debentures which are secured by a charge on the assets of the company are called _________
Answer:
Secured debentures

Question 21.
Debentures which can be converted in equity shares are called _________
Answer:
Convertable debentures

Question 22.
Debenture issued without the name of owner is __________ debenture.
Answer:
Unregistered or naked

Question 23.
Which of the following is not a characterstics features of debentures?
(a) Ownership security
(b) Generally secured
(c) Participate in the surplus profit
(d) Guarantee of returms
Answer:
(c) Participate in the surplus profit

Question 24.
An Indian Company can now raise funds not only from India but also through foreign equity participation. How is it possible?
Answer:

1. GDRs
2. ADRs
3. FDI

Question 25.
Expand the term GDR
Answer:
Global Depositors Receipts.

Question 26.
Expand the term ADR
Answer:
American Depository Receipt

Question 27.
ADRs are issued in
(a) Canada
(b) China
(c) India
(d) USA
Answer:
(d) USA

Question 28.
Identify the type of financial services belonged to each cash explain its features.

1. Acquired a machinery for monthly rental basis from an outside agency.
2. Gives the right for collecting their accounts receivable to a specialised agency.
3. An organization which collects and pools funds from public and invests in securities.

Answer:

1. Leasing
2. Factoring
3. Mutual fund

Question 29.
A company decided to raise its funds by selling its account receivables to an agency. Which type of financial service is maintaining here.
Answer:
Factoring

Question 30.
I render specialized services to companies in the collection of their accounts receivables.
Answer:
Factoring

Question 31.
State the appropriate term to denote the arrangement of acquiring the right to use an asset without actually owning it.
Answer:
Leasing

Plus One Sources of Business Finance Two Mark Questions and Answers

Question 1.
What is business finance? Why do businesses need funds? Explain. (2)
Answer:
Nature of Business Finance:

1. Fixed capital requirements:
In order to start a business funds are needed to purchase fixed assets like land and building, plant and machinery. This is called fixed capital requirement.

2. Working Capital requirements:
A business needs funds for its day to day operation. This is known as working Capital requirements. Working capital is required for purchase of raw materials, to pay salaries, wages, rent and taxes.

Question 2.
These are shares which carry preferential rights over the equity shares. Being a commerce student, identify this type of share. And state its 2 preferential rights. (2)
Answer:
Preference shares.
Their preferential rights are:

1. The right to get a fixed rate of divided
2. The right to claim repayment of capital in the event of winding up of the company.

Question 3.
Match the following

1. Equity share – Fixed percentage of interest
2. Debenture – International source of finance
3. Preference share – Real owner
4. American depository – No voting right receipt

Answer:

1. Equity share – Real owner
2. Debenture – Fixed percentage of interest
3. Preference share – No voting right
4. American depository receipt – International source of finance

Question 4.
An Indian company can expand not only through the fund in India but also from foreign equity participation. How is it possible? (2)
Answer:
FDI. It refers to direct subscription to the equity capital of an Indian company by a multinational corporation. It includes Establishment of a new enterprise in a foreign.

Plus One Sources of Business Finance Three Mark Questions and Answers

Question 1.
An Indian company can now raise funds not only from India, but also through foreign equity participation. How is it possible? Explain
Answer:
GDR: Global Depository Receipts are issued by an Indian company to an intermediary abroad called an Overseas Depository Bank. They are issued and traded in European capital market.

ADR: American Depository receipts are issued and traded in U.S.A.

Question 2.
List sources of raising long-term and short-term finance. (3)
Answer:
Long Term Sources:
The amount of funds required by a business for more than five years is called long-term finance. Generally this type
of finance is required for the purchase of fixed assets like land and building, plant and machinery furniture, etc. It include sources such as shares and debentures, long-term borrowings and loans from financial institutions.

Short Term Sources:
Short-term funds are those which are required for a period not exceeding one year. These sources include Trade credit, loans from commercial banks and commercial papers etc. Short-term finance is used for financing of current assets such as accounts receivable and inventories.

Question 3.
Name any three special financial institutions and state their objectives. (3)
Answer:
Financial Institutions:
The state and central government have established many financial institutions to provide finance to companies. These institutions aim at promoting the industrial development of a country, these are also called ‘development Bank’. These are IFCI, ICICI, IDBI and LIC, UTI.

This source of financing is considered suitable when large funds for longer duration are required for expansion, reorganisation and modernisation of an enterprise.
Merits:

1. Financial Institution provide long term finance which is not provided by Commercial Bank
2. These institutions provide financial, managerial and technical advice and consultancy to business firms.
3. It increases the goodwill of the borrowing company in the capital market.
4. As repayment of loan can be made in easy installments, it does not prove to be much of a burden on the business.
5. The funds are made available even during periods of depression, when other sources of finance are not available.

Limitations:

1. The procedure for granting loan is time consuming due to rigid criteria and many formalities.
2. Financial Institution place restrictions on the powers of the borrowing company.
3. Financial institutions may have their nominees on the Board of Directors of the borrowing company thereby restricting the autonomy of the company.

Question 4.
While presenting a seminar paper on different sources of business finance, your friend Vineeth, pointed out that “ownership capital is the risk capital of the business”. Can you explain why it is called risk capital? (3)
Answer:
Equity shareholders are the real owners of the company. Equity shareholders will get their dividend only after dividend is paid to preference shareholders. They can claim back their capital only on winding up after discharging all other liabilities of the company. So we can say that ownership capital is the risk capital of the business.

Question 5.
“ADR & GDR serves the same purpose whenever shares are issued abroad by Indian companies”. Then why can’t we call them by the same name? (3)
Answer:
The important differences between ADR and GDR are:

ADR	GDR
They are issued and traded in USA	They are issued and traded in European capital market
Both individual and institutional investors can make investment	Only institutional investors can invest
It can be converted into shares and shares into ADR	Once converted into shares, it cannot be converted back.
Legal and accounting costs are high	Legal and accounting costs are comparatively less

Plus One Sources of Business Finance Four Mark Questions and Answers

Question 1.
What is the difference between internal and external sources of raising funds?
Answer:

Internal sources	External Sources
Funds are generated from within the organisation	Funds are generated from outside the organization
Fulfill limited needs of the business	Fulfill long term needs f the business
It is not costly	It is costly as compared to internal sources of fund
No need to mortgage the assets of the company to obtain fund from internal sources	Need to mortgage the assets of the company to obtain fund from internal sources

Question 2.
What is the difference between GDR and ADR? (4)
Answer:

ADR	GDR
They issued and traded in USA	They issued and traded in European capital market
Both individual and institutional investors can make investment	Only institutional investors can make investment
It can be converted into shares and shares into ADR	Once converted into shares, it cannot be converted back
Legal and accounting costs are high	Legal and accounting costs are less

Question 3.
Discuss the financial instruments used in international financing. (4)
Answer:
International Financing:

1. Commercial Banks:
Commercial banks all over the world extend foreign currency loans for business purposes. Standard chartered is a major source of foreign currency loan to the Indian industry.

2. International Agencies and Development Banks:
A number of international agencies and development banks provide long and medium term loans and grants to promote the development of economically backward areas in the world. Eg. International Finance Corporation (IFC), EXIM Bank and Asian Development Bank.

3. International Capital Markets:

a. Global Depository Receipts (GDR’s):
Under GDR, shares of the company are first converted into depository receipts by international banks. These depository receipts are denominated in US dollars. Then these depository receipts are offered for sale globally through foreign stock exchanges. GDR is a negotiable instrument and can be traded freely like any other security.

The holder of GDRs are entitled for dividend just like shareholders. But they do not enjoy the voting rights. Many Indian companies like ICICI, Wipro etc. have raised foreign capital through issue of GDRs.
Feature of GDR:

• GDR can be listed and traded on a stock exchange of any foreign country other than America.
• It is negotiable instrument.
• A holder of GDR can convert it into the shares.
• Holder gets dividends
• Holder does not have voting rights.
• Many Indian companies such as Reliance, Wipro and ICICI have issue GDR.

b. American Depository Receipts (ADR’s):
The depository receipts issued by a company in the USA are known as American Depository Receipts.
Feature of ADR:

• It can be issued only to American Citizens.
• It can be listed and traded is American stock exchange.
• Indian companies such as Infosys, Reliance issued ADR

Question 4.
Explain different types of Preference shares. (4)
Answer:
Types of Preference Shares:

a. Cumulative and Non-cumulative Preference Share:
in cumulative preference shares, the unpaid dividends are accumulated and carried forward for payment in future years. On the other hand, in non- cumulative preference share, the dividend is not accumulated if it is not paid out of the current year’s profit.

b. Participating and Non-participating Preference Share:
Participating preference shares have a right to share the profit after making payment to the equity shares. The non-participating preference shares do not enjoy such a right.

c. Convertible and Non-convertible Preference Share:
The preference shares which can be converted into equity shares after a specified period of time are known as convertible preference share. Non-convertible shares cannot be converted into equity shares.

d. Redeemable and Irredeemable Preference Share:
Redeemable preference shares are those where the company undertakes to repay it after a specified period. Where the amount of the preference shares is refunded only at the time of liquidation, are known an irredeemable preference shares.

Merits:

1. Preference shares provide reasonably steady income in the form of fixed rate of return and safety of investment.
2. Preference shares are useful for those investors who want fixed rate of return with comparatively low risk

Limitations:

1. Preference shareholders have no voting right.
2. The dividend paid is not deductible from profit for income tax.

Plus One Sources of Business Finance Five Mark Questions and Answers

Question 1.
What is a commercial paper? What are its advantages and limitations. (5)
Answer:
Commercial Paper (CP):
It is an unsecured promissory note issued by a firm to raise funds for a short period. The maturity period of commercial paper usually ranges from 90 days to 364 days. Being unsecured, only firms having good credit rating can issue the CP and its regulation comes under the purview of the Reserve Bank of India.
Merits:

1. A commercial paper does not contain any restrictive conditions.
2. As it is a freely transferable instrument, it has high liquidity.
3. A commercial paper provides a continuous source of funds.
4. They are cheaper than a bank loan.

Limitations:

1. Only financially sound and highly rated firms can raise money through commercial papers
2. The size of money that can be raised through commercial paper is limited
3. Commercial paper is an impersonal method of financing. Extending the maturity of a CP is not possible.
4. Issue of commercial paper is very closely regulated by the RBI guidelines.

Question 2.
Mr. Ganesh, a sole trader, acquired a machinery on a monthly rental basis from an outside agency. Identify the type of financial service in which he entered into. Explain it. (5)
Answer:
Lease Financing:
A lease is a contractual agreement whereby the owner of an asset (lessor) grants the right to use the asset to the other party (lessee). The lessor charges a periodic payment for renting of an asset for some specified period called lease rent.
Merits:

1. It enables the lessee to acquire the asset with a lower investment;
2. Lease rentals paid by the lessee are deductible for computing taxable profits;
3. It provides finance without diluting the ownership or control of business
4. The lease agreement does not affect the debt raising capacity of an enterprise;
5. Simple documentation makes it easier to finance assets.

Limitations:

1. A lease arrangement may impose certain restrictions on the use of assets.
2. The normal business operations may be affected in case the lease is not renewed.
3. The lessee never becomes the owner of the
   asset.

Question 3.
Both Equity shares and Preference shares are ownership funds of a company. But there is significant difference between these two funds. Can you identify the same. (5)
Answer:

Equity Shares	Preference Shares
It is compulsory to issue these shares.	It is not compulsory to issue these shares
Rate of dividend varies according to the profits of the company	Rate of dividend is fixed
Face value is lower	Face value is higher
No priority in dividend and repayment of capital	Priority in dividend and repayment of capital
It cannot be redeemed	It can be redeemed
Risk is high	Risk is low
They have voting rights	They do not have voting rights
They can participate in the management	They can not participate in the management

Plus One Sources of Business Finance Eight Mark Questions and Answers

Question 1.
“The issue of debentures provides wide options to the company as well as investors in terms of its features”. Can you substantiate the statement from the point of view of its classification? (8)
Answer:
Debentures:
A debenture is a document issued by a company under its seal to acknowledge its debt. Debenture holders are, therefore, termed as creditors of the company. Debenture holders are paid a fixed rate of interest.
Types of Debentures:

a. Secured and Unsecured Debentures:
Secured (Mortgaged) debentures are debentures which are secured by a charge on the assets of the company. Unsecured (Simple or naked) debentures do not carry any charge or security on the assets of the company.

b. Registered and Bearer Debentures:
In the case registered debentures, the name, address and other details of the debenture holders are entitled in the books of the company. The debentures which are transferable by mere delivery are called bearer (Unsecured) debentures.

c. Convertible and Non-convertible Debentures:
Convertible debentures are those debentures that can be converted into equity shares after the expiry of a specified period. On the other hand, non¬convertible debentures are those which cannot be converted into equity shares.

d. First and Second:
Debentures that are repaid before other debentures are repaid are known as first debentures. The second debentures are those which are paid after the first debentures have been paid back.

Merits:

1. It. is preferred by investors who want fixed income at lesser risk
2. Debenture holder do not have voting right
3. Interest on Debentures is a tax deductable expense
4. It does not dilute control of equity shareholders on management
5. Debentures are less costly as compared to cost of preference shares.
6. They guarantee a fixed rate of interest
7. It enables the company to take the advantage of trading on equity.
8. The issue of debentures is suitable when the sales and earnings are relatively stable

Limitations:

1. It is not suitable for companies with unstable future earnings.
2. The company has to mortgage its assets to issue debentures.
3. Debenture holders do not enjoy any voting rights.
4. In case of redeemable debentures, the company has to make provisions for repayment on the specified date, even during periods of financial difficulty.
5. With the new issue of debentures, the company’s capability to further borrow funds reduces.

Question 2.
Distinguish between Shares and Debentures. (8)
Answer:

Shares	Debentures
Shareholders are the owners of the company	Debenture holders are the creditors of the company
Shareholders get dividends	Debenture holders get interest
Shareholders have voting right	Debenture holders have no voting right
No security is required to issue shares	Generally debentures are secured
Shares are not redeemable	Debentures are redeemable
Share capital is payable after paying all outside liabilities	Debenture holders have the priority of repayment over shareholders