II. Very Short Answer Questions
Question 1.
Write a short notes on debentures.
Answer:
Debentures are an important instrument for raising long term debt capital. A company can raise funds through issue of debentures which bear a fixed rate of interest.
Question 2.
What do you mean by public deposits?
Answer:
Debentures are an important instrument for raising long term debt capital. A company can raise funds through issue of debentures which bear a fixed rate of interest.
Question 3.
Name any two sources of funds classified under borrowed funds.
Answer:
- Debentures
- Loan from banks
Question 4.
Name any two internal sources of business finance.
Answer:
- Retained earnings
- Collections form receivables
Question 5.
State any two factors that affect the choice of source of finance.
Answer:
- Cost
- Financial capacity to the firms
III. Short Answer Questions
Question 1.
Define Business finance.
Answer:
“Finance is that business activity which is concerned with the acquisition and conservation of capital fund in meeting the financial needs and overall objectives of business enterprises.” – B.O. Wheeler
Question 2.
What is pledge?
Answer:
A customer transfers the possession of an article with the creditor (banker) and receives loan. Till the repayment of loan, the article is under the custody of the borrower. If the debtor fails to refund the loan, creditor (banker) will auction the article pawned and adjust the outstanding loan from the sale proceeds.
Question 3.
List sources of raising long – term and short – term finance.
Answer:
Sources of Short Term Finance:
- Loans and Advances
- Bank Overdraft
- Discounting Bills of Exchange
- Trade Credit
- Pledge
- Hypothecation
- Mortgage
- Loans Against the Securities
- Clean Loan
- Commercial Paper (CP)
- Hire Purchase Finance
- Factoring
Sources of Long Term Finance:
- Shares (i) Equity Shares (ii) Preference Shares
- Debentures
- Retained Earnings
- Public Deposits
- Long Term Loan from Commercial Banks
- The Loans from Financial Institutions
Question 4.
For which purpose fixed capital is needed in business?
Answer:
Business enterprises need finance for fixed and working capital requirement. Fixed capital requirements include purchase of plant, machinery, furniture, fixtures, vehicles, and so on.
Question 5.
What do you mean by working capital requirement of business?
Answer:
Working capital requirements include purchase of raw materials, payment of salary and. wages, incurring operating expenses like telephone bills, carriage inward and outward, electricity charges, premium, stationery, etc.
IV. Long Answer Questions
Question 1.
List out the various sources of financing.
Answer:
The various sources of business finance can be classified into three categories on the basis of
(i) period basis
(ii) ownership basis
(iii) source of generation basis.
On the basis of period:
- Short term finance
- Medium term finance
- Long term finance
Sources of Short Term Finance:
- Loans and Advances
- Bank Overdraft
- Discounting Bills of Exchange
- Trade Credit
- Pledge
- Hypothecation
- Mortgage
- Loans Against the Securities
- Clean Loan
- Commercial Paper (CP)
- Hire Purchase Finance
- Factoring
Sources of Medium Term Finance:
- Loans from Banks
- Loan from Financial Institutions
- Lease Financing
Sources of Long Term Finance:
- Shares (i) Equity Shares (ii) Preference Shares
- Debentures
- Retained Earnings
- Public Deposits
- Long Term Loan from Commercial Banks
- The Loans from Financial Institutions
On the Basis of Ownership:
- Owner’s Funds
- Borrowed Funds
On the Basis of Generation of Funds:
- Internal Sources
- External Sources
Question 2.
What are the different types of short term finances given by commercial banks?
Answer:
1. Loans and Advances:
Loan is a direct advance made in lump sum which is credited to a separate loan account in the name of borrower. The borrower can withdraw the entire amount in cash immediately.
2. Bank Overdraft:
Bank overdraft refers to an arrangement whereby the bank allows the customers to overdraw the required amount from its current deposit account within a specified limit.
3. Discounting Bills of Exchange:
When goods are sold on credit, the suppliers generally draw bills of exchange upon customers who are required to accept it.
4. Trade Credit:
Trade credit is the credit extended by one trader to another for the purpose of purchasing goods and sendees. Purchaser need not pay money immediately after the purchase.
5. Pledge:
A customer transfers the possession of an article with the creditor (banker) and receives loan. Till the repayment of loan, the article is under the custody of the borrower. If the debtor fails to refund the loan, creditor (banker) will auction the article pawned and adjust the outstanding loan from the sale proceeds.
6. Hypothecation:
This is loan taken by depositing document of title to the property with the banker. Of course the physical possession of asset property is with the borrower. If the borrower fails to repay the loan amount, the article hypothecated will be sold in auction by the banker concerned.
Question 3.
Write short notes on
- Retained Earnings
- Lease financing
Answer:
1. Retained Earnings:
Retained earnings refer to the process of retaining a part of net profit year after year and reinvesting them in the business. It is also termed as ploughing back of profit. An individual would like to save a portion of his/her income for meeting the contingencies and growth needs.
Similarly profit making company would retain a portion of the net profit in order to finance its growth and expansion in near future. It is described to be the most convenient and economical method of finance.
2. Lease Financing:
Lease financing denotes procurement of assets through lease. For many small and medium enterprises, acquisition of plant and equipment and other permanent assets will be difficult in the initial stages. In such a situation Leasing is helping them to a greater extent.
Leasing here refers to the owning of an asset by any individual or a corporate body which will be given for use to another needy business enterprise on a rental basis. The firm which owns the asset is called ‘Lessor’ and the business enterprise which hires the asset is called ‘Lessee’.
The contract is called ‘Lease’. The lessee pays a fixed rent on agreed basis to the lessor for the use of the asset. The terms and conditions like lease period, rent fixed, mode of payment and allocation of maintenance, are mentioned in the lease contract.
At the end of the lease period, the asset goes back to the lessor. Alternatively lessee can own the asset taken on lease by paying the balance of price of asset concerned to lessor. Hence lease finance is a popular method of medium term business finance.
Question 4.
Write short notes on
- Owner’s funds
- Borrowed funds
Answer:
1. Owner’s Funds:
Owner’s funds mean funds which are provided by the owner of the enterprises who may be an individual, or partners or shareholders of a company. The profits reinvested in the business (ploughing back of profit or retained earnings) come under owner’s funds.
These funds are not required to be refunded during the life time of business enterprise. It provides the owner the right to control the management of the enterprise.
2. Borrowed Funds:
The term ‘borrowed funds’ denotes the funds raised through loans or borrowings. For example debentures, loans from banks and financial institutions, public deposits, trade credit, lease financing, commercial papers, factoring, etc., represent borrowed funds.
These borrowed sources of funds provide specific period before which the fund is to be returned. Borrower is under legal obligation to pay interest at given rate at regular intervals to the lender. Generally borrowed funds are obtained on the security of certain assets like bonds, land, building, stock, vehicles, machinery, documents of title to the goods, and the like.
Question 5.
Explain any four personal investment avenues.
Answer:
1. Public Provident Fund (PPF):
It is the safest long – term investment option for the investors in India. It is totally tax – free. PPF account can be opened in bank or post office. The money deposited cannot be withdrawn before 15 years and an investor can earn compound interest from this account.
However the investor can extend the time frame for the next five years if the investor does not opt to withdraw the amount matured for payment at maturity date. PPF investor can take loan against PPF account when he/she experiences financial difficulties.
2. Mutual Funds:
An individual investor who wants to invest in equities and bond with a balance of risk and return generally can invest in mutual funds. Nowadays people invest in stock markets through a mutual fund. Systematic investment plan is one of the best investment options in India.
3. Direct Equity or Share Purchase:
An individual can opt for investment in shares. But he has to analyse the market price of various shares traded in stock exchange, reputation of the company, consistency in the payment of dividend, the nature of the project undertaken by the company, growth prospects of industry in which a company is operating, before investing in shares. If the investment is made for a long time, it may yield good return.
4. Real Estate Investment:
Real estate is one of the fastest growing sectors in India. Buying, a flat or plot is supposed to be the best decision amongst the investment options. The value of the real asset may increase substantially depending upon the area of location and other support facilities available therein.