Samacheer Kalvi 11th Commerce Solutions Chapter 19 Sources of Business Finance

   

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Samacheer Kalvi 11th Commerce Solutions Chapter 19 Sources of Business Finance

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Samacheer Kalvi 11th Commerce Sources of Business Finance Textbook Exercise Questions and Answers

I. Choose the Correct Answer
Question 1.
What is defined as the provision of money at the time when it is required?
(a) Finance
(b) Bank
(c) Cash management
(d) None of these
Answer:
(a) Finance

Question 2.
Internal sources of capital are those that are ……………..
(a) a generated through outsiders such as suppliers
(b) generated through loans from commercial banks
(c) generated through issue of shares
(d) generated within the business
Answer:
(d) generated within the business

Question 3.
Debenture holders are entitled to a fixed rate of ……………..
(a) Dividend
(b) Profits
(c) Interest
(d) Ratios
Answer:
(c) Interest

Question 4.
Public deposits are the deposits which are raised directly from ……………..
(a) the public
(b) the directors
(c) the auditors
(d) the owners
Answer:
(a) the public

Question 5.
Equity shareholders are the …………….. of a company.
(a) Creditors
(b) Owners
(c) Debtors
(d) Employees
Answer:
(b) Owners

Question 6.
Funds required for purchasing current assets is an example for ……………..
(a) Fixed Capital Requirement
(b) Ploughing Back of Profits
(c) Working Capital Requirement
(d) Lease Financing
Answer:
(c) Working Capital Requirement

Question 7.
Which of the following holder is given voting right?
(a) Debentures
(b) Preference Shares
(c) Equity shares
(d) Bonds
Answer:
(c) Equity shares

Question 8.
It may be wise to finance fixed assets through ………………
(a) Creditors
(b) Long term debts
(c) Bank Overdraft
(d) Bills Discounting
Answer:
(b) Long term debts

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:

  1. Debentures
  2. Loan from banks

Samacheer Kalvi 11th Commerce Solutions Chapter 19 Sources of Business Finance

Question 4.
Name any two internal sources of business finance.
Answer:

  1. Retained earnings
  2. Collections form receivables

Question 5.
State any two factors that affect the choice of source of finance.
Answer:

  1. Cost
  2. 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:

  1. Loans and Advances
  2. Bank Overdraft
  3. Discounting Bills of Exchange
  4. Trade Credit
  5. Pledge
  6. Hypothecation
  7. Mortgage
  8. Loans Against the Securities
  9. Clean Loan
  10. Commercial Paper (CP)
  11. Hire Purchase Finance
  12. Factoring

Sources of Long Term Finance:

  1. Shares
    • Equity Shares
    • Preference Shares
  2. Debentures
  3. Retained Earnings
  4. Public Deposits
  5. Long Term Loan from Commercial Banks
  6. The Loans from Financial Institutions

Question 4.
For which purpose fixed capital is needed in business?
Answer:
Business enterprises need finance for the fixed and working capital requirements. Fixed capital requirements include the purchase of plants, machinery, furniture, fixtures, vehicles, and so on.

Question 5.
What do you mean by the working capital requirement of a business?
Answer:
Working capital requirements include the 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 the period:

  1. Short term finance
  2. Medium-term finance
  3. Long term finance

Sources of Short Term Finance:

  1. Loans and Advances
  2. Bank Overdraft
  3. Discounting Bills of Exchange
  4. Trade Credit
  5. Pledge
  6. Hypothecation
  7. Mortgage
  8. Loans Against the Securities
  9. Clean Loan
  10. Commercial Paper (CP)
  11. Hire Purchase Finance
  12. Factoring

Sources of Medium Term Finance:

  1. Loans from Banks
  2. Loan from Financial Institutions
  3. Lease Financing

Sources of Long Term Finance:

  1. Shares (i) Equity Shares (ii) Preference Shares
  2. Debentures
  3. Retained Earnings
  4. Public Deposits
  5. Long Term Loan from Commercial Banks
  6. The Loans from Financial Institutions

On the Basis of Ownership:

  1. Owner’s Funds
  2. Borrowed Funds

On the Basis of Generation of Funds:

  1. Internal Sources
  2. 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

  1. Retained Earnings
  2. 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

  1. Owner’s funds
  2. 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.

Samacheer Kalvi 11th Commerce Sources of Business Finance Additional Questions and Answers

I. Choose the Correct Answer:

Question 1.
……………………….is the lifeblood of any business.
a. Share
b. Building
c. Accounting
d. Finance
Answer:
d. Finance

Question 2.
The various sources of business finance can be classified into ………………
(a) three
(b) two
(c) four
(d) five
Answer:
(a) three

Question 3.
International saving Bank Congress declared World Savings Day on
a. October 31
b. October 13
c. September 31
d. March 13
Answer:
a. October 31

Question 4.
……………… is a type of loan taken from the bank by lodging with the bank title deeds of immovable assets like land and building.
(a) Hypothecation
(b) Mortgage
(c) Clean loan
(d) Factoring
Answer:
(b) Mortgage

Question 5.
The maturity period of a commercial paper usually ranges from
a. 20 to 40 days
b. 60 to 90 days
c. 120 to 365 days
d. 7 to 365 days
Answer:
d. 7 to 365 days

Question 6.
Which one is the internal source?
(a) Retained earnings
(b) Shares
(c) Debentures
(d) Public deposits
Answer:
(a) Retained earnings

Question 7.
The duration of the bill of exchange may be ranging from …………..
a. 15 to 80 days
b. 16 to 90 days
c. 7 to 365 days
d. 51 to 80 days
Answer:
a. 15 to 80 days

II. Very Short Answer Questions

Question 1.
What is a clear loan?
Answer:
It is a type of loan given without any security or with personal security. It simply grants loans without any physical security.

Question 2.
What are Mutual Funds?
Answer:
An individual investor who wants to invest in equities and bonds with a balance of risk and return generally can invest in mutual funds. Nowadays people invest in stock markets through a mutual fund.

Question 3.
What is Hypothecation?
Answer:
This is a kind of loan taken by depositing a document of title to the property with the banker. It is a loan taken on the security of the movable asset. Business people hypothecate goods or equipment to get this kind of loan.

III. Short Answer Questions

Question 1.
What do you mean by Mortgage?
Answer:
A mortgage is a type of loan taken from the bank by lodging with the banker title deeds of immovable assets like land and building. Business people raise loans by depositing the title deeds of the properties with the bank.

Question 2.
What are the unethical practices followed by Informal money lenders?
Answer:
The following are the unethical practices of lending by informal money lenders

  • Charging a very high rate of interest on a daily basis.
  • Collecting back the loans through money and muscle power.
  • Ill-treating the borrowers to the core, sometimes leading to suicides.
  • Being highly choosy about the borrowers rather than the project financed.

Case Study

Gokul Steel Ltd is a large and creditworthy company that manufactures steel for the Indian market. It now wants to cater to the Asian market and decides to invest in new hi-tech machines. Since the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation costs. To meet the expenses of floatation cost, the company decides to tap the money market.

  1. Name and explain the money-market instrument the company can use for the above purpose.
  2. What is the duration for which the company can get funds through the instrument?
  3. State any other purpose for which this instrument can be used.

Answer:
The company can issue equity shares with premium. If the issue of the shares at a premium value, the share can be subsided easily because the company has already created a creditworthy less. So it can easily raise their capital and get more funds and solve the huge requirement of funds.

  1. NSE (National Stock Exchange) – Gokul Steel Ltd.
    BSE (Business Stock Exchange) – Equity shares
  2. Equity share capital for the long-term source of the company. One year, two years, or the life of the company.
  3. In the future, the shares can be used to change the value of shares. In the future, this investment can be surrendered and get back the cash also with dividends.

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