Please see Chapter 8 Sources of Business Finance Exam Questions Class 11 Business Studies below. These important questions with solutions have been prepared based on the latest examination guidelines and syllabus issued by CBSE, NCERT, and KVS. We have provided Class 11 Business Studies Questions and answers for all chapters in your NCERT Book for Class 11 Business Studies. These solved problems for Sources of Business Finance in Class 11 Business Studies will help you to score more marks in upcoming examinations.
Exam Questions Chapter 8 Sources of Business Finance Class 11 Business Studies
Very Short Answer Type Questions
Question. Differ between ADR & GDR.
Answer : The local currency shares of a company are delivered to the depository bank. The depository bank issues depository receipts against these shares. Such depository receipts denominated in US dollars are known as Global Depository Receipts (GDR). The depository receipts issued by a company in the USA are known as American Depository Receipts. It is similar to a GDR except that it can be issued only to American citizens and can be listed and traded on a stock exchange.
Question. What type of share capital is also called ‘’Risk Capital”
Answer : Equity share capital is also called as Risk Capital
Question. Name the one unique feature of ‘’Retained Earnings’’ which is not available in any other source of finance?
Answer : It is a source of self-financing and does not involve any explicit cost. A portion of the net earnings may be retained in the business for use in the future is known as retained earnings
Question. Which term is concerned with the acquisition and conservation of capital funds in meeting the financial needs of a business enterprise
Answer : Retained earnnings is concerned with acquisition and conservation of capital funds in meeting the financial needs
Question. Write any one similarity between Equity share capital and Preference share capital.
Answer : They are part of owner’s fund
Short Answer Type Questions
Question. What factors influence the working capital need in a business? write any three
Answer :
1. Cost:
There are two types of cost viz., the cost of procurement of funds and cost of utilising the funds. Both these costs should be taken into account while deciding about the source of funds.
2. Financial strength and stability of operations:
In the choice of source of funds business should be in a sound financial position so as to be
able to repay the principal amount and interest on the borrowed amount. When the earnings of the organisation are not stable, fixed charged funds should be carefully selected as these add to the financial burden
3. Form of organisation and legal status:
A partnership firm, for example, cannot raise money by issue of equity shares as these can be issued only by a joint stock company
Question. Write any two differences between share and debentures.
Answer :
1. Shares are referred to as owner’s fund whereas Debentures are borrowed fund
2. Shares carry return on the investments whereas in case of debentures a fixed rate of interest is paid by the company
Question. Write any three advantages of Retained Earnings
Answer :
• It does not involve any explicit cost in the form of interest, dividend or floatation cost
• It has greater degree of operational freedom and flexibility
• It enhances the capacity of the business to absorb unexpected losses
Long Answer Type Questions
Question. Explain trade credit and Factoring as a source of finance for a business enterprise.
Answer : Trade Credit: Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment. It is short-term financing source. It is granted to those customers who have reasonable amount of financial standing and goodwill. Terms of trade credit may vary from one industry to another and from one person to another. A firm may also offer different credit terms to different customers
Advantages
• It is a convenient and continuous source of funds
• It is readily available in case the credit worthiness of the customers is known to the seller
• It helps in promoting the sales of an organisation
• It does not create any charge on the assets of the firm while providing funds.
Disadvantages
• It may induce a firm to indulge in overtrading, which may add to the risks of the firm
• Only limited amount of funds can be generated through it
• It is a costly source of funds as compared to most other sources
Factoring: Factoring is a financial service under which the ‘factor’ renders various services which includes: Discounting of bills (with or without recourse) and collection of the client’s debts. Under this, the receivables on account of sale of goods or services are sold to the factor at a certain discount. There are two methods of factoring—recourse and non-recourse. Under recourse factoring, the client is not protected against the risk of bad debts. On the other hand, the factor assumes the entire credit risk under non-recourse factoring Providing information about credit worthiness of prospective client’s etc., Factors hold large amounts of information about the trading histories of the firms
Advantages
• Cheaper than financing through other means such as bank credit
• Factoring as a source of funds is flexible and ensures a definite pattern of cash inflows from credit sales. It provides security for a debt
• It does not create any charge on the assets of the firm
• The client can concentrate on other functional areas of business as the responsibility of credit control is shouldered by the factor
Disadvantages
• This source is expensive when the invoices are numerous and smaller in amount
• The advance finance provided by the factor firm is generally available at a higher interest cost
• The factor is a third party to the customer who may not feel comfortable while dealing with it
Question. From which source a firm can raise long term funds as loan when not provided by commercial bank? Discuss its merits.
Answer : The government has established a number of financial institutions all over the country to provide finance to business organisations. They provide both owned capital and loan capital for long and medium term requirements and supplement the traditional financial agencies like commercial banks These are also called ‘development banks
Merits are listed as below:
• Financial institutions provide longterm finance, which are not provided by commercial banks
• Many of these institutions provide financial, managerial and technical advice and consultancy to business firms
• Obtaining loan from financial institutions increases the goodwill of the borrowing company in the capital market
• As repayment of loan can be made in easy instalments, it does not prove to be much of a burden on the business
• The funds are made available even during periods of depression, when other sources of finance are not available
Question. Write main advantages and disadvantages of Public Deposits.
Answer : Advantages
• The procedure of obtaining deposits is simple and does not contain restrictive conditions as are generally there in a loan agreement
• Cost of public deposits is generally lower than the cost of borrowings
• Public deposits do not usually create any charge on the assets of the company
• As the depositors do not have voting rights, the control of the company is not diluted
Disadvantages
• New companies generally find it difficult to raise funds through public deposits;
• It is an unreliable source of finance as the public may not respond when the company needs money;
• Collection of public deposits may prove difficult, particularly when the size of deposits required is large
Question. ‘’Ojas Auto Ltd. ‘’ is a very well known auto company in the industry having more of equity share capital than long term debt in its capital structure. It is willing to expand and establish new unit in the backward region and want to train the tribal women in skill Development to empower them. It has a huge amount of cash reserve of Rs. 1000 crores.
(a) what is the status of capital structure of the above company.
(b) According to you, which source of finance should be used by the company in establishing new units? Give any two reasons in support of your answer.
(c) What values does the company exhibit in the above case?
Answer :
(a) The capital structure of the compny is sound as it is having more of equity share capital than long term debt in its capital structure and huge amount of cash reserve
(b) I think Retained earnings i.e. the self financing method should be used in establishing new unit. A portion of the net earnings may be retained in the business for use in the future is known as retained earnings. It is a source of internal financing or selffinancing or ‘ploughing back of profits. Reason for supporting Retained earnings are as follows:
• It is a permanent source of funds
• It does not involve any explicit cost in the form of interest, dividend or floatation cost
• It has greater degree of operational freedom and flexibility as there is no dilution of control
• It enhances the capacity of the business to absorb unexpected losses by optimum utilization of resources
• It may lead to increase in the market price of the equity shares of a company
(c)Company exhibit the following value:
• Balanced Regional Development: The company is willing to expand and establish new unit in the backward region and contributes in regional development
• Women Enpowerment: The company wants to train the tribal women in skill Development to empower them