Please refer to Sources of Business Finance Class 11 Business Studies Important Questions with solutions provided below. These questions and answers have been provided for Class 11 Business Studies based on the latest syllabus and examination guidelines issued by CBSE, NCERT, and KVS. Students should learn these problem solutions as it will help them to gain more marks in examinations. We have provided Important Questions for Class 11 Business Studies for all chapters in your book. These Board exam questions have been designed by expert teachers of Standard 11.
Class 11 Business Studies Important Questions Sources of Business Finance
Very Short Answer Type Questions
Question. What do you mean by ploughing back of profits?
Answer : 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
Question. State the difference between lessor and lessee with the help of an example
Answer : The owner of the assets is called the ‘lessor’ while the party that uses the assets is known as the ‘lessee’. For example: Amul Diary Ltd purchased machinery from Jindal and Co. on hire purchase basis for which he paid lease rentals of Rs 200000. Here Amul Diary Ltd is lessee and Jindal and Co. is Lesor
Question. Name the return given to debenture holders for using their funds?
Answer : Fixed rate of Interest is given to debenture holders for using their funds.
Question. What is the similarity between ADR and Public Deposits?
Answer : In both ADR and Public deposit, Depositor do not have voting rights, the control of the company is not diluted.
Question. Name the organization which have been set up by the central as well as State governments to provide medium term and long term loans to business sector
Answer : Developmental Banks provides medium term and long term loans to business sector
Question 11. Write the names of 2 Indian companies that offer Factoring services.
Answer : Two names of Indian Companies offering factoring services are SBI Factors and Commercial Services Ltd., Canbank Factors Ltd.,
Short Answer Type Questions
Question. What prefential rights are enjoyed by preference shareholders?
Answer : The preference shareholders enjoy a preferential position over equity shareholders in two ways:
1. receiving a fixed rate of dividend, out of the net profits of the company, before any dividend is declared for equity shareholders;
2. receiving their capital after the claims of the company’s creditors have been settled, at the time of liquidation
Question. Define Share and write any two advantages of it.
Answer : Equity shares represent the ownership of a company and thus the capital raised by issue of such shares is known as ownership capital or owner’s funds. They are referred to as ‘residual owners’. They enjoy the reward as well as bear the risk of ownership. Their liability is limited to capital contributed. They have right to participate in the management
Advantages:
• Equity capital serves as permanent capital as it is to be repaid only at the time of liquidation of a company
• Equity capital provides credit worthiness to the company and confidence to prospective loan providers
Question. Write any three limitations of equity share capital.
Answer :
• Investors who want steady income may not prefer equity shares as equity shares get fluctuating returns
• The cost of equity shares is generally more as compared to the cost of raising funds through other sources
• Issue of additional equity shares dilutes the voting power, and earnings of existing equity shareholders
Long Answer Type Questions
Question. Discuss the various international sources from where the funds can be generated.
Answer : There are various avenues for organisations to raise funds internationally. Various international sources from where funds may be generated include
• Commercial Banks:
Commercial banks all over the world extend foreign currency loans for business purposes. The types of loans and services provided by banks vary from country to country.
• International Agencies and Development Banks:
A number of international agencies and development banks have emerged over the years to finance international trade and business. These bodies provide long and medium-term loans and grants to promote the development of economically backward areas in the world.
• International Capital Markets:
o Global Depository Receipts (GDR’s):
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 holders of GDRs do not carry any voting rights but only dividends and capital appreciation.
o American Depository Receipts (ADRs):
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.
o Indian Depository Receipt (IDRs):
An Indian Depository Receipt is a financial instrument denominated in Indian Rupees in the form of a Depository Receipt. It is created by an Indian Depository to enable a foreign company to raise funds from the Indian securities market. According to SEBI guidelines, IDRs are issued to Indian residents in the same way as domestic shares are issued. The issuer company makes a public offer in India, and residents can bid in exactly the same format and method as they bid for Indian shares.
o Foreign Currency Convertible Bonds (FCCBs):
Foreign currency convertible bonds are equity linked debt securities that are to be converted into equity or depository receipts after a specific period. Thus, a holder of FCCB has the option of either converting them into equity shares at a predetermined price or exchange rate, or retaining the bonds. They carry a fixed interest rate which is lower than the rate of any other similar nonconvertible debt instrument. FCCB’s are listed and traded in foreign stock exchanges.
Question. What do you mean by owners fund? When it is not suitable?
Answer : Owner’s funds means funds that are provided by the owners of an enterprise, which may be a sole trader or partners or shareholders of a company. Issue of equity shares and retained earnings are the two important sources from where owner’s funds can be obtained.
When it is not suitable depends on the following factors:
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
4. Purpose and time period:
Business should plan according to the time period for which the funds are required. A short-term need for example can be met through borrowing funds at low rate of interest through trade credit, commercial paper, etc. For long term finance, sources such as issue of shares and debentures are more appropriate. Similarly, the purpose for which funds are required need to be considered so that the source is matched with the use
5. Risk profile:
Business should evaluate each of the source of finance in terms of the risk involved For example, there is a least risk in equity as the share capital has to be repaid only at the time of winding up A loan on the other hand, has a repayment schedule for both the principal and the interest which is to be paid irrespective of the firm earning a profit or incurring a loss.
6. Control:
Issue of equity shares may mean dilution of the control. Thus, business firm should choose a source keeping in mind the extent to which they are willing to share their control over business.
7. Effect on credit worthiness:
Issue of secured debentures may affect the interest of unsecured creditors of the company and may adversely affect their willingness to extend further loans as credit to the company.
8. Flexibility and ease:
Restrictive provisions, detailed investigation and documentation may be the reason that a business organisations may not prefer it, if other options are readily available.
9. Tax benefits:
Non taxable instrument will be preferred over tax deductible. For example, while the dividend on preference shares is not tax deductible interest paid on debentures and loan is tax deductible and may, therefore, be preferred by organisations seeking tax advantage
So, it is not suitable in case of partnership form of organization, short term need , business wants to take challenge risk, no dilution of control etc.
Question. Comment on the following sources of International finance
(i) I.D.R.
(ii) F.C.C.B
Answer :
(i) IDR: Indian Depository Receipt (IDRs):
An Indian Depository Receipt is a financial instrument denominated in Indian Rupees in the form of a Depository Receipt. It is created by an Indian Depository to enable a foreign company to raise funds
from the Indian securities market. According to SEBI guidelines, IDRs are issued to Indian residents in the same way as domestic shares are issued. The issuer company makes a public offer in India, and residents can bid in exactly the same format and method as they bid for Indian shares.
(ii)FCCB: Foreign Currency Convertible Bonds (FCCBs):
Foreign currency convertible bonds are equity linked debt securities that are to be converted into equity or depository receipts after a specific period. Thus, a holder of FCCB has the option of either converting them into equity shares at a predetermined price or exchange rate, or retaining the bonds. They carry a fixed interest rate which is lower than the rate of any other similar nonconvertible debt instrument. FCCB’s are listed and traded in foreign stock exchanges.
Question. ‘’Avika Ltd.’’ company, an IT giant company registered in India want to top the huge amount of resources for its growth and expansion from U.S.A.for long term needs. IT also needs money for a period of less then 3 years to meet its medium cum short term needs. The company is following the practice of educating and giving employment to under privileged youth.50% of its office electricity is generated through solar power.
(a) Which two sources of finance should be used by the company to meet its requirement. Write any two characteristics of each source.
(b) What values does the company exhibit in above case?
[Hints- ADR and Public Deposits, Employment Generation, Concern for environment]
Answer :
(a)The company can meet its requirement through ADR and Public Deposits.
• Public Deposits: The deposits that are raised by organisations directly from the public are known as public deposits. While the depositors get higher interest rate than that offered by banks, the cost of deposits to the company is less than the cost of borrowings from banks. It is Regulated by RBI. Companies generally invite public deposits for a period upto three years
• ADR: The local currency shares of a company are delivered to the depository bank. The depository bank issues depository receipts against these shares. The depository receipts issued by a company in the USA are known as American Depository Receipts. The holders of ADRs do not carry any voting rights
(b) The company exhibits the following values:
• Social Responsibility towards the environment: The company is generating 50% of its office electricity through solar power. Hereby conserving resources.
• Generation of Employment: The company is following the practice of educating and giving employment to under privileged youth and thereby generating employment opportunities for youth
