Topics Discussed
1 Mark Questions
Q1: What is business finance?
Ans: Business finance refers to the funds required for carrying out business activities such as purchasing assets, meeting daily expenses, and expanding operations.
Q2: Name any two sources of business finance.
Ans: (i) Equity Shares
(ii) Debentures
Q3: What are short-term sources of finance?
Ans: Short-term sources of finance are funds required for a period of less than one year, such as trade credit, bank overdraft, and commercial paper.
Q4: What is the meaning of retained earnings?
Ans: Retained earnings are the profits of a business that are reinvested rather than distributed as dividends.
3-4 Marks Questions
Q5: Explain any three sources of short-term business finance.
Ans:
- Trade Credit: Suppliers provide goods and services on credit, allowing businesses to delay payments.
- Bank Overdraft: A facility provided by banks allowing businesses to withdraw more money than available in their account.
- Commercial Paper: An unsecured, short-term debt instrument issued by large corporations to meet working capital requirements.
Q6: Differentiate between equity shares and preference shares.
Ans:
| Basis | Equity Shares | Preference Shares |
|---|---|---|
| Voting Rights | Have voting rights | Usually do not have voting rights |
| Dividend | Paid after preference shareholders | Paid before equity shareholders |
| Risk | High risk | Low risk due to fixed dividend |
Q7: What is lease financing? Mention two advantages.
Ans: Lease financing is a method where a company obtains the right to use an asset for a specified period by paying rent. Advantages: (i) No large initial investment required. (ii) Provides tax benefits to businesses.
5-6 Marks Questions
Q8: Explain the classification of business finance based on time period.
Ans: Business finance can be classified into:
- Short-term Finance: Required for less than one year (e.g., trade credit, bank overdraft).
- Medium-term Finance: Required for 1-5 years (e.g., bank loans, leasing).
- Long-term Finance: Required for more than five years (e.g., equity shares, debentures, retained earnings).
Q9: Discuss the merits and demerits of issuing debentures as a source of finance.
Ans: Merits: (i) Fixed interest payments provide stability to investors. (ii) No dilution of ownership as debenture holders are not owners.
Demerits: (i) Regular interest payments can be a burden in case of financial losses. (ii) Increases the financial risk due to debt obligations.
Q10: Discuss any four sources of long-term finance.
Ans:
- Equity Shares: Owners’ capital raised by issuing shares to the public.
- Debentures: Debt instruments used to raise capital with a fixed interest rate.
- Retained Earnings: Profits reinvested into the business instead of distributing dividends.
- Bank Loans: Long-term loans provided by banks for business expansion and asset acquisition.
Conclusion
Understanding different sources of business finance is essential for making informed financial decisions. These questions cover all the important aspects that can help you prepare effectively for your exams. Revise them thoroughly to score well!