Hridaan’s Edumax

S1 - 18, Gate 3, Dosti Shoppe

Imperia, Manpada Thane

Sources Of Business Finance

CLASS 11 - BUSINESS STUDIES

Time Allowed : 1 mins Maximum Marks : 308

Section A

1 What are the [3]

advantages and
disadvantages of
preference shares?
2 Discuss any three [3]
limitations of retained
earnings as a source of
Finance.
3 What is business [3]
finance? Why do
businesses need funds?
Explain.
4 After reading an [3]
advertisement in the
newspaper about an
upcoming public issue
of preference shares of
a pharmaceutical
company, Tushar made
up his mind to invest
money in that issue.
Later on, he discussed
his plan with his friend
Vikesh who he is a
stock broker. Vikesh,
on the contrary,
advised him to invest
in equity instead.Give
any three possible
reasons because of
which Vikesh wants
Tushar to invest in
 equity and not in
preference shares.
5 A seminar was held in [3]
New York on the
problems of finance. Its
topic was ’The
Different Finance
Sources’ available at
the Global Level in the
Modern Context.’ 150
representatives from
different countries
participated in this
seminar. In this
seminar, the discussion
that took place was on
the ’World - level
Financial Sources’. All
the representatives
expressed their
respective opinions.
One of the financial
sources discussed in
the seminar was such
through which the
foreign companies
could issue their
security in India.
Looking at the great
possibilities of
obtaining capital from
the investors in India,
all of them showed a
great interest in the
discussion of this
source. On the demand
of people present in the
seminar, a special
session on this source
was organized.
Another financial
source that interested
everyone was the
source through which
money could be
 obtained from the
investors in America
and other European
countries. Since this
source was concerned
with a very big area,
the number of people
who took an interest in
it was also large. One of
the Indian
representatives threw
light on the special
characteristics of this
source. His
presentation was
appreciated by one and
all. In the final session
of the seminar, the
discussion took place
on such a source as
could be used only in
America. In other
words, through the use
of this source, the
capital could be
obtained only from the
investors in America.
At the end of the
seminar, the organizers
thanked all the guests
and the seminar came
to a successful
conclusion.In the above
paragraph, three
financial sources were
discussed. Quoting the
relevant lines identify
those sources.
6 Who issues bonds? [3]
How are they different
from debentures?
7 Liver Pharmaceutical [3]
Limitedwas set up
about ten years ago in
a hilly region. The
company’s business
was to manufacture
medicines. This
company
manufactured
medicines related to
particularly the
diseases of the liver. At
the time of setting up
the factory, 50,000
’Equity shares of the
Face Value of’ 100 only
were issued. With the
setting up of this
company, several
people in the local area
got employment. The
medicines
manufactured by the
company were being
supplied all over the
country. Now, besides
growth in the size of
the company, there
was also an increase in
the capital need of the
company. The company
was, once again,
preparing to seek the
help of the public for
arranging the capital.
In this context, the Top
Management held a
meeting. In the
meeting, it was decided
that first of all, from
the market survey, it
should be ascertained
in which particular
security the investors
are interested to invest
their money. The
report received after
the market survey was
that in those days
 people wanted to have
their share in the
ownership of the
company and also they
wanted that they
should get their
dividend at a fixed rate
before the other
shareholders. Besides,
the investors wanted
that after a fixed
period, their money
invested by them
should be refunded.
The company decided
to issue the shares in
accordance with the
report of Market
Survey. Quoting the
relevant line, explain
what type of shares
was decided by the
company to be issued.
8 The directors of a [3]
company have decided
to expand the business
activities by
purchasing fully
automatic machinery
worth Rs.50 crores. As
a finance manager,
advise the directors
about the various
sources of finance
available to the
company.
9 Tejasv Private [3]
Limitedis struggling
with a shortage of
medium - term finance.
The expert was
consulted to determine
what source of finance
the company should
resort to. One finance
 specialist, Mr Ram
Murti Dhariwal,
advised that the
company should use
such security on which
it has a tax advantage
and the investors are
unable to interfere in
its managerial
activities. Another
finance specialist, Mr
Akshay Aggarwal,
advised that the
company should issue
such security which,
from the point of view
of investors, is very
much liquid, although
they may not have any
share at all in the
company’s
management, similarly,
the third specialist, Ms
Bindu Guglani, gave
her opinion that the
company should issue
such security which
should create flexibility
in the capital structure
of the company as well
as provide a tax
advantage. After
knowing the opinions
of all of them, the
company arranged the
capital issuing a special
type of security.
Quoting the relevant
lines from the above
paragraph, identify the
capital sources
suggested by the
different specialists.
10 Why is adequate [3]
finance necessary to
 start the business?
11 List any three [3]
advantages of
borrowed funds?
12 Mention the special [3]
features of Inter -
corporate deposits.
13 Discuss the various [3]
types of preference
shares.
14 What is the difference [3]
between internal and
external sources of
raising funds? Explain.
15 Write any three points [3]
of differences between
owners’ funds and
borrowed funds.
16 What are equity [3]
shares? Discuss its
various features.
17 Name any three special [3]
financial institutions
and state their
objectives.
18 Equity Sharesare [3]
known as Risk
Capital.What is your
view about it?
19 After completing the [3]
studies, Priyanka
decided to start her
own business of hand
made chocolates. After
analyzing all the pros
and cons, she came to
the conclusion that the
total funds required
are Rs.12,00,000. She
had Rs.2,00,000 in her
savings bank account.
As these funds were
insufficient to start the
 business, she
approached Axis Bank
for obtaining a loan of
Rs.10,00,000. The loan
was approved within a
month. On the basis of
the given case, answer
the following
questions:

1. Categorize the
two types of
funds on the
basis of
ownership.

2. Out of the two

sources of
funds, which
one is a
permanent
source of
finance?

3. Which source of
funds requires a
legal obligation
to pay interest
at a fixed rate at
regular
intervals?

20 Identify the source of [3]

finance which is
regarded as a ’Fair
Weather Friend’. What
is the reason for calling
it so?
21 Balaji Traders Ltd.is a [3]
company that deals in
the wholesale business
of rice. It’s Financial
Manager, Mr.
Ghanshyam Das
Chatterji arranges
unsecured short - term
 finance for the
company through a
commission agent. The
rate of interest to be
paid on this finance is
more than the bank’s
rate of interest. For Mr.
Chatterji, one of the
great advantages of
this finance was that its
source was far away
from Bureaucratic and
Legal Hassles.Identify
this source of finance
and write about any
five of its
characteristics.
22 Explain the [3]
classification of
sources of funds on the
basis of the period.
23 Mayank has a surplus [3]
money of Rs.25,00,000,
which he wants to
invest either in equity
shares or in preference
shares. Two real estate
companies (Magic
Estate and Skylark
Enterprises), with
almost the same
creditworthiness, are
launching their public
issue. Magic Estate is
coming up with a
public issue of
preference shares,
while Skylark
Enterprises is coming
up with equity shares.
Mayank is confused
about the two issues.
He consulted his friend
Gaurav, who is a
portfolio manager and
 Gaurav convinced him
to invest the money in
Magic Estate due to
‘Preferential Rights’ of
preference
shareholders over
equity
shareholders.State the
‘Preferential Rights’
stated by Gaurav,
which convinced
Mayank to invest in
Magic Estate.
24 Libra Sales Private [3]
Limitedowns the
agency of different
food products. This
company sells the
goods of different
brands to retailers
after buying them from
several companies. The
special characteristic of
this company’s
business is that it buys
almost all its goods on
cash and its sale is on
credit. The retailers
make payment to it
about one month after.
This is the very reason
that this company
keeps often struggling
with short term
finance. To overcome
this problem, the
company’s finance
department held a
meeting. The
chairperson of the
meeting asked the
members to express
their views on the
solution of this
problem. The first
person said, "we
should use such a
source of finance as
should not involve
bureaucracy and legal
hassels and to obtain
which, help from other
companies can be got."
The second person’s
opinion was: "We are
often in need of
overdraft. Therefore,
keeping this fact in
mind, the source of
finance should be
selected." The view of
the third person was:
"When we sell goods
on credit, why not to
make efforts to buy
goods on credit? Hence,
to do so pressure on
the companies selling
goods should be built
up." The chairperson of
the meeting listened to
the suggestions of all
the people and, to take
the final decision,
asked them to be
present in the meeting
again after a week. This
company planted trees
at different places in
the whole surrounding
area and on the trees it
fixed its small boards
for advertisement. This
type of advertisement
attracted the people
towards the company
and its business had a
fast growth.Quoting the
relevant lines; identify
the source of finance
 indicated by the
suggestions given by
different people.
25 What preferences are [3]
available to preference
shareholders?
26 Briefly explain three [3]
advantages of issuing
debentures.
27 Discuss any three [3]
characteristics of
debentures.
28 Explain three merits of [3]
public deposits.
29 Give the meaning of [3]
Participating
Preference Shares.
30 Girish the finance [3]
manager of Ritu Food
Ltd., has decided to
plough back the
profitsfor expanding
his business. Identify
the source mentioned
here and write any
three advantages of
this source.
31 Identify the source of [3]
finance highlighted in
the following cases:

1. It facilitates the
purchase of
goods and
services without
making an
immediate
payment.

2. It refers to that
part of profits
which is kept as
a reserve for use
 in the future.

3. This source has

characteristics
of both equity
shares and
debentures.

4. It is also known
as ploughing
back of profits.

5. it is a
permanent
source of capital
and is not
redeemed
during the
lifetime of the
company.

32 Mr. Ankit is a Sole [3]

Trader. He runs the
’Prabhat Medical Store’.
He needs some money.
For this, he met the
Branch Manager of a
bank. Ankit told the
Manager that he
needed some such loan
as may have the
maximum limit fixed.
He should be permitted
to withdraw as much
money as desired up to
that limit from the
bank. Also, he wants
that the interest
charged should not be
on the maximum limit
fixed but on the actual
amount withdrawn.
The Bank Manager said
that they had got such
a scheme under which
loan could be granted
only when the person
 availing loan kept some
property with the bank
by way of security. Mr.
Ankit became prepared
to fulfil this condition.
In this way, the loan
agreement was
finalised between Mr.
Ankit and the
bank.Identify this
scheme of the bank and
explain it.
33 Jupiter Ltd. is a well - [3]
known manufacturer of
sanitary fittings.
Recently, the company
was short of funds for
meeting its day - to -
day expenses. So, the
company approached
one of its suppliers to
grant 60 days credit on
the purchase of raw
material. On the basis
of the creditworthiness
of Jupiter Ltd., the
supplier granted the
credit. Identify the
source of finance
highlighted in the given
case. Also, state its four
merits.
34 What do you mean by [3]
preference shares?
Discuss its various
merits.
35 Suhasini and some of [4]
her friends jointly set
up ’Trimurti Limited’.
The business of their
company was to
manufacture blankets
at a low rate. At the
time of setting up the
company, they issued
25000 shares of the
face value of100. In this
way, they started their
business with a capital
of25 lac. Before
collecting the money
from the public, they
decided that they
would issue such
security as should not
let the company
undergo any fixed
financial burden. Also,
they wished to have
the capital from such a
source as should
enable the company to
keep the capital for a
long time. To collect
the capital Suhasini
and her friends issued
a prospectus. Through
it, they told the public
that in the coming
years, the company
expected to earn a big
profit and that the
price of its shares
would be very very
high. As a result,
investors would be
able to earn extra
profit. In the
prospectus, it was also
said that the company
would organize its
meetings from time to
time and that the
investors would be
invited to these
meetings. They would
have the right to cast
their votes in these
meetings. The company
collected money from
the public and the
 company’s business
started. The company
started earning more
profit than what had
been promised to the
investors.

1. Identify the type

of shares issued
by ’Trimurti
Limited.’

2. Quoting the
relevant lines
write about the
two advantages
each to the
investors and to
the company
from the shares
identified in (i).

36 What are debentures? [4]

Discuss their merits
and limitations.
37 Give the classification [4]
of funds on the basis of
ownership.
38 Define debentures? [4]
Explain its three
merits.
39 Differentiate between [4]
preference shares and
equity shares.
40 Equity shares are the [4]
best investment
avenue for
adventurous investors.
Justify the statement by
giving your views.
41 Briefly discuss the [4]
merits and demerits of
equity shares as a
source of finance.
42 Explain any four merits [4]
 of trade credit.
43 What do you [4]
understand by financial
institutions? Write
their merits and
limitations
44 State the limitations of [4]
equity shares.
45 Sachin Ltd. is a well - [4]
known manufacturer of
sanitary fittings.
Recently, the company
was short of funds for
meeting its day - to -
day expenses. So, the
company approached
one of its suppliers to
grant 60 days credit on
the purchase of raw
material. On the basis
of the creditworthiness
of SachinLtd., the
supplier granted the
credit. Identify the
source of finance
highlighted in the given
case. Also, state its four
merits.
46 What do you mean by [4]
Business Finance ?
Why do business
activities need it?
47 Define preference [4]
shares. State the merits
of raising funds
through the issue of
preference shares.
48 To meet the problem of [4]
short - term capital
inadequacy, Tizen Ltd.
borrowed Rs.5 crores
from Sky Ltd., which
had surplus funds.
Although Sky Ltd.
 charged higher interest
rates as compared to
bank borrowings, still
Tizen Ltd. preferred
this source as no
security had to be
given to raise
funds.Identify the
source of finance is
discussed in the given
case. Also, state its
three merits.
49 Explain the merits and [4]
demerits of retained
earnings.
50 What preferential [4]
rights are enjoyed by
preference
shareholders? Explain.
51 Explain any two merits [4]
and two demerits of
raising funds through
preference shares.
52 State any three merits [4]
and two demerits of
issue of equity shares.
53 Write the types of [4]
preference shares.
54 Pluto Electricals Ltd. [4]
has been successfully
manufacturing
electrical accessories
for the past ten years.
As the profit margin is
good, the company has
been managing all the
financial requirements
of the business through
the profits reinvested
in the business.
Identify the source of
finance being
mentioned in the given
case and state its four
 merits.
55 Differentiate between [6]
debentures and shares
on the following basis:

1. Consideration/
Return.

2. Participation in
management.

3. Refund of
capital.

4. Tax advantage.

5. Relation with
the company.

56 Explain trade credit [6]

and bank credit as
sources of short term
finance for business
enterprises.
57 Garima is having a [6]
degree of hotel
management and an
experience of 5 years
working with Hotel
Oberoi. She has a keen
desire to start a hotel
of her own. A few days
back she saw a hotel
which was in the sale.
The hotel was on a
highway and had good
business potential but
needed renovation. She
fixed a meeting with
the property owner
and finalized the deal
for₹ 25 lakh, she sat
down to prepare a
business plan and
realized that to start off
her own business she
will need funds not
only to finance the
purchase but also to
run the business. She
will need an additional
₹ 10 lakh to renovate
the hotel and ₹ 5 lakhs
as a bank balance to
meet day - to - day
expenses. She checked
her bank balance and
could organize only 10
lakhs out of personal
savings. She met the
bank manager to find
out how the bank could
help to arrange the
required funds. The
bank manager was
ready to give her loan
of ₹ 15 lakh against
hotel ownership
papers as security for
ten years. Her two
friends Himanshi and
Seema readily agreed
to provide the funds
required but would like
to be a partner in the
business. On the basis
of the information
given above answer the
following question:

1. Name the type

of capital
required to
meet day to day
expenses.

2. What type of
capital Garima
requires to buy
the hotel.

3. State any four

limitations of
 borrowing from
the bank.

4. If she gives
ownership
rights to her
two friends in
her business
with limiting
their liabilities
to the extent of
their
investment
made, which
source of the
fund she has
used here?

5. What will be the

nature of return
on capital
employed given
to Himanshi and
Seema who are
also the owners
of Garima’s
hotel?

58 What advantage does [6]

the issue of debentures
provide over the issue
of equity shares?
59 What are the different [6]
types of debentures?
60 Recently when Mosaic [6]
Ltd. was falling short of
funds to meet the
flotation cost of its
upcoming issue of
preference shares, the
company raised
deposits from Mosaic
Ltd. which had surplus
funds.In the context of
the above case, answer
the following
 questions:

1. Identify and
explain the
source of
finance being
discussed
above.

2. State any two

limitations of
the source of
finance as
identified in
part (a) of the
question.

61 Briefly explain any five [6]

merits of issuing equity
shares.
62 State the limitations of [6]
preference shares.
63 What are the [6]
advantages and
disadvantages of Trade
Creditas a source of
finance?
64 Ding Dong Ltd. is [6]
planning to float an
issue of equity shares
in the market in the
next four months. The
directors of the
company are also of
the opinion that the
company should raise
some portion of funds
from international
capital markets
through equity.In the
context of the above
case:

1. State any four

merits of raising
funds through
 equity shares.

2. Explain briefly
any one source
through which
Ding Dong Ltd.
can raise funds
through
international
capital markets.

65 Ayushi is successfully [6]

running a bakery shop
in her residential
colony for the past
many years. She has
wisely invested funds
in different areas in
order to ensure the
smooth running of her
business. She owns the
manufacturing unit,
whereas the shop
through which she
operates is on rent.
Recently, she took a
loan from the bank to
install air conditioners
and create provision
for sitting for the
customers by
extending the shop
area. Although she
buys the majority of
the ingredients like
flour, sugar, oil on 15
days credit from the
local suppliers but
sales are made only in
cash.In the context of
the above case:

1. Identify and
explain the
various external
sources of
 finance that
Ayushi has
employed in her
business.

2. Distinguish
between
internal and
external sources
of funds (any
four).

66 Discuss the sources [6]

from which a large
industrial enterprise
can raise capital for
financing
modernisation and
expansion.
67 A Company should [6]
have an ideal capital
structure striking a
balance between the
owned funds and the
borrowed funds. The
finance manager
should be efficient
enough to do effective
financial planning and
take all the financial
decisions - Investment
decision, financing
decision, and dividend
decision in such a way
that the shareholders’
wealth is maximized.
Excess of owned funds
may reduce earnings
per share and excess of
borrowed funds may
increase financial risks
for the company.

1. Enlist the
different
sources of
 owned capital
and borrowed
capital used by a
company with
the help of a
chart.

2. Give any four

differences
between the
two.

68 Gurpreet is planning to [6]

start a
DiagnosticCentre in
Ambala. He visits his
uncle Mr. Amarnath in
Patiala, who is
successfully running a
Diagnostic Centre for
many years, to seek his
guidance. Mr.
Amarnath tells
Gurpreet that the
capital needs of his
business can be
divided into two
categories. Firstly, he
will need funds to buy
land and building,
machinery and
furniture and fixtures.
Secondly, funds Tjvill
be required to meet
day - to - day
operations such as
maintaining stocks,
bills receivables and
for meeting current
expenses like salaries,
wages, taxes, and
rent.In the context of
the above case answer
the following:

1. Identify and
 explain the two
types of capital
being described
above by
quoting lines
from the
paragraph.

2. Briefly outline
any two factors
that are likely to
affect the
requirem ents of
each of the two
types of capital.

69 Distinguish between [6]

Owner’s Funds and
Borrowed Fund.
70 Rakesh plans to set up [6]
an environmentally -
friendly textile factory.
He plans to use fossil
fuels to make paint,
plastics, and polymers.
Since the wastewater
from textile processing
and dyeing contain
residues, he has also
decided to ensure its
appropriate treatment
before it is released
into the environment.
He is planning to
approach a Special
Financial Institution to
raise loans for his
business.In the context
of the above case
answer the following
questions:

1. Describe briefly
any two Special
Financial
Institutions in
 India.

2. State any two

merits of raising
loans from
financial
institutions.

3. List any two

values that
Rakesh wants to
com m unicate
to society.

71 Qureshi had aspired to [6]

start a Thai food
restaurant from his
childhood. On
completing his
education he shared
his childhood dream
with his father.
Therefore, the father -
son duo decided to
approach a nearby
bank for obtaining a
loan. His father’s
foremost concern was
to raise finance for the
business as his savings
would be insufficient
for starting a
business.In the context
of the above case
answer the following:

1. Define the term

business
finance.

2. Briefly outline
the importance
of business
finance.

3. The two types of

funds on the
 basis of
ownership are
being discussed
above. Identify
and
differentiate
between them
by giving any
three suitable
points.

72 What is commercial [6]

paper? What are its
advantages and
limitations?
73 Discuss the factors [6]
affecting the choice of
source of funds.
74 Gunjan Cinemas is a [6]
popular film
entertainment
company in Delhi.
Keeping in view the
growing culture of
multiplex its owners
have decided to make
some changes in the
interiors like creating a
lounge area, installing
more effective sound
systems, etc. The
company wants to
raise the required
funds for a period of
more than one year but
less than five years.In
the context of the
above case answer the
following questions:

1. Identify and
explain the type
of funds that
Gunjan Cinema
seeks to raise on
the basis of the
 time period.

2. Explain any one

appropriate
source of the
type of funds as
identified in
part (a) of the
question.Also,
state its any two
merits.

75 State the merits and [6]

demerits of public
deposits and retained
earnings as methods of
business finance.