RBSE Solutions for Class 11 Business Studies Chapter 5 Business Capital/Finance

RBSE Solutions for Class 11 Business Studies Chapter 5 Business Capital/Finance

Rajasthan Board RBSE Class 11 Business Studies Chapter 5 Business Capital/Finance

RBSE Class 11 Business Studies Chapter 5 Textual Questions and Answers

RBSE Class 11 Business Studies Chapter 5 Multiple Choice Questions

Question 1.
Equity shareholders are called –
(a) Owners of the company
(b) Partners of the company
(c) Officers of the company
(d) Employees of the company
Answer:
(a) Owners of the company

Question 2.
Public deposits are those deposits which are collected from –
(a) investors
(b) auditors
(c) public
(d) owners
Answer:
(c) public

Question 3.
In lease financing, the lessee gets the right to –
(a) profits earned by the lessor
(b) use the assets for a specific period
(c) sell the assets
(d) participate in the management of the organisation
Answer:
(b) use the assets for a specific period

Question 4.
The maturity period of commercial papers is between –
(a) 20 – 40 days
(b) 60 – 90 days
(c) 120 – 165 days
(d) 90 – 364 days
Answer:
(d) 90 – 364 days

Question 5.
The duration of long term loans is –
(a) one year
(b) three years
(c) two years
(d) five or more years
Answer:
(d) five or more years

RBSE Class 11 Business Studies Chapter 5 Very Short Answer Type Questions

Question 1.
What do you mean by discounting of bills?
Answer:
In order to tide over the shortage of funds, business firms can discount their bills, receivables, and it can borrow from the bank on the security of bills and promissory notes.

Question 2.
Give the meaning of Preference shares.
Answer:
These are the shares which enjoy a fixed rate of return and get preferential or special priority while receiving dividends/repayment of capital at the time of liquidation.

Question 3.
What is lease financing?
Answer:
It is a contract wherein the owner of an asset grant after the party the right to use the asset in return for a periodic payment.

Question 4.
What is a Bank Overdraft?
Answer:
An arrangement of the current account holders with the bank to withdraw a specified amount over and above his actual deposits in the bank.

Question 5.
What is Owner’s fund?
Answer:
It refers to the fund contributed by owners as well as the accumulated profits of the company.

Question 6.
What do you mean by retained Earnings?
Answer:
It refers to the percentage of net earnings not paid out as dividends but retained by the company to be reinvested in its core business or to pay the debt.

Question 7.
What is Venture Capital Fund?
Answer:
It is a type of private equity capital provided as seed funding to early-stage, high potential, high risk, start-up companies and entrepreneurs who lack the necessary funds to give shape to their business ideas.

RBSE Class 11 Business Studies Chapter 5 Short Answer Type Questions

Question 1.
Give four differences between overdraft and cash credit.
Answer:
Four differences between overdraft and cash credit:

1. Bank loan/cash credit can be given to any person/firm/business, while bank facility is given only to current account holders.
2. In cash credit, the sanctioned loan amount is credited in a seperate account opened, whereas, in bank overdraft, no such seperate account is required to be opened.
3. For cash credit, it is essential to offer tangible assets as security, whereas in bank overdraft, this facility is granted without any security.
4. The ROI in cash credit is higher than a bank overdraft.

Question 2.
Distinguish between equity and preference shares (any four).
Answer:

Question 3.
What are Redeemable and Non – Redeemable Debentures?
Answer:

1. Redeemable Debentures:
   The debentures which are to be redeemed within a specified period as per the terms of their issue.
2. Non – Redeemable debentures:
   These are not redeemed at a specified period. Their redemption is not certain. Such debentures holder can’t ask for a refund of capital except for the case when the number makes any default in payment of interest on these debentures or these are paid only in case of winding up of the company.

Question 4.
Difference between shares and Debentures as a source of finance.
Answer:
Difference between shares & Debentures:

Question 5.
What is portfolio Investment?
Answer:
Foreign investment is found in the form of foreign direct investment. It means the subscription of participation in shares and debentures of Indian companies by foreign investors. This is also known as portfolio investment.

RBSE Class 11 Business Studies Chapter 5 Essay Type Questions

Question 1.
Explain in detail Trade Credit as Internal Source of finance to business enterprise.
Answer:
Trade Credit:
Trade credit means credit extended to business by other traders to purchase inventories or services without making immediate payment.

Generally, a trader buys the goods on credit for a period of one and a half month and makes the payment of this fund later to the business. Trade credit depends on the firm’s creditworthiness, purchase volume, market competition and financial status of the buyer and seller.

Merits:

1. It is a very reliable and easy process.
2. Due to traders credit, credit-earning is easy.
3. The growth in selling increases.
4. It does not affect the property of the business.

Demerits:

1. Many times a lot of businesses may run into risk.
2. It is an expensive finance source.
3. It is a non – economic source.

Bank Credit:
The short term credit provided by commercial banks to business firms is known as Bank Credit. It can be divided into 2 parts.

1. Direct Credit – Loan is provided directly to the bank employees. The amount of loan depends upon its current status.
2. Cash Credit – It is an arrangement in which a specified amount sanctioned as a loan by the bank is credited to the customer’s account by the bank.

Merits:

1. It provides loan to the needy.
2. It provides secrecy.
3. It is very easy to receive a loan.
4. The interest can be increased or decreased as per the requirement.

Limitations:

1. Renewal is difficult because it provides small-term loans.
2. Due to the receiving of loan from another loan, its investigation is difficult.
3. The bank employs lots of conditions while applying for a loan, that affects its availability.

Question 2.
Name and explain the different sources of finance used by large industrial units for their modernization and renovation.
Answer:
Sources of long term finance are as follows:

1. By Issue of shares – The capital raised by issuing shares is known as share capital. The owners of these shares are called shareholders.
   • Shares are of two types –
   • Equity Shares – If the shareholders are not entitled to a fixed dividend in preference to others or if there is no prior right for the capital to be repaid, the share capital is treated as equity shares.
   • Preference Shares – These are the shares which enjoy a fixed rate of return and get preferential priority while receiving dividends/repayment of capital at the time of liquidation.
2. Issue of Debentures – Debentures are instruments for raising long term debt capital. Interest is paid on the debentures regularly at a fixed rate as it is done for a loan taken by the company.
3. Public Deposits – The amount deposited by the public with the company for a specified period at a predetermined rate of Interest. These are the source of finance. These are cheaper than bank loans for the company and fetch interest at rates higher than the deposits with the bank.
4. Reinvestment of Earnings – These are the direct share of earnings from a direct investment that is not distributed to owners. These earnings are recorded in the current account of the balance of payment
5. A loan from Commercial Banks – Commercial Banks also play an important role in raising funds of a big industrial unit. The loans are provided to the companies to fulfil their various objectives.
6. Institutional Finance – To provide long term finance to business organizations, the central and state government have established various specialised financial institutions, These institutions also provide marketing services, etc.,

Question 3.
Explain in detail different kinds of long term sources of finance.
Answer:
Long term sources – The sources of funds required for more than 5 years.
Example – shares, debentures, institutional loans, lease financing, foreign investment.

These are of following types:
(i) Issue of Shares – The capital raised by issuing shares is called share capital.

1. Equity Shares – The equity shareholders are not entitled to a fixed dividend in preference to others. They get dividend after all the preferential shareholders obtain their share.
2. Preference Shares – These are the shares which enjoy a fixed rate of return and get preferential or special priority while receiving dividend repayment at the time of liquidation.

(ii) Issue of Debentures – Debentures are common securities under borrowed fund capital.
Debentures are instruments for raising long term debt capital.

Debentures are of following types:

1. Redeemable and non – redeemable debentures.
2. Convertible and non – convertible debentures.
3. Secured and unsecured debentures.
4. Registered and Bearer debentures.
5. Zero per cent interest debentures.

(iii) Institutional loans – To provide long term finance to business organizations, the central and state government have established various specialised financial institutions. These institutions also provide consultancy, guidance and assistance to new business enterprises in their formation, expansion and modernisation.

These institutions are:

1. Industrial Finance Corporation of India.
2. Industrial Credit and Investment Corporation of India.
3. Industrial Development Bank of India.
4. Industrial Investment Bank of India.
5. Small Scale Industry Development Bank of India.
6. State Finance Corporation.
7. State Industrial Development Corporation.
8. Life Insurance Corporation of India.
9. General Insurance Corporation of India.
10. Unit Trust of India.
11. Export-Import Bank of India.
12. Venture capital fund institutions

(iv) Retention of funds – Usually, a company does not distribute its entire profits as dividend to shareholders. This is considered a cushion of security because it provides support in times of need for financing.

(v) Lease financing – a Lease is a contract wherein the owner of an asset grant after the party the right to use the asset in return for a periodic payment. In other words, the lease is a renting of assets for a specified period. The owner of the asset is called the Lessor, whereas the user is known as Lessee. Lease financing is an important source of finance for modernisation and diversification of the firm. Lease financing is suitable and popular for those assets where technological changes are common. For example, computers and electronic equipment.

(vi) International Financial Resources – It plays an important role in meeting the long term financial needs of the business enterprise.

Important sources are:
1. Foreign loans – Under these loans, commercial and service loans are included, which can be obtained at a concessional rate of interest with long term maturity. These are the International Monetary Fund, Indian Assistance Association, Asian Development Bank, World Bank, etc.

2. Foreign Investment – In India, foreign investment is found in the form of foreign direct investment. FDI means subscription of participation is shares and debentures of Indian companies by foreign investors.

3. Non – Resident Indians – The persons of Indian origin who live in foreign countries are known as NRIs. The share of NRI deposits in foreign capital is more than 30% and this is increasing continuously.

RBSE Class 11 Business Studies Chapter 5 Additional Questions and Answers

RBSE Class 11 Business Studies Chapter 5 Multiple Choice Questions

Question 1.
Every business needs finance for –
(a) Regular activities
(b) To meet day to day expenses
(c) For the growth of the business
(d) All of the above
Answer:
(d) All of the above

Question 2.
On the basis of ownership, which of these is not a source of finance?
(a) short term finance
(b) owner’s fund
(c) medium-term finance
(d) long term finance
Answer:
(b) owner’s fund

Question 3.
The source of business finance whose period ranges less than 7 years –
(a) short term finance
(b) medium-term finance
(c) long term finance
(d) None of them
Answer:
(a) short term finance

Question 4.
The owner’s fund that is arranged by the owner’s enterprise, those owners are –
(a) Sole trader
(b) Partnership
(c) Company
(d) All of the above
Answer:
(d) All of the above

 

Question 5.
This is not the source of short term finance –
(a) Business credit
(b) Bank credit
(c) Issue of shares
(d) Equity shares
Answer:
(c) Issue of shares

Question 6.
Provision of short term sources of finance by banks is called –
(a) Bank credit
(b) Cash credit
(c) Trade credit
(d) All of the above
Answer:
(a) Bank credit

Question 7.
The source of short term finance in the unorganized sector is –
(a) Moneylenders
(b) Indigenous bankers
(c) friends and family
(d) All of the above
Answer:
(d) All of the above

Question 8.
Which is not the source of long term finance?
(a) Institutional debt
(b) Consolidated fund
(c) Bills of Discount
(d) Foreign Investment
Answer:
(c) Bills of Discount

Question 9.
Those preference shares which are determined by the date of maturity to pay in part are –
(a) Redeemable preference shares
(b) Non – Redeemable preference shares
(c) Cumulative Preference shares
(d) None of these
Answer:
(a) Redeemable preference shares

Question 10.
A debenture holder is –
(a) customer of the company
(b) a creditor of the company
(c) owner of the company
(d) None of these
Answer:
(b) a creditor of the company

Question 11.
The bonds in which pay-back of money has a specified date are known as –
(a) Redeemable debentures
(b) Non Redeemable debentures
(c) Registered debentures
(d) Bearer debentures
Answer:
(a) Redeemable debentures

Question 12.
Mortgage Debentures are called –
(a) Unsecured Debentures
(b) Secured Debentures
(c) Registered Debentures
(d) None of these
Answer:
(b) Secured Debentures

Question 13.
The function of Institutional Debt are –
(a) to provide loans to industrial concerns.
(b) establishment of the undertaking.
(c) to provide assistance for rapid economic development.
(d) All of the above
Answer:
(d) All of the above

Question 14.
When was Industrial Finance Corporation of India established?
(a) In the year 1956
(b) In the year 1973
(c) In the year 1948
(d) In the year 1982
Answer:
(c) In the year 1948

Question 15.
When was the name of Industrial Finance Corporation of India changed to IFCI?
(a) In June 1993
(b) In June 1973
(c) In June 1948
(d) In June 1992
Answer:
(a) In June 1993

Question 16.
IFCI provides loan for up to how many years?
(a) 5
(b) 10
(c) 20
(d) 25
Answer:
(d) 25

Question 17.
When was Industrial Credit and Investment Corporation of India established?
(a) In the year 1956
(b) In the year 1982
(c) In the year 1955
(d) None of them
Answer:
(c) In the year 1955

Question 18.
The dissolution of ICICI was done on 3rd May 2002 in –
(a) IDBI Bank Ltd.
(b) ICICI Bank Ltd.
(c) Industrial Reconstruction Bank of India
(d) None of these
Answer:
(a) IDBI Bank Ltd.

Question 19.
When was Industrial Development Bank of India established?
(a) In the year 1964
(b) In the year 1956
(c) In the year 1997
(d) In the year 1973
Answer:
(a) In the year 1964

Question 20.
The institute whose establishment was as a primary agency for the rehabilitation and revival of sick and weak industries –
(a) State Finance Corporation
(b) IDBI bank
(c) Industrial Investment Bank of India
(d) None of them
Answer:
(a) State Finance Corporation

Question 21.
The Industrial Investment bank of India was renamed as Industrial Reconstruction Bank of India in the year –
(a) 1997
(b) 1985
(c) 2004
(d) 1964
Answer:
(b) 1985

Question 22.
State Industrial Development Corporation was established in –
(a) 1973
(b) 1964
(c) 1990
(d) None of these
Answer:
(c) 1990

Question 23.
State Finance Corporation provides finance to –
(a) Sole trading
(b) Partnership
(c) Company
(d) All of these
Answer:
(d) All of these

Question 24.
The main objective behind the incorporation of LIC is –
(a) Life Insurance Business
(b) To give assistance to businesses
(c) To provide loans
(d) All of the above
Answer:
(a) Life Insurance Business

Question 25.
Unit Trust of India was established in –
(a) 1982
(b) 1985
(c) 1964
(d) 1990
Answer:
(c) 1964

Question 26.
The Unit Trust of India was incorporated by –
(a) RBI
(b) LIC
(c) SBI
(d) All of the above
Answer:
(d) All of the above

Question 27.
How many crores were incorporated for Unit Trust of India –
(a) 5 Crore
(b) 10 Crore
(c) 15 Crore
(d) 20 Crore
Answer:
(a) 5 Crore

Question 28.
The important institute for International financial Resources is –
(a) Unit Trust of India
(b) Export-Import Bank of India
(c) IDBI
(d) None of them
Answer:
(b) Export-Import Bank of India

Question 29.
When was Export-Import Bank of India established?
(a) In the year 1956
(b) in the year 1973
(c) In the year 1982
(d) None of these
Answer:
(c) In the year 1982

Question 30.
An International financial resource is –
(a) International Monetary Fund
(b) Asian Development Bank
(c) World Bank
(d) All of the above
Answer:
(d) All of the above

RBSE Class 11 Business Studies Chapter 5 Very Short Answer Type Questions

Question 1.
What is Business Finance?
Answer:
The money required for business activities is called Business Finance.

Question 2.
What is the basis of classification of sources of Business finance?
Answer:

1. On the basis of the period.
2. On the basis of ownership.
3. On the basis of the source of generation.

Question 3.
What are the sources of business finance on the basis of ownership?
Answer:

1. Owner’s funds.
2. Borrowed funds.

Question 4.
What do you understand by Internal source of finance?
Answer:
Internal sources of finance are collected by the organization.
Example – To sell out the extra stock.

Question 5.
What are External sources of finance?
Answer:
A business may generate finance from sources outside the business. They have usually borrowed funds which the enterprise needs to provide security against.

Question 6.
What is Trade Credit?
Answer:
Trade credit means credit extended to business by other traders to purchase inventories without making immediate payment.

Question 7.
What is a Bank Credit?
Answer:
The short term credit on loans provided by commercial banks to business firms is known as Bank Credit.

Question 8.
The facility of Bank overdraft is given to which account holders?
Answer:
Current Account holders.

Question 9.
What are Customer’s Advances?
Answer:
At times, the businessman can take some advance from his customers against the order of goods given, this advance is known as customer’s advance.

Question 10.
Who provide short terms loans to the unorganised sector?
Answer:

• Moneylenders.
• International Bankers.

Question 11.
How are public deposits useful in financial needs?
Answer:
Public deposits are used in short term and medium-term source of finance.

Question 12.
State one difference between cash credit and bank overdraft.
Answer:
A bank loan can be given to any person/firm, whether they have their account in the bank or not, but the bank overdraft facility is given only to current account holders.

Question 13.
Name two long term sources of finance.
Answer:

• Issue of shares
• Issue of Debentures.

Question 14.
What is Share Capital?
Answer:
The capital raised by issuing shares is known as share capital.

Question 15.
How many types of shares are there?
Answer:

• Equity shares.
• Preference shares.

Question 16.
Explain the meaning of Equity Shares?
Answer:
If the shareholder is not entitled to a fixed dividend in preference to others or if there is no prior right for the capital to be repaid, the share capital will be treated as equity share capital.

Question 17.
Explain two demerits of equity share capital.
Answer:

• The shareholders have to bear a lot of risks.
• Equity shareholders sink and swim with the company.

Question 18.
What are convertible preference shares?
Answer:
Convertible preference shares have the option of being converted into equity shares after a specific period of time.

Question 19.
What do you mean by bonds?
Answer:
It is an instrument of indebtedness of the bond issued to the holders. The most common types of bonds include multiple and corporate bonds.

Question 20.
Explain the two merits of Debentures.
Answer:

• This is an attractive source of investment to investors who want fixed income regularly at minimum risk.
• A fixed rate of interest is paid to the debenture holders.

Question 21.
Which are also known as permanent debentures?
Answer:
Redeemable Debentures.

Question 22.
What are Registered Debentures?
Answer:
These are those debentures in which the name of debenture holders is registered with the company.

Question 23.
What is Zero Percent Interest Debentures?
Answer:
The debentures which do not carry any interest payable are called zero per cent interest debentures.

Question 24.
What are Institutional loans?
Answer:
These are loans provided by those institutions that provide long – term finance to business organizations.

Question 25.
When was Industrial Finance Corporation of India Established?
Answer:
In the year 1948.

Question 26.
Why was Industrial Investment Bank of India established?
Answer:
This bank was established for the rehabilitation and revival of sick and weak industries.

Question 27.
When was Life Insurance Corporation of India established?
Answer:
In the year 1956.

Question 28.
The share capital of UTI was provided by which financial Institutions?
Answer:
RBI, LIC, SBI and other financial institutions.

Question 29.
Lease financing is famous for which kind of activities?
Answer:
Lease financing is an important source of finance for modernisation and diversification of the firm.

Question 30.
What is Foreign Direct Investment?
Answer:
The subscription of participation in shares and debentures of Indian companies by foreign investors is called FDI.

Question 31.
Till what percentage did the government permit equity participation by foreign investors in 34 industries?
Answer:
Till 57%.

Question 32.
Who are Non – Resident Indians?
Answer:
The persons of Indian origin who live in foreign countries are called Non – Resident Indians.

RBSE Class 11 Business Studies Chapter 5 Short Answer Type Questions (SA – I)

Question 1.
What do you mean by Business Finance? Why are funds required for Business?
Answer:
The money required for business activities is called business finance.
The requirement of funds for business:

1. To purchase fixed assets.
2. To meet daily expenses.
3. For expansion and growth of the business.

Question 2.
What is the difference between internal and external sources of business?
Answer:
Difference between internal & external source:

Question 3.
What is Bank credit? Explain its types.
Answer:
The short term loan provided by commercial banks to business firms is called bank credit. On the agreed terms, the bank credits the loan amount in the business firm/client’s account.
Bank credit includes:

• Loans and advances.
• Cash Credit.
• Bank Overdraft.
• Discounting of Bills.

Question 4.
What is Cash Credit?
Answer:
It is an arrangement in which the loan is credited to the customer’s account in the bank. He is allowed to withdraw as per the requirement. Interest is charged on the amount withdrawn.

Question 5.
What do you mean by factoring?
Answer:
It is a financial service under which a business firm sells its book debts to factors at a certain value who take the responsibility for debt collection on behalf of the business firm and provide the business firm protection from bad debts.

Question 6.
What do you mean by Customer’s advance?
Answer:
At times, the businessman can take some advance from his customers against the order of goods given, it is called customer’s advance.

Question 7.
Explain loans from the unorganized sector.
Answer:
This category of finance source includes indigenous bankers, money lenders, friends, relatives, who provide finance on personal security or on the security of an asset. The ROI charged by these sector’s lenders is much higher in comparison to other institutional sources.

Question 8.
What do you mean by public deposits?
Answer:
The amount deposited by the public with the company for a specific period at the predetermined rate of interest. These days, they are a source of finance. Many joint-stock companies have been issuing advertisements and inviting public deposits to meet their short term and medium-term needs of finance.

Question 9.
What are commercial papers?
Answer:
It is an unsecured promissory note issued by a firm having the good creditworthiness to raise funds for a short period varying from 1 month to 1 year. These are issued by a firm to other firms, to insurance companies, to pension funds and to banks.

Question 10.
Which are the long term financial sources for small and big businesses and also for joint-stock companies?
Answer:

1. Issue of shares.
2. Issue of debentures.
3. Institutional loans.
4. Retention of the fund.
5. Lease financing.
6. Foreign Investment.

Question 11.
What are Equity Shares?
Answer:
It means that if the shareholders are not entitled to a fixed dividend in preference to others or if there is no prior right for the capital to be repaid, it is known as share capital. These equity shareholders participate in the profits of a company after all preferential rights have been satisfied. They get dividend after the dividend is paid to preference shareholders.

Question 12.
What are preference shares? How many types of preference shares are there?
Answer:
These are the shares which enjoy a fixed rate of return and get preferential or special priority while receiving dividends, repayment of capital at the time of liquidation.

Preference shareholders get a fixed rate of dividend, predetermined at the time of such issue. They get the preferential position over equity shareholders. They do not have voting rights.

Preference shares can be of the following types:

1. Convertible and Non – convertible
2. Cumulative and Non – cumulative
3. Participating and Non-participating
4. Redeemable and Non – redeemable.

Question 13.
What are the rights given to preference shareholders?
Answer:

• Preference shareholders get special priority while receiving dividend/repayment of capital at the time of liquidation.
• They get a/fixed rate of return, regular income is earned and safety of investment is ensured on redeemable preference shares.

Question 14.
What do you mean by redeemable and non – redeemable shares?
Answer:
Those preference shares which are repayable at the end of the predetermined period are called redeemable shares, whereas non – redeemable preference shares are paid back only at the time of liquidation.

Question 15.
What are convertible and Non – convertible preference shares?
Answer:
Convertible preference shares have the option of being converted into equity shares after a specific period of time. Non – convertible shares do not have this advantage.

Question 16.
What is Zero Percent Interest Debentures?
Answer:
These are debentures which do not carry any interest payable. Such debentures are issued at discount and redeemed at par. In other words, the difference between the face value and purchase price of debentures will be the income of the debenture holder.

Question 17.
What were the objectives behind the establishment of Industrial Finance Corporation of India?
Answer:
It was established in 1948 under a special act of parliament. The main objective of the establishment of IFCI is to provide medium and long term credit to eligible industrial concerns. It provides loan for a duration not exceeding 25 years. It grants loans and advances for the establishment, expansion, diversification and modernisation of industries. It provides technical, legal and marketing assistance to any industrial concern for its promotion, management and expansion and to subscribe to the issue of shares and debentures by the industries.

Question 18.
Comment on ‘Small – Scale Industrial Development Bank of India’.
Answer:
SIDBI was established in April 1990, as the principal financial institution for promoting, financing and development of small industries in India. It also provided venture capital assistance to entrepreneurs, leasing and factoring facilities to small scale units.

Question 19.
Explain the important functions of Export-Import Bank of India.
Answer:
Important functions of Export-Import Bank of India are:

1. Providing funds for the imports of goods and services.
2. Providing long term and medium-term loans for export trade.
3. Financing the import of capital goods, software and consultancy.
4. Providing loans to foreign governments and companies to enable them to buy goods from India.
5. Undertaking export market studies and providing merchant banking services.

Question 20.
What do you mean by Retention of funds?
Answer:
Usually, a company does not distribute its entire profits as dividend to shareholders, rather a part of the profit is retained to be used for future growth prospects and for other future uses. This is also known as ploughing back of profits, retained earnings, self – financing or internal financing, etc. It is considered as a cushion of security because it provides support in times of adversities. Retained earnings add to the financial strength and improve the credibility of the company. This is the most dependable, cost-free, internal source of finance.

Question 21.
Explain Non – Resident Indians in context to getting long term Financial Sources.
Answer:
The persons of Indian origin who live in foreign countries are known as Non – Resident Indians. They are an important source of long term finance in India. Their important contribution in the area of finance is foreign currency, NRI accounts and NRI money accounts. The share of NRI deposits in foreign capital is more than 30% and it is increasing continuously. However, NRI source of finance is costlier.

RBSE Class 11 Business Studies Chapter 5 Short Answer Type Questions (SA – II)

Question 1.
Explain sources of Business finance on the basis of the period.
Answer:

1. Short term sources – It is required to meet the day to day needs of the business. The short term finance is also known as short term capital which is required for a period not exceeding one year.
2. Medium-term finance – It is required for modernisation, sales promotion, innovation in business. It is taken for a period ranging between 1 to 3 years.
3. Long term finance – Funds required for more than 5 years. These funds are required for making an investment in fixed assets and to meet the permanent needs of the business.

Question 2.
What is Equity Share Capital? Explain its merit and demerits.
Answer:
If the shareholders are not entitled to a fixed dividend in preference to others or if there is no prior right for the capital to be repaid, the share capital will be treated as equity share capital.

Merits of Equity shareholders:

• No compulsory dividend is required to be paid to equity shareholders.
• Equity capital is a permanent source in business
• Equity shares are issued without any security or charge on assets, thus assets are free and can be pledged to raise funds from long term borrowings.
• Voting rights of equity shareholders facilitate democratic control and management of company matters.
• These shares can be easily traded in the capital market.

Demerits of Equity shares:

• They do not provide regular income.
• The holders have to bear a high risk of returns.
• There can be frequent changes in their share price, causing capital loss also.
• Compliance of so many legal formalities in issuing equity shares may cause a delay in getting funds.

Question 3.
Explain the merits and demerits of preference share capital.
Answer:
Merits of Preference share capital:

• Regular income is received here.
• The preference shareholders get preferential rights to get capital repayment.
• They are a good alternative for substituting debentures.
• Safety of investment is ensured on redeemable preference shares.
• There is no dilution of control of management for equity shareholders.
• The rate of return is already divided in advance.

Demerits of Preference Share Capital:

• The rate of dividend on preference share capital is usually higher than the rate of interest on debentures.
• The dividends are paid to preference shareholders only when the company earns profits.
• The fixed rate of return restricts the investors from enjoying higher profitability.
• There is no tax saving benefit on preference shares as like interest on debts.
• Shareholders do not have any say in the management of the company’s affairs.

Question 4.
What are Debentures? Explain their merits and demerits.
Answer:
Debentures are instruments for raising long term debt capital. This is a document issued by a company under its seal as an acknowledgement of its debt.

Merits of Debentures:

• The income is received at less risk.
• Debenture holders do not share the part of the company’s profit when it earns high profit.
• Debenture holders have the priority of refund of their loan prior to shareholders.
• Debenture financing does not result in the dissolution of control of equity shareholders.
• The liability of tax is reduced.

Demerits of Debentures:

• Payment of interest is a fixed obligation of the organization whether it is earning profits or loss. Thus, the company may face a huge burden of interest in payment.
• A company has to redeem the debentures at the specified date as per terms of issue and has to make provision for payment crisis.
• Every company has limited capacity to borrow. Excessive issue of debentures may reduce the company’s capacity to borrow more funds in the future.

Question 5.
Name and state the objectives of three institutional finance companies.
Answer:
Three institutional finance companies are:

1. Industrial Finance Corporation of India
2. Industrial Development Bank of India
3. Unit Trust of India

1. Objectives of Industrial Finance Corporation of India:

• To provide medium and long term credit to eligible industrial concerns.
• To provide loan and advances for the establishment, expansion, diversification and modernisation of industries.
• To provide technical, legal and marketing assistance to industries.
• It also provides a guarantee for loans raised by industrial concerns in the capital market.

2. The objective of Industrial Development Bank of India:

• It provides financial support to all industrial concerns without any restrictions.
• It also provides refinancing facilities on the loans granted by banks and other financial institutions.
• To invest in shares and debentures.
• To provide technical support.

3. Objectives of Unit Trust of India:

• It mobilizes public savings under US – 64 and master shares plan.
• Collecting the savings of Public and Promote growth.
• Providing direct assistance to Industrial units.
• Joining hands with other financial institutions and promoting growth.

Question 6.
What are Financial Institutions? Describe their main functions.
Answer:
To provide long term finance to business organizations, the central and state governments have established various specialized financial institutions.

Main functions of financial Institutions:

1. To provide long term finance to industrial concerns.
2. To help in the establishment of those business enterprises which require a large amount of capital and their gestation period is very long.
3. To provide assistance for the rapid economic development of especially backward regions.
4. To provide specialised and professional services identifying new projects, their evaluation in terms of economic, technical feasibility and their execution.
5. Financial Institutions provide loans in foreign currency to business enterprises to import capital goods.

Question 7.
What is lease financing? Explain its merits and demerits.
Answer:
The lease is a contract wherein the owner of an asset grant other than the party the right to use the asset in return for a periodic payment. In other words, the lease is a renting of assets for a specified period. The owner of the asset is called the Lesser, whereas the user is known as Lessee. Lease financing is an important source of finance for modernisation and diversification of the firm. Lease financing is suitable and popular for those assets where technological changes are common. For example, computers and electronic equipment.

Merits of Lease financing:

• The owner of an asset grants the other party the right to use the asset.
• It is an important source of finance for modernisation and diversification of the firm.
• The owner can rent the asset for a specific period of time.
• The receiving of the fund has no effect on ownership.
• It has no effect on receiving of loan.
• It is suitable for those assets where technological changes are common.

Limitations:

• There are several limitations in the proprietorship of the lease arrangement.
• If it is not registered then it can create problems in conducting the business.
• In case the financer wants to end the lease agreement before its actual date then he would have to pay extra money for that.

Question 8.
Which financial documents are required for collecting finance from international financial resources?
Answer:
The documents that are required for collecting finance from international financial resources:

1. Global Depository Receipts – It is a bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares but are offered for sale globally through various bank branches.
2. American depository Receipts – It is a negotiable certificate of title to a number of shares in a non – US company which are deposited in an overseas bank.
3. Foreign Currency Convertible Bonds – It is a type of convertible bond issued in a currency different than the issuer’s domestic currency. A convertible bond is a mix between a debt and equity instrument.

RBSE Class 11 Business Studies Chapter 5 Essay Type Questions

Question 1.
What do you mean by commercial papers? State their merits and demerits.
Answer:
Commercial papers:
It is an unsecured promissory note issued by a firm having good creditworthiness to raise funds for a short period varying from 1 month to 1 year. These are issued by a firm to other firms, insurance companies, to pension funds and to banks. Only those firms having good credit rating can issue commercial papers. The RBI regulates the issue of commercial papers.

Merits of Commercial Papers:

• The best way on part of the company to take advantage of short term interest fluctuation in the market.
• It has a wide range of maturity.
• It is unsecured and thus does not create any liens on assets of the company.
• Good rating reduces the cost of capital for the company.

Limitations of Commercial Papers:

• It is available only to a few selected blue-chip and profitable companies.
• By issuing this paper, the credit available from the banks may get reduced.
• Issue of commercial papers is very closely – regulated by RBI guidelines.

Question 2.
What do you mean by Equity share capital? State its merits and demerits.
Answer:
Share Capital – It means that if the shareholder is not entitled to a fixed dividend in preference to others or if there is no prior right for the capital to be repaid, the share capital will be treated as Equity share capital.

Merits of Equity Shares:

1. Source of fixed capital – Share capital is the source of fixed capital. There is no compulsion of paying a dividend to equity shareholders.
2. High Credit level – The credit of the company is decided through its entire share capital.
3. No burden on Company – There is no compulsion of dividend to be paid to equity shareholders, therefore there is no burden on the company.
4. Suitable for risk-taking Investors – This is the best option for those investors who are willing to take more risk and want to earn more profit.
5. High Funds – Equity share capital helps in the funding of more capital, and in that case, personal property can be kept as security.

Demerits of Equity Shares:

1. No Regular Income – There is the uncertainty of dividends as well as their amount.
2. High Cost – As the return on these shares is not regular and guaranteed, so their holders have to bear a high risk of returns.
3. Lack of flexibility – Equity shares are subject to speculation, that is, there can be frequent changes in their share price, causing capital loss also.
4. Legal Formalities – Compliance of many legal formalities in issuing equity shares may cause a delay in getting funds.

Question 3.
Explain the types of preference shares.
Answer:
1. Cumulative Preference Shares – Due to losses or lesser profits in a financial year, a company may not be able to pay a dividend on preference shares. The dividend on cumulative preference shares is carried forward. For example – If a company did not earn profit in 2010 – 11 but it earns profit in 2011 – 12, then the shareholders have to pay the cumulative amount of 2010 – 11 & 2011 – 12 in 2011 – 12.

2. Non – cumulative Preference Shares – Non – cumulative preference shares do not get a dividend in arrears. These shareholders lose their dividend in the year of loss.

3. Participating Preference Shares – It provides the right to certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid.

4. Non Participating Preference Shares – It typically receives an amount equal to the initial investment plus accrued and unpaid dividends upon a liquidation event.

5. Convertible Preference Shares – These are fixed-income securities that the investor can choose to turn into a certain no. of shares of the company’s stock. These have the option of being converted into equity shares after a specific period of time.

6. Non – convertible Preference Shares – These are the preference shares that do not include shares which are convertible into equity shares of the issuer at a later date, with or without the option of the holder.

7. Redeemable preference shares – A company may issue these shares on the condition that the company will repay the amount of share capital to the holders of this category of shares after the fixed time period or even earlier than that at the discretion of the company.

8. Non – redeemable preference shares – These are paid back at the time of liquidation of the company.

Question 4.
Explain ‘Debentures’. Also, state their merits and demerits.
Answer:
Meaning of Debentures:
It is a document issued by a company under its seal as an acknowledgement of its debt. Holder of the debenture certificate is called debenture holder.

Merits of Debentures:

1. Low Cost – Issue of debentures costs less and their, maintenance cost is also very low.
2. No change in company control – Debenture holders do not have any voting rights and hence debenture financing does not result in dilution of control of equity shareholders.
3. Accepted Interest Expenditure – There is a fixed rate of interest paid to debenture holders. They do not participate in the sharing of profits when the company earns higher profit.
4. Flexible – Debenture holders have the priority of refund of their loan prior to shareholders.
5. Low Rate of Interest – The interest paid to debenture holders is considered as a tax-deductible expense.
6. The attraction of More Investors – The issue of debenture is suitable in the situation when the sales and income of the company are stable.

Demerits of Debentures:

1. Fixed Burden – Payments of Interest is a fixed obligation of the organisation, whether the company is earning profits or incurring a loss.
2. Lack of Confidence – Those companies which have more of debentures, their credit in the market goes down, therefore financial institutions lose confidence in providing loans to them.
3. The burden on Assets – The debentures are issued against charge/mortgage of assets. This reduces the creditworthiness of the company.
4. No Voting Rights – The debenture holders have no voting rights. They are always dependent upon the shareholders.

Question 5.
Explain the types of Debentures.
Answer:
Types of Debentures are:
1. Redeemable Debentures – The debentures which are to be redeemed within a specific period as per the terms of their issue.

2. Irredeemable Debentures – These debentures are not redeemed at a specific period. Their redemption is not certain. Such debenture holders can’t ask for a refund of capital except for the case when the company makes any default in payment of interest on these debentures otherwise these are paid only in case of winding up of the company.

3. Convertible Debentures – The debentures which get converted into equity shares on expiry of a specified period.

4. Non – convertible Debentures – The debentures which do not carry the option of conversion into equity shares and are therefore known as non – convertible debentures. These are redeemed on the expiry of the specified period.

5. Secured Debentures – Debentures which are secured by a charge on the immovable property of the company.

6. Unsecured Debentures – Debentures which are issued without creating a charge on assets are known as Unsecured Debentures.

7. Registered Debentures – Those debentures in which the name of debenture holder is registered or recorded.

8. Bearer Debentures – These debentures are transferrable by mere delivery. The name of the holder is not registered with the company.

9. Zero Percent Interest Debentures – The debentures which do not carry any interest payable. Such debentures are issued at discount and redeemed at par.

Question 6.
What are the merits of debenture issue in comparison of equity shares?
Answer:
Merits of debenture issue in comparison to equity shares are:
1. Low cost – The cost of establishment is comparatively low in debentures than shares.

2. No Interference in Management – The debenture holders have no voting rights, therefore, they have no interference in the management of the affairs of the company, while shareholders have the full right in the management of the company.

3. The attraction of Investors – Investors are more interested to invest their capital in the debentures, especially the ones who want a guaranteed result on their fixed investment. Therefore, the debenture issuers can easily get finance from this. This is the most easier way of arranging funds for the company.

4. Accepted Expenses of Interest – Interest is a compulsory expense in debentures. Therefore the company can show it is profit and loss account. This way the tax imposed on it also gets reduced.

5. Low rate of Interest – There is a low rate of interest on the investment of debentures. Therefore, investors earn less profit here.

6. Flexible – Many times, in the case when the market is good, the shareholders issue the shares in a large amount and collect the funds. It can result in higher capitalization. This is not in the case of debentures. Thus, more compilation of funds can be processed on debentures.

7. Suitable to fixed income and sales institutions – Those financial institutes who have suitability to fixed income and sales, they can collect capital through debentures and can access far more profit, because they have to pay a fixed rate of interest, and the additional profit earned is received by the debenture holders.

8. Less Risk to Investors – Debentures have a fixed rate of interest, while there is no guaranteed rate of interest in shares, and if there is profit, then there is no guarantee of its amount. Therefore, debentures hold more rate of interest along with lesser risk.

9. No effect on shareholders and debenture holders – Debenture holders do not participate in profit-taking, but they receive interest at a fixed amount, and thus shareholders do not bear any risk. In the same way, it does not affect the previous debenture holders. And if the shares are issued, then their holders affect the previous profit and thus issuing shares can result in conflicts.

Question 7.
Explain the merits and demerits of Public Deposits.
Answer:
Merits of Public Deposits:

1. Easy Process – Public deposit is a very neat and easy process. Investment of the public requires no capital, neither does it require the utilisation of shares in the market. The issue of shares and debentures is a very lengthy and complicated process. In comparison to this. public deposit is very easy.
2. Low Cost – There is a very low cost involved in public deposits. There is no brokerage amount involved in it. Therefore, the increased expenditure on these items is saved.
3. No Security – Since public deposits are unsafe, therefore no security is required.
4. Less Tax Stability – There is less tax stability in public deposits. Thus. the tax burden is less here.
5. Flexible – If a company doesn’t require money, public deposits can be given in advance. Therefore much flexibility is here.
6. No controlling efforts of shareholders – Public depositors have no control over the company. The control of shareholders is not impacted here.

Demerits of Public Deposits:

1. Limited Quantity – A limited amount of funds can be raised through public deposits due to legal restriction.
2. Uncertainty – Public deposits are an uncertain and unreliable source of finance. The depositors may not respond when economic conditions are uncertain.
3. More efficient for short term finance – No company can rely on public deposits for long term investment.
4. Not efficient for New Ventures – New companies lacking in sound credit rating cannot depend upon public deposit.
5. Obstacles in the development of Money Market – Public deposits hamper the growth of a healthy capital market in the country.
6. Suitable only for conservative Investors – The ones who want to earn more, might take risks more. Public deposit is not for such investors. Public deposit is suitable only for conservative investors.

Question 8.
Explain the specialised financial institutions in context to long term source of Investment.
Answer:

1. Industrial Credit and Investment Corporation of India:
   This corporation was established as a joint-stock company in the private sector in 1955. Its main objective is to provide long term loans up to a period of 15 years, to subscribe to the new issue of shares, generally by underwriting them. Sole proprietorship concerns, partnership firms are also entitled to take loans from ICICI.
2. State Finance Corporation – To provide financial assistance to various types of industrial concerns (Sole Trading, Partnership and Co-Operative Sector), the state finance corporations were established. To meet the financial needs of small and medium enterprises and rapid industrial development, this act was issued.
3. State Industrial Development Corporation – These corporations were set – up in different states as wholly-owned companies for promoting industrial development in their respective states. They are established with an objective of promotion, expansion and revival of medium and large scale industries. These corporations also help in implementing different promotional schemes of central and state governments for industrial development in the state.
4. Life Insurance Corporation of India – LIC was established in 1956 after the nationalisation of insurance companies. The main objective for establishing it was to promote insurance business as well as to channelise investment in different public enterprises according to national interest and objectives.
5. Export-Import Bank of India – This bank was established in January 1982 by taking over the functions of the International cell of IDBI. This is working as an apex bank in the field of foreign exchange financing.

Question 9.
What do you mean by Retained Earnings? Explain its merits and demerits.
Answer:
Net income of a company has two elements. After paying a dividend to the shareholder, a portion of income is retained in the hands of a corporation, this portion of the profit is called retained earnings.

Merits of Retained Earnings:

1. Costless Means – Retained earnings are one of the least costly sources of finance since it does not involve any flotation cost.
2. Permanent Means of Capital – This is a permanent means of capital.
3. No fixed Liability – No liability is fixed in case of retained earnings.
4. Increase in Market Price of equity shares – When profits increase, it results in the increase in the market price of equity shares.
5. No Security – There is no security in retained earnings.
6. Helpful in unexpected loss – If a corporation faces an unexpected loss, then retained earnings are very helpful in it.

Demerits of Retained Earnings:

1. Discontentment in shareholders – If the company uses retained earnings as a source of finance, the shareholders are unable to obtain more dividends.
2. Indefinite Source of Capital – It can never be a definite source of capital because it is not essential that a company may make a profit only.
3. Carelessness in Use – This income is generated very easily, therefore directors of the company become careless.
4. More Capitalisation – The transfering of retained capital can sometimes result in more capitalisation. The image of the company is negatively impacted due to this.

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