EduAdda By Sailesh Goenka

SOURCES OF FINANCE
Class 11 - Business Studies

1. Under the factoring arrangement, the factor: [1]

a) makes the payment on behalf of the client b) produces and distributes the goods or

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services

c) transfer the goods from one place to another d) collects the client's debt or account
receivables

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2. Which preference shares have a right to participate in the surplus profits of a company which remains after [1]
payment of dividend on equity shares?
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a) Non-Cumulative preference shares b) Non-Participating preference shares

c) Participating preference shares d) Cumulative preference shares

3. The maturity period of a commercial paper usually ranges from: [1]
ka
ab

a) 90 to 364 days b) 120 to 365 days

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c) 20 to 40 days d) 60 to 90 days
dd

4. The minimum period for issuing commercial papers is how many days? [1]

a) 60 days b) 364 days

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c) 90 days d) 30 days
5. Which of the following is a source for raising owner's funds? [1]
Ed

a) Trade Credit b) Debentures

c) Public Deposits d) Equity Shares

6. Raising money through retained earnings involves which of the following explicit costs: [1]

a) Flotation cost b) Dividend

c) Interest d) No explicit cost is incurred

7. State Industrial Development Corporations were established by ________. [1]

a) None of these b) Ministry of Finance

c) Central Government d) Different States

8. Unit Trust of India was established by ________. [1]

a) State Bank Group b) ICICI

c) Indian Government d) HDFC Bank

9. Investors who want steady income may not prefer ________. [1]

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 a) equity shares b) bonds

c) preference shares d) debentures

10. Which out of the following is a commercial bank? [1]

a) All of these b) Punjab National Bank

c) Canara Bank d) State Bank of India

11. Dividend is paid only on ________. [1]

a) debentures b) shares

c) bonds d) loans
12. Industrial Finance Corporation of India (IFCI) was established in ________. [1]

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a) July 1948 b) July 2001

c) July 1956 d) July 1991

13. Public deposits are the deposits that are raised directly from: [1]

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a) the public b) the owners

c) the auditors d) the directors

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14. Expand the term ICICI: [1]

a) Industrial Credit and Investment

ka b) None of these
Corporation of India
ab

c) International Credit and Investment d) Indian Credit and Investment Corporation of

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Corporation of India India
dd

15. Debentures represent: [1]

a) permanent capital of the company b) loan capital of the company

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c) fluctuating capital of the company d) fixed capital of the company

16. Elaborate CP. [1]
17. Give any one source of short-term financial needs. [1]
Ed

18. Distinguish between Shares and Debentures on the basis of ‘Rate of Return’. [1]
19. Name the source of finance having the least financial risk on the business. [1]
20. Give two examples of borrowed funds. [1]
21. Debentures bear a ________ rate of interest. [1]

a) Flexible b) All of these

c) Floating d) Fixed
22. Debentures are a source of raising ________ finance. [1]

a) Long-term b) None of these

c) Short-term d) Medium-term
23. ________ is an example of short term finance. [1]

a) Trade credit b) Debenture

c) Share d) None of these

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24. Retained earnings also are known as ploughing back of profits are a source of ________ financing. [1]

a) Temporary b) External

c) Borrowed d) Internal
25. The rate of dividend on preference shares is generally ________ than the rate of interest on debentures. [1]

a) Depends on the amount of preference shares b) Depends on the amount of debentures

issued

c) Higher d) Lower
26. Match the following: [2]

(a) The amount which is required to purchase fixed assets are known as (i) Long term loan

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(ii) Fixed capital
(b) The amount required to meet day to day requirements are known as
requirements

(c) The sources provide finance to business firm for a period exceeding five years. (iii) Medium term loan

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(d) The sources provide finance to business firm for a period exceeding one year (iv) Working capital
but less than five year. requirements
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27. Match the following: [2]
(a) It is that part of profit which are not distributed in the form of dividend. (i) Trade credit
(b) It facilitates the purchase of supplies and raw material without immediate (ii) Inter corporate
ka
ab

payment. deposits

(c) It is a deposit made by one company with another company period of upto six
en
(iii) Public deposits
month.
dd

(d) It refers to the deposit that are raised by business organisation directly from the
(iv) Retained earning
public.
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28. Match the following: [2]

(a) It refers to capital fund & credit funds invested in the business. (i) Owner Fund
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(b) It is a source of permanent capital. (ii) Business Finance

(c) It refers to the funds contributed by owners. (iii) Borrowed Fund

(d) It refers to the funds available by way of loans or credit. (iv) Retained Earning

29. Match the following: [2]

(a) Retained earning are also known as (i) Expense of the company

(b) Interest paid on public deposits is deducted from the total income of the
(ii) Ploughing back of profit
company

(iii) Reduction in Tax

(c) They are always redeemed or paid back on the expiry of fixed period of time
liability

(d) When it is paid to debentureholders it is considered as (iv) Debentures

30. Match the following: [2]

(a) These shares the feature of equity shares as well as features of debentures. (i) Trading on equity

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 (b) The return of dividend on preference share is fixed. (ii) Depends on market
conditions

(c) Equity shares are risky securities so these are demanded during boom
(iii) Preference shareholders
period only.

(d) They get a fixed rate of dividend before paying to other shareholders. (iv) Hybrid security

31. Match the following: [2]

(a) The capital of company is divided into small units called (i) Short term loan

(b) The sources provide finance to business firm for less than one year. (ii) Internal source

(c) All the sources which are generated from within a business are (iii) External source
(d) All the source of funds which are generated from outside a business are (iv) Shares

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32. Match the following: [2]

(a) It is a contractual agreement whereby one party grants the other party the right it (i) Foreign currency
to use the assets is known as convertible bond

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(b) These are equity-linked debt securities that are to be converted into equity or
(ii) Lease financing
depository receipts after a specific period.
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(c) These are also called as development banks. (iii) Retained earning

(d) A portion of net earning may be kept in the business for use in the future is
ka (iv) Financial institutions
ab

33. Match the following: [2]

(a) It is a convenient and continuous source of funds. (i) Shares

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dd

(b) They are short-term and unsecured deposits. (ii) Debentures

(c) They are the primary risk bearers of the company. (iii) Trade credit
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(d) They have no control over the affairs of the company. (iv) Inter-corporate deposits

34. Match the following: [2]

(i) Standard Chartered
Ed

(a) Deposits can be withdrawn by the lending company by giving a one day notice.
Bank
(b) Deposits are made for a period of three months. (ii) Call deposit

(c) Deposits are made for a period of six month only with the company which enjoy a (iii) Three-month
high credit rating. deposit

(d) It was the first global company to file for an issue of IDR in India. (iv) Six-month deposit
35. Match the following: [2]

(i) Loan from financial

(a) Bank loans are governed by rule and regulations of
institution

(b) Financial institutions provide managerial as well as financial advice on

(ii) Commercial bank
various matters.

(c) LIC, UTI & IFCI are examples of (iii) RBI

(d) They provide loans to the business organisation for different period. (iv) Managerial advice

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36. Balaji Traders Ltd. is a company that deals in the wholesale business of rice. It's Financial Manager, Mr. [3]
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.
37. Tejasv Private Limited is struggling with a shortage of medium-term finance. The expert was consulted to [3]
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

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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

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paragraph, identify the capital sources suggested by the different specialists.
38. Write any three points of differences between owners' funds and borrowed funds. [3]
39. What is the Intercorporate Deposit? [3]
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40. Explain the classification of sources of funds on the basis of the period. [3]
41. Explain the meaning of trade credit. [3]
42. What do you mean by preference shares? Discuss its various merits.
ka [3]
ab

43. Girish the finance manager of Ritu Food Ltd., has decided to plough back the profits for expanding his business. [3]
Identify the source mentioned here and write any three advantages of this source.
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44. Enumerate the short-term sources of company finance. [3]
dd

45. Mr. Ankit is a Sole Trader. He runs the 'Prabhat Medical Store'. He needs some money. For this, he met the [3]
Branch Manager of a bank. Ankit told the Manager that he needed some such loan as may have the maximum
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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
Ed

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.
46. What do you understand by financial institutions? Write their merits and limitations [4]
47. Briefly explain the merits and demerits of Debentures as a method of raising finance. [4]
48. Define debentures? Explain its three merits. [4]
49. What preferential rights are enjoyed by preference shareholders? Explain. [4]
50. State the limitations of equity shares. [4]
51. Pluto Electricals Ltd. has been successfully manufacturing electrical accessories for the past ten years. As the [4]
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.
52. State the type of business finance. [4]
53. Briefly discuss the merits and demerits of equity shares as a source of finance. [4]
54. State any three merits and two demerits of issue of equity shares. [4]

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55. Equity shares are the best investment avenue for adventurous investors. Justify the statement by giving your [4]
views.
Question No. 56 to 60 are based on the given text. Read the text carefully and answer the questions: [5]
A debenture is a legal certificate that states how much money the investor gave (principal), the interest rate to be paid
and the schedule of payments. Investors usually receive their principal back when the debenture matures (i.e., at the end
of its term). That means the business typically only pays the interest (a percentage of the face value of the certificate, or
loan amount) during the loan period and then repays the full principal (the loan amount) when the certificate matures.
In finance, a bond is a type of security under which the issuer (debtor) owes the holder (creditor) a debt, and is obliged-
depending on the terms-to repay the principal (i.e. amount borrowed) of the bond at the maturity date as well as interest
(called the coupon) over a specified amount of time. Interest is usually payable at fixed intervals (semiannual, annual,
and less often at other periods).

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56. Pranav Udyog Ltd. is a company manufacturing electric devices. The company’s financial manager, Mr. Manav, in order
to fulfill the long-term financial need, wants to raise the cheapest source of finance. Identify the source of finance.

a) Retained earnings b) Bonds

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c) Shares d) Debentures
57. If W Ltd. has 12% debentures of ₹ 1,00,000. Then how much interest on debentures is to paid?
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a) 1200 b) 12000

c) 100000 ka d) 1200000
ab

58. Assertion (A): For a company, there is no risk when there is no earning.
Reason (R): Each company has certain borrowing capacity.
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a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
dd

explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

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59. Which among the following is not an advantage of debentures?

a) It is less costly as compared to preference or b) Control of equity shareholders does not get
equity shares diluted.
Ed

c) The company has to make provision for d) Fixed interest payable

repayment after a specific period.
60. Assertion (A): a debenture is an acknowledgment of debt.
Reason (R): Debenture holders are not entitled to fixed rate of interest.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

61. Ann has been successfully running a soft skills training company for the past five years in Bangalore. Her [6]
company has become popular and enjoys a good reputation in the city. She now plans to start a chain of soft
skills training centers and has identified four strategic places for the same in the city. Till now she has been
managing all the financial requirements of her business through the profits made in her business. However, in
order to implement her expansion plans funds will have to be raised externally.
In the context of the above case answer the following questions:

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 a. Till now she has been managing all the financial requirements of her business through the profits made in the
business. Name the source of the funds being mentioned in the statement and state it's any three merits.
b. Suggest any external source of funds that Ann can use to finance her expansion plans. Also, give any two
features of such a source of finance.
62. Garima is having a degree of hotel management and an experience of 5 years working with Hotel Oberoi. She [6]
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

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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

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information given above answer the following question:
i. Name the type of capital required to meet day to day expenses.
ii. What type of capital Garima requires to buy the hotel.
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iii. State any four limitations of borrowing from the bank.
iv. 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?
ka
ab

v. What will be the nature of return on capital employed given to Himanshi and Seema who are also the owners
of Garima's hotel?
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63. Superb Ltd. is a well-diversified company engaged in the development of real estate, tourism, and textiles. The [6]
dd

company plans to raise a sum of Rs. 120 crores in order to finance its expansion plans. Presently, there is a
conflict among its financial managers as to whether the company should float an issue of equity shares or
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debentures to raise the required amount of funds.

Which of the two sources of funds will you suggest considering the fact that the company has not raised much
debt capital so far and why?
Ed

64. Explain the nature and significance of business finance. [6]

65. Briefly explain any five merits of issuing equity shares. [6]
66. Hitesh started his business with a small sweet shop in Delhi under the name 'Swad'. Over the years his business [6]
grew manifold, by the word of mouth, and gradually became a household name in the savories and sweets
segment. Recently, he procured a big export order. Although the exporter has promised to make some advance
payments, Hitesh would still need more funds to meet the increased working capital requirements.
a. Suggest any two sources through which Hitesh can raise funds to meet the increased working capital
requirements of his business.
b. Give any two merits for each of the suggested sources of funds.
67. What are the different types of debentures? [6]
68. Recently when Mosaic Ltd. was falling short of funds to meet the flotation cost of its upcoming issue of [6]
preference shares, the company raised deposits from Elpis Ltd. which had surplus funds.
In the context of the above case, answer the following questions:
a. Identify and explain the source of finance being discussed above.

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 b. State any two limitations of the source of finance as identified in part (a) of the question.
69. Explain trade credit and bank credit as sources of short term finance for business enterprises. [6]
70. Girish is working as a finance manager in a German Company producing remote-operated high-end kitchen [6]
equipment. Considering festival demand, the company needs to increase its stock of raw material and finished
goods which will require funds of ₹ 50 Lakhs. The directors of the company have decided to expand the
business by opening one more factory in India which will require funds of ₹ 3 crore and 1 branch is America
requiring ₹ 6 crores and 1 branch in Srilanka requiring ₹ 5 crore investment.
i. Advise Girish about the various sources of finance available to meet fund requirements for buying the stock
of raw material and finished goods.
ii. Name various instruments used to raise money in the international capital market.
iii. To finance the establishment of a factory in India which financial instrument can be used on the pattern of

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ADR? Mention the name and explain its two features.
iv. In case the company does not want to borrow/raise capital from the general public and Banks, then through
which financial instrument it can raise ₹ 50 lakhs for a short period? Explain it.

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71. Ayushi is successfully running a bakery shop in her residential colony for the past many years. She has wisely [6]
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
Go y S
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.
ka
ab

In the context of the above case:

a. Identify and explain the various external sources of finance that Ayushi has employed in her business.
en
b. Distinguish between internal and external sources of funds (any four).
dd

72. Distinguish between Owner's Funds and Borrowed Fund. [6]

73. Gurpreet is planning to start a Diagnostic Centre in Ambala. He visits his uncle Mr. Amarnath in Patiala, who is [6]
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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
Ed

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:
a. Identify and explain the two types of capital being described above by quoting lines from the paragraph.
b. Briefly outline any two factors that are likely to affect the requirem ents of each of the two types of capital.
74. What is commercial paper? What are its advantages and limitations? [6]
75. Qureshi had aspired to start a Thai food restaurant from his childhood. On completing his education he shared [6]
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:
a. Define the term business finance.
b. Briefly outline the importance of business finance.

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c. 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.

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Go y S
ka
ab
en
dd
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Ed

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