NCERT Solutions Class 11 Business Studies Chapter 8 Sources of Business Finance

NCERT Solutions Class 11 Business Studies Chapter 8 Sources of Business Finance

NCERT Solutions Class 11 Business Studies Sources of Business Finance

NCERT Solutions Class 11 Business Studies Chapter 8 Sources of Business Finance: National Council of Educational Research and Training (NCERT) Class 11 Business Studies Chapter 8 Solutions – Sources of Business Finance.

Board

NCERT
Class

11

Subject

Business Studies
Chapter

8

Chapter Name

Sources of Business Finance
Topic

Exercise Solutions

 

Short answer questions:

(1) What is business finance? Why do business needs funds? Explain.

Ans: Business finance refers to funds or money and credit funds invested in the business. The requirement of funds by business to carry out various activities is called business finance.

Business need funds for its day-to-day operation like for purchasing raw materials, payment of wages, salaries, taxes purchase of assets. These needs can be classified under (a) fixed capital requirement and (b) working capital requirement.

 

(2) List the sources of raising long-term and short-term finance.

Ans: The sources of raising long-term finance or funds are – debentures, loan, equity shares, preference shares, retained earning etc.

The sources of raising short-term finance are – factorising short term loans from banks, commercial paper, Trade credit, public deposit etc.

 

(3) What is the difference between internal and external sources of raising funds explain?

Ans: A Business can generate funds internally by accelerating collection of receivables, disposing of surplus inventories, ploughing back its profit and these can fulfill only limited needs of the business,  whereas external sources of funds includes those sources that lie outside of an organisation and is required to meet huge financial needs of the business which involves cost I.e. borrowings from bank issue of debentures etc.

 

(4) What preferential rights are enjoyed by preference shareholders? Explain.

Ans: The preferential rights enjoyed by preference shareholders are as follows:

(i) They get dividend prior to equity shareholders.

(ii) They are paid their investment amount before equity shareholders at the time of winding up of the business.

 

(5) Name any three special financial institutions and state their objective.

Ans:

(i) EXIM bank (Export and import bank) of India: The objective of this financial institution is to provide financial help to importers and exporters of India.

(ii) Industrial development Bank of India (IDBI): The objective of IDBI is to provide assistance to industrial concern and promotion of industries in India.

(iii) National Bank for Agricultural and rural development (NABARD): The objective of NABARD is to provide financial support and assistance to the agricultural sector of the country.

 

(6) What is the difference between GDR and ADR? Explain.

Ans: Global depository receipts (GDR) is an negotiable instrument that can be traded globally whereas American depository receipt (ADR) is as negotiable instrument that can be traded or bought and sold only in American markets. 

 

Long Answer question:

(1) Explain trade credit and bank credit as source of short term finance for business enterprises.

Ans:

Trade credit: It is a form of credit that is entered by one trade to another for the purchase of goods and services. It facilitates the purchase of supplies without immediate payment and is records as “Sunday creditors” or “accounts payable” in the records of such buyers of goods & services. It is used as a short-term financing, and depends on factors like – reputation of firm, financial position of the seller, volume of purchase etc.

Bank credit: Commercial bank provides funds for different purposes as well as for different time periods in the form of – cash credit, overdrafts, term loan, discounting of bills, issuing letter of credit. The rate of interest charged by banks depend on factors like – level of interest rate in economy, nature of firm etc.

 

(2) Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion.

Ans: A large industrial unit can raise capital for financing modernisation and expansion expanses through long term source of finance as discussed below:

(i) Equity shares: These are more important source of raising long-term capital. The capital of a company is dividend into small units called shares. The capital or funds obtained by issue of shares is called share capital. The equity shares are those shares that do not have any preferential rights over payment of dividend and repayment of capital.

(ii) Debentures: These are considered as a loan for the business and includes debentures stock, bonds. Debentures are used for raising long term funds and carries a fixed rate of interest on it.

(iii) Preference share: These are shares which have some preferential rights over equity shares and carries a fixed rate of dividend.

(iv) Loan from bank or financial institutions: Banks and other financial institutions provides loans to business against some security or asset. This source of raising fund is considered much easy and economical.

 

(3) What advantages does issue of debenture provide over the issue of equity shares?

Ans: The advantages of debentures over equity shares are as follows:

(i) Equity shares are a part of owner’s funds which increases the owners of the company whereas debentures are a part of borrowed fund.

(ii) Equity shareholder’s get the voting rights and can participate in the management of the company whereas debenture holders do not get such rights.

(iii) Equity shareholders get dividend on the basis of the profits earned by the company whereas debenture holders get a fixed rate of interest irrespective of the profit earned.

(iv) The control of the company lies in the hands of equity shareholders whereas debenture holders do not have any control in the matters of the company.

 

(4) State the merits and demerits of public deposits and retained earnings as methods of business finance.

Ans: The merits of public deposit are as follows:

(a) The procedure of obtaining these deposit is simple and does not involve any security against it.

(b) Cost of public deposit is generally lower cost of borrowing from bank.

The demerits of public deposit are as follows:

(a) New company find it difficult to raise funds through public deposit.

(b) Incase the requirement of fund is large, public deposit may prove difficult.

The merits of retained earnings are as follows:

(a) It is a permanent source of fund available for a business.

(b) It does not involve any explicit cost interms of interest, dividend etc.

The Demerits of Retained earnings are as follows:

(a) Excessive ploughing back of profit in the form of retained earnings may dissatisfy shareholders as it lowers their dividend.

(b) It is an uncertain source of funds as profits are fluctuating.

 

(5) Discuss the financial instruments used in international financing.

Ans: The financial instruments used in international financing are as follows:

(i) Global depository receipt (GDR): These are issued against issue of equity shares in the global market. The equity shares issued against GDR are held by an international bank called depository.

The features of GDR are as follows:

(i) GDR are denominated in US dollar and can be traded freely like any other security.

(ii) A holder of a GDR can anytime convert into the number of shares it represents.

(ii) American depository receipt: The depository receipts issued by a company in the USA are known as American depository receipt. ADR’s are bought and sold in American market like regular stocks. It is similar to GDR except that it can be issued only to American citizens and can be listed and traded on a stock exchange of USA.

(iii) Indian depository receipt (IDR): An IDR is a financial instrument denominated in Indian rupee and created by an Indian depository to enable a foreign company to raise funds from Indian securities marked.

 

(6) What is commercial paper? What are its advantages and limitations?

Ans: Commercial paper is an unsecured money market instrument issued in the form of a promissory note that was introduced in 1990 for enabling highly rated corporate borrowers to diversity their sources of short-term borrowings.

The advantages of commercial paper are as follows:

(i) It is sold on an unsecured basis and does not contain any restrictive

(ii) It is a freely transferable instrument and has high liquidity.

The disadvantages of commercial paper are as follows:

(i) Only financially sound and highly rated firms can raise money through CP.

(ii) Commercial paper is an impersonal method of financing.

 

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Updated: December 6, 2023 — 6:04 pm

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