Corporate Finance Fundamentals

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Questions and Answers

What is one reason large scale operations require high fixed capital?

They often have fewer production processes.

They rarely require substantial physical space.

They rely on manual labor instead of machinery.

They utilize automatic machines and equipment. (correct)

How does acquiring assets on lease affect fixed capital requirements?

It decreases the amount of funds needed for fixed assets. (correct)

It increases the need for more funds.

It has no impact on capital requirements.

It guarantees ownership of the assets.

Why might a business consider acquiring old assets?

To comply with industry standards.

To ensure they have the latest technology.

To avoid engaging in leasing contracts.

To reduce investment in fixed assets due to lower prices. (correct)

What role do international conditions play in a business's capital investment decisions?

They encourage businesses to stock up in anticipation of shortages. Signup and view all the answers

How can a positive trend in the economy influence a business's fixed capital investment?

It encourages large investments in fixed assets for future benefits. Signup and view all the answers

What is an effect of population trends on certain industries?

Opportunities for expansion necessitating increased fixed capital. Signup and view all the answers

What is the impact of government concessions on capital investments for businesses?

They can significantly reduce the need for large investments in assets. Signup and view all the answers

How does subcontracting affect the capital requirements of a business?

It minimizes the fixed capital requirements. Signup and view all the answers

What is the main difference between owned and borrowed capital?

Owned capital does not require repayment, whereas borrowed capital does. Signup and view all the answers

What is a key function of the Depository System?

To facilitate the trading and safekeeping of securities. Signup and view all the answers

What is the difference between interim and final dividends?

Interim dividends are declared before the financial year ends, while final dividends are declared at year-end. Signup and view all the answers

What role does SEBI play in the Capital Market?

It regulates and promotes the securities market to protect investor interests. Signup and view all the answers

Which of the following best defines a financial market?

A platform for the buying and selling of financial instruments. Signup and view all the answers

Which source of capital involves issuing debt instruments?

Debentures. Signup and view all the answers

What is the primary purpose of corporate finance?

To manage and allocate financial resources effectively for business growth. Signup and view all the answers

Which of the following is NOT a characteristic of public deposits?

They are guaranteed by the government. Signup and view all the answers

Which decision primarily relates to acquiring the necessary funds for a business?

Financing decision Signup and view all the answers

What happens to sales during an economic boom?

Sales increase Signup and view all the answers

The transformation of raw materials into finished goods is referred to as what?

Production process Signup and view all the answers

What is likely to occur to sales during a recession?

Sales will decrease Signup and view all the answers

Which type of capital is essential for long-term investments like machinery?

Fixed capital Signup and view all the answers

In the context of capital structure, which of the following is NOT typically considered an element of it?

Inventory Signup and view all the answers

What encompasses the total mix of debt and equity that a company uses for financing?

Capital structure Signup and view all the answers

In deciding whether to purchase or lease machinery, which capital type is primarily involved?

Fixed capital Signup and view all the answers

What is considered owned capital in a company?

Equity Shares Signup and view all the answers

Which of the following is not a type of owned capital?

Public Deposits Signup and view all the answers

What is the main characteristic of owned capital?

It is a permanent form of capital. Signup and view all the answers

Retained earnings refer to what?

Reinvestment of profits back into the business. Signup and view all the answers

What does the term 'authorized capital' refer to?

The maximum amount of share capital that a company can raise. Signup and view all the answers

Which type of share capital represents ownership in a company?

Equity Shares Signup and view all the answers

Why can retained earnings not be considered as an initial source of capital?

They are generated from the company's profits. Signup and view all the answers

Which of the following best describes the term 'share' in a company?

A unit representing a portion of the company's capital. Signup and view all the answers

What is the primary purpose of retaining earnings in a business?

To reinvest in the business Signup and view all the answers

What is a common outcome of a conservative dividend policy?

Higher accumulation of retained earnings Signup and view all the answers

Which of the following can be converted into bonus shares?

Retained earnings Signup and view all the answers

Which factor does NOT significantly affect retained earnings?

Employee satisfaction levels Signup and view all the answers

What is the effect of high taxation rates on a company's retained earnings?

It decreases the amount of retained earnings Signup and view all the answers

How is the accumulation of corporate profits primarily utilized?

To fund research and development Signup and view all the answers

What is the concept of 'ploughing back of profit'?

Reinvesting profits into the business Signup and view all the answers

What is an important advantage of issuing bonus shares?

It provides a method for raising long-term capital Signup and view all the answers

Study Notes

Understanding Capital

Capital represents financial resources for company operations, divided into owned and borrowed capital.
Owned capital includes equity shares and retained earnings; it is considered a permanent source as it remains until company liquidation.
Borrowed capital comprises debentures, public deposits, bank loans, and trade credit, often repaid within a specified timeframe.

Sources of Corporate Finance

Primary sources of finance are categorized as owned (internal) and borrowed (external).
Owned Capital: Supplied by shareholders through share purchases and retained earnings.
Borrowed Capital: Raised from external entities, requiring repayment with interest.

Capital Raising Mechanisms

Shares and debentures are common methods for raising capital.
Public deposits enable companies to obtain funds directly from the public.
Regulatory procedures must be followed for issuing shares and debentures, ensuring compliance with corporate finance laws.

Corporate Communication

Effective communication with stakeholders—members, debenture holders, and deposit holders—is crucial.
Proper correspondence fosters transparency and trust in the financial management of the company.

Depository System

The depository system facilitates the holding and transfer of securities electronically.
Significantly improves efficiency in trading and record-keeping, reducing paper-based transactions.
Understanding the constituents and functioning of the depository system is vital for modern finance.

Dividends and Interest

Dividends are payments made to shareholders from profits; they can be interim (paid before year-end) or final.
Interest represents payments on borrowed capital, often calculated as a percentage of the principal amount.

Financial Markets Overview

Financial markets encompass various platforms where securities are traded, affecting capital formation.
Key types include stock markets, where shares of companies are bought and sold.
BSE and NSE are major stock exchanges in India, facilitating trading activities.
SEBI regulates capital markets, ensuring investor protection and market integrity.

Fixed Capital vs Working Capital

Fixed capital refers to long-term investments in physical assets and equipment, necessary for large-scale production.
Working capital relates to short-term funding needed for day-to-day operational costs.
Business size, production method, and economic trends influence capital requirements.

Factors Influencing Capital Requirements

Market conditions, such as economic booms or recessions, affect sales and consequently the capital needed for operations.
Expansion opportunities arise with population growth, necessitating higher fixed capital investments.
Strategic decisions like leasing equipment or acquiring assets at concessional prices can optimize capital usage.

Understanding Shares

Shares represent ownership in a company, divided into small units with a face value.
Issuing shares is a method of generating owned capital, outlined in the company's Memorandum of Association.

Retained Earnings as a Resource

Retained earnings are profits not distributed as dividends, reinvested back into the company for growth.
Important determinants include overall earnings, taxation policies, and dividend distribution strategies.

Importance of Capital Structure

Capital structure denotes the mix of owned and borrowed funds used to finance operations, affecting financial stability and growth potential.
Strategic capital management supports sustainable business practices, ensuring liquidity and investment capability over time.

Equity and Preference Shares

Equity shares provide ownership and dividends, whereas preference shares offer fixed dividends with a claim on assets before equity holders during liquidation.

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Description

This quiz explores the essential concepts of capital in corporate finance, including owned and borrowed capital. Participants will learn about various sources of corporate finance, the mechanisms for raising capital, and the regulatory requirements involved. Test your understanding of how companies fund their operations through different financial avenues.