Meaning and Nature of Business Finance
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Which of the following is a characteristic of Foreign Currency Convertible Bonds (FCCBs)?

  • They do not have a fixed rate of interest.
  • They are issued in domestic currency.
  • They can be converted into equity at a predetermined rate. (correct)
  • They require no interest payments.

    • The procurement cost is related to the expenses involved in using the funds.

    False

    What factor should companies consider regarding their financial position when choosing a source of funds?

    They should choose sources that don’t burden the company, especially if it’s not in a strong financial position.

    Equity shareholders should be cautious about the ______ of control when opting for new financing options.

    <p>dilution</p> Signup and view all the answers

    Match the following factors with their descriptions:

    <p>Cost of Finance = Expenses involved in acquiring and using funds Credit Worthiness = Firm's ability to maintain or enhance market reputation Time Period = Duration for which funds are needed Risk Factors = Potential risks associated with different financing sources</p> Signup and view all the answers

    Which of the following is a source of short-term funds?

    <p>Trade credit</p> Signup and view all the answers

    Working capital is used to purchase fixed assets such as land and buildings.

    <p>False</p> Signup and view all the answers

    What is meant by fixed capital requirements?

    <p>Funds needed to purchase long-term fixed assets.</p> Signup and view all the answers

    The _____ of a business refers to the money required to run everyday operations.

    <p>working capital</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Short-term funds = Required for a period of one year or less Medium-term funds = Required for a period of one to five years Long-term funds = Required for a period exceeding five years Working capital = Funds for daily operational activities</p> Signup and view all the answers

    What is the primary purpose of business finance?

    <p>Serve society and earn profit in the long run</p> Signup and view all the answers

    Fixed capital is generally invested for a short period of time.

    <p>False</p> Signup and view all the answers

    Name one example of a medium-term source of finance.

    <p>Loans from financial institutions.</p> Signup and view all the answers

    Which of the following is considered as an owner's fund?

    <p>Retained earnings</p> Signup and view all the answers

    Trade credit is typically a long-term source of finance.

    <p>False</p> Signup and view all the answers

    What is meant by retained earnings?

    <p>Retained earnings refer to the portion of profit that is reinvested in the business instead of being distributed as dividends.</p> Signup and view all the answers

    Funds raised through loans and borrowings are known as ______ funds.

    <p>borrowed</p> Signup and view all the answers

    Which of the following is an internal source of finance?

    <p>Ploughing back profit</p> Signup and view all the answers

    Match the following sources of finance with their descriptions:

    <p>Retained Earnings = Permanent source of funds Trade Credit = Short-term credit for purchases Debentures = Long-term borrowed funds Loans from Financial Institutions = Borrowed funds from lenders</p> Signup and view all the answers

    Internal sources of financing are generally less expensive than external sources.

    <p>True</p> Signup and view all the answers

    Raising funds through the issue of share capital is categorized under ______ funds.

    <p>owners'</p> Signup and view all the answers

    What is a notable merit of using credit?

    <p>It is a continuous and convenient source of funds</p> Signup and view all the answers

    Non-recourse factoring puts the credit risk on the factor.

    <p>True</p> Signup and view all the answers

    What is a primary advantage of debentures for investors?

    <p>Fixed income with lower risk</p> Signup and view all the answers

    What is factoring?

    <p>A financial service where a third party collects debts and discounts bills.</p> Signup and view all the answers

    In lease financing, the party that grants the right to use the asset is called the ______.

    <p>lessor</p> Signup and view all the answers

    Debenture holders have voting rights in a company.

    <p>False</p> Signup and view all the answers

    What is the main difference between secured and unsecured debentures?

    <p>Secured debentures are backed by collateral, while unsecured debentures are not.</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Credit = A method to obtain funds based on creditworthiness Factoring = Delegating debt collection to a third party Lease Financing = Contractual agreement for asset usage Recourse Factoring = Factor does not assume the credit risk</p> Signup and view all the answers

    Commercial banks may require __________ before issuing loans.

    <p>security assets</p> Signup and view all the answers

    Which of the following is a limitation of credit?

    <p>Costly in comparison to other sources</p> Signup and view all the answers

    Factoring can be helpful in protecting a firm against bad debts.

    <p>True</p> Signup and view all the answers

    Match the following types of debentures with their descriptions:

    <p>Secured = Backed by an asset or collateral Unsecured = Not backed by any asset Convertible = Can be converted into equity shares Non-convertible = Cannot be converted into equity shares</p> Signup and view all the answers

    Which of the following is a limitation of debentures?

    <p>Permanent burden on the company</p> Signup and view all the answers

    What happens at the end of a lease period in lease financing?

    <p>The lessee returns the asset to the lessor.</p> Signup and view all the answers

    Financial institutions in India primarily aim to promote industrial development.

    <p>True</p> Signup and view all the answers

    What is one primary function of commercial banks?

    <p>To provide loans and financial support to organizations.</p> Signup and view all the answers

    What is one of the services provided by financial institutions to companies?

    <p>Managerial advice</p> Signup and view all the answers

    Commercial banks are primarily known for providing long-term funds to companies.

    <p>False</p> Signup and view all the answers

    Name a type of depository receipt issued by Indian companies to raise funds from abroad.

    <p>Global Depository Receipts (GDR)</p> Signup and view all the answers

    International agencies and development banks provide medium to long-term loans for the development of __________ areas.

    <p>economically backward</p> Signup and view all the answers

    Match the types of depository receipts with their characteristics:

    <p>Global Depository Receipts = Issued by Indian companies for foreign capital American Depository Receipts = Traded in US stock exchanges Indian Depository Receipts = Issued to Indian residents only</p> Signup and view all the answers

    Which of the following is a limitation faced by companies when seeking loans?

    <p>Rigorous criteria for loan sanctioning</p> Signup and view all the answers

    International capital markets allow MNCs to borrow in rupees and other foreign currencies.

    <p>True</p> Signup and view all the answers

    What is one example of an international agency or development bank?

    <p>Asian Development Bank (ADB)</p> Signup and view all the answers

    Study Notes

    Meaning and Nature of Business Finance

    • Businesses aim to serve society and earn profit long-term.
    • The "going-concern" concept means businesses operate continuously.
    • Capital is the initial investment in a business.
    • Business finance is the money needed to run a company, crucial for its operations and growth.

    Significance of Business Finance

    • Purchasing fixed assets like plant, machinery, land, and buildings.
    • Smooth daily operations and business expansion.

    Financing Needs of the Business

    Fixed Capital Requirements

    • Funds for purchasing land, buildings, machinery, and furniture.
    • Required for a longer period within an organization, the level dependent on the specific company.

    Working Capital Requirements

    • Funds needed for daily business operations.
    • Used for holding current assets (e.g. stock, debtors).
    • Amount is influenced by factors like business type and size, and operational cycles.

    Classification of Sources of Funds

    A. Based on Period

    • Short-term: Funds needed for periods of one year or less (trade credit, loans from commercial banks, commercial papers).
    • Medium-term: Funds for one to five years (public deposits, lease financing, loans from financial institutions).
    • Long-term: Funds for more than five years (shares, debentures, long-term borrowings).

    B. Based on Ownership

    • Owners' Funds: Capital provided by the business owners (retained earnings, issue of equity shares).
    • Borrowed Funds: Funds raised through loans and borrowings (debentures, loans from financial institutions, public deposits, trade credit).

    C. Based on Source of Generation

    • Internal Sources: Funds generated internally (e.g., retained profits, disposal of surplus inventory).
    • External Sources: Funds obtained from external sources (e.g., borrowings from commercial banks, public deposits, issuance of debentures).

    Sources of Finance

    1. Retained Earnings

    • Using profits to reinvest gives a permanent source.
    • No explicit costs like dividends/interest.
    • Flexible operations and freedom to absorb losses.
    • Can raise the market price. Its limitations include potential shareholder dissatisfaction and uncertain profits, potentially resulting in sub-optimal funds allocation.

    2. Trade Credit

    • Credit extended to businesses by other businesses for goods and services, often without immediate payment.
    • Short-term financing tool.
    • Terms vary by companies and industries.

    3. Factoring

    • A 3rd party (factor) collects debts for a business.
    • Discounting accounts receivable and/ or collecting payments.
    • Improves the company's cash flow.
    • Recourse Factoring: The factor doesn't take credit risk, but the business still is potentially liable.
    • Non-recourse Factoring: The factor bears the credit risk completely.

    4. Lease Financing

    • A contract for using an asset.
    • The business (lessee) pays for the use of the asset in return (rentals).
    • Helps acquire assets via lower investment.
    • No dilution of ownership.
    • Tax benefits. The company using the leased asset doesn't face the wear and tear risk.

    5. Public Deposits

    • Money raised from the public directly.
    • Relatively high interest rates.
    • Funding requirements short- and medium-term.
    • An easy and fast source of financing. Requires no security against the business assets.
    • Limitations include dependence on the public, especially in large-scale deposits; this can be problematic for smaller companies or in an unstable economic climate.

    6. Commercial Papers

    • Unsecured promissory notes.
    • Used for short-term funding.
    • Issued by companies with strong credit ratings.
    • Provides higher financing capacity compared to loans. Available quickly and easily.

    7. Issue of Shares

    • Dividing capital into smaller units—shares—for investors.
    • Two main types: equity and preference.
    • Equity Shares: Represent ownership in the company, with voting rights and potentially higher returns(fluctuation and variable).
    • Preference Shares: Provide a fixed dividend and preference in receiving returns, and no voting rights.

    8. Debentures

    • A long-term debt instrument, similar to bonds, issued by companies.
    • Fixed interest payments, important for long-term projects.
    • The issuing company is responsible for repaying the amount, in addition to the interest.

    9. Commercial Banks

    • Provide various funding options (loans, overdrafts, discounting bills) and services/ support.
    • Loans for different time periods.
    • Assistance in handling and utilizing the money for day-to-day transactions.

    10. Financial Institutions

    • Government-supported entities that provide long-term funds.
    • Offer managerial advice, financial, and technical support.
    • Useful especially in funding expansion. This source can support industries not in business operation alone, but can help promote industrial development in general.

    11. International Financing

    • Commercial Banks: Provide funding for international operations, often involving currency conversions.
    • International Agencies and Development Banks: Offer medium to long-term loans for development in various countries.
    • International Capital Markets: Provide funding via instruments like Global Depository Receipts (GDRs) and American Depository Receipts (ADRs).

    Factors Affecting the Choice of Source of Funds

    • Cost of Finance: Considering the direct and indirect costs.
    • Financial Position: The strength and condition of the company in terms of its liquidity and financial risk.
    • Form of Business: The business legal structure (sole proprietor, partnership). options are limited by this factor.
    • Time Period: Source is selected for short-term or long-term.
    • Risk Factors: Risk of the source is compared to return, with lower risk typically preferred.
    • Dilution of Control: How much control equity shareholders wish to maintain. This factor influences the selection of debt financing versus equity.
    • Creditworthiness: This is a factor affecting the choice of source, where the company credit ratings and history come into focus regarding their ability to take credit/borrow.
    • Ease of Issuance: A source easier to secure is desirable.
    • Tax Advantages: Tax benefits associated with a particular source are considered as this factor influences financial decisions.

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    Description

    This quiz explores the essential concepts of business finance, including its significance, fixed and working capital requirements, and sources of funds. Understanding these elements is crucial for effective financial management in any business. Test your knowledge and see how well you grasp the foundation of business finance.

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