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Test: Sources of Business Finance- Case Based Type Questions - Commerce MCQ


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15 Questions MCQ Test Business Studies (BST) Class 11 - Test: Sources of Business Finance- Case Based Type Questions

Test: Sources of Business Finance- Case Based Type Questions for Commerce 2024 is part of Business Studies (BST) Class 11 preparation. The Test: Sources of Business Finance- Case Based Type Questions questions and answers have been prepared according to the Commerce exam syllabus.The Test: Sources of Business Finance- Case Based Type Questions MCQs are made for Commerce 2024 Exam. Find important definitions, questions, notes, meanings, examples, exercises, MCQs and online tests for Test: Sources of Business Finance- Case Based Type Questions below.
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Test: Sources of Business Finance- Case Based Type Questions - Question 1
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Direction: Read the following text and answer the questions on the basis of the same:

Faulad Steel Ltd. is a multi-product company, manufacturing steel pipes in wide range for wide spectrum of application. Recently the company received a big order from an MNC for which it requires additional funds. The finance manager reported that the company is not in a position to bear extra burden of explicit cost and equity shareholders insisted not to issue more shares as it can affect their control consideration. Now, the company has only one option, i.e., ploughing back of profit.

Q. ‘Company is not in a position to bear extra burden of explicit cost.’ Identify the meaning of explicit cost in the context of equity shares.

Detailed Solution for Test: Sources of Business Finance- Case Based Type Questions - Question 1

- Explicit cost in the context of equity shares refers to the direct financial obligation a company incurs.
- For equity, this is primarily the dividend, which is a portion of profits paid to shareholders.
- The finance manager's concern is that paying dividends would increase the financial burden on the company.
- Unlike interest on debt, dividends are not mandatory but are expected by shareholders.
- Issuing new equity could dilute ownership and control, thus dividends are considered a cost. Explicit costs are typical business costs that appear in the general ledger and have a direct impact on the profitability of a company. Examples of explicit costs include salaries, raw materials, utilities, lease payments, and other direct costs.

Therefore, the correct answer is Option A. 

Test: Sources of Business Finance- Case Based Type Questions - Question 2
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Direction: Read the following text and answer the questions on the basis of the same:

Faulad Steel Ltd. is a multi-product company, manufacturing steel pipes in wide range for wide spectrum of application. Recently the company received a big order from an MNC for which it requires additional funds. The finance manager reported that the company is not in a position to bear extra burden of explicit cost and equity shareholders insisted not to issue more shares as it can affect their control consideration. Now, the company has only one option, i.e., ploughing back of profit.

Q. Right to control is enjoyed by which of the following sources of finance?

Detailed Solution for Test: Sources of Business Finance- Case Based Type Questions - Question 2
Equity shares are long-term financing sources for any company. These shares are issued to the general public and are non-redeemable in nature. Investors in such shares hold the right to vote, share profits and claim assets of a company.
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Test: Sources of Business Finance- Case Based Type Questions - Question 3
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Direction: Read the following text and answer the questions on the basis of the same:

Faulad Steel Ltd. is a multi-product company, manufacturing steel pipes in wide range for wide spectrum of application. Recently the company received a big order from an MNC for which it requires additional funds. The finance manager reported that the company is not in a position to bear extra burden of explicit cost and equity shareholders insisted not to issue more shares as it can affect their control consideration. Now, the company has only one option, i.e., ploughing back of profit.

Q. ’.............. can affect their control consideration.’ What is the meaning of control consideration in this context?

Detailed Solution for Test: Sources of Business Finance- Case Based Type Questions - Question 3
Control Consideration means the amount per Company Share to be received by Company Shareholders in connection with a Change of Control Transaction, with any non-cash consideration valued as determined by the value ascribed to such consideration by the parties to such transaction.
Test: Sources of Business Finance- Case Based Type Questions - Question 4
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Direction: Read the following text and answer the questions on the basis of the same:

Faulad Steel Ltd. is a multi-product company, manufacturing steel pipes in wide range for wide spectrum of application. Recently the company received a big order from an MNC for which it requires additional funds. The finance manager reported that the company is not in a position to bear extra burden of explicit cost and equity shareholders insisted not to issue more shares as it can affect their control consideration. Now, the company has only one option, i.e., ploughing back of profit.

Q. In the above case, which of the following sources of finance is most suitable?
Detailed Solution for Test: Sources of Business Finance- Case Based Type Questions - Question 4

- Retained earnings are funds generated from the company's profits, not distributed as dividends, and reinvested in the business.
- This source does not incur explicit costs like interest or dilute ownership, maintaining existing shareholder control.
- Ploughing back profits aligns with the company's situation, where external financing options, like issuing shares or taking on debt, are not viable.
- Using retained earnings is cost-effective and supports financial stability without affecting shareholder influence. Retained earnings (RE) is the amount of net income left over for the business after it has paid out dividends to its shareholders. The decision to retain the earnings or distribute them among the shareholders is usually left to the company management.

Therefore, the correct answer is Option C. 

Test: Sources of Business Finance- Case Based Type Questions - Question 5
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Direction: Read the following text and answer the questions that follow:

Saksham Ltd., a firm manufacturing textiles, needs to finance its day-to-day expenses, like, wages, rent, maintain stock of raw material, etc. Other than this, the company also decides to set up a new plant at an estimated cost of ` 5 crores. The finance manager of the company, Mr. Ramakant was asked by the management to do the financial planning by identifying most suitable source of raising long-term funds for financing the investment decision and short-term sources for working capital decision. As per the suggestions of Mr. Ramakant, the company approached their raw material supplier to give them credit for three months, so that the company can get cloth for making garments without making immediate payment. For long-term investment, the company had issued equity and preference shares to meet its requirement. This decision resulted in payment of large amount of taxes to government as dividend on shares is not deducted from total income of the company before calculating income tax. But this situation could be avoided if company had chosen borrowed funds as a source of finance.

Q. State the source of finance, suggested by Mr. Ramakant to finance working capital decision.
Detailed Solution for Test: Sources of Business Finance- Case Based Type Questions - Question 5

- The source of finance suggested by Mr. Ramakant to finance the working capital decision is trade credit.
- Trade credit is an arrangement where suppliers allow the company to purchase goods or services and pay for them later, typically within 30 to 90 days.
- This method helps the company manage its cash flow efficiently by deferring payments, allowing it to use its available funds for other immediate expenses.
- Trade credit is a common short-term financing strategy for managing day-to-day operational costs.

Therefore, the correct answer is Option A. 

 

Test: Sources of Business Finance- Case Based Type Questions - Question 6
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Direction: Read the following text and answer the questions that follow:

Saksham Ltd., a firm manufacturing textiles, needs to finance its day-to-day expenses, like, wages, rent, maintain stock of raw material, etc. Other than this, the company also decides to set up a new plant at an estimated cost of ` 5 crores. The finance manager of the company, Mr. Ramakant was asked by the management to do the financial planning by identifying most suitable source of raising long-term funds for financing the investment decision and short-term sources for working capital decision. As per the suggestions of Mr. Ramakant, the company approached their raw material supplier to give them credit for three months, so that the company can get cloth for making garments without making immediate payment. For long-term investment, the company had issued equity and preference shares to meet its requirement. This decision resulted in payment of large amount of taxes to government as dividend on shares is not deducted from total income of the company before calculating income tax. But this situation could be avoided if company had chosen borrowed funds as a source of finance.

Q. State the factors which have not been kept in mind for selecting source of long-term finance.

Detailed Solution for Test: Sources of Business Finance- Case Based Type Questions - Question 6

  • Long-term finance can be defined as any financial instrument with maturity exceeding one year (such as bank loans, bonds, leasing and other forms of debt finance), and public and private equity instruments.

  • Equity, which has no final repayment date of a principal, can be seen as an instrument with non finite maturity.

Test: Sources of Business Finance- Case Based Type Questions - Question 7
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Direction: Read the following text and answer the questions that follow:

Saksham Ltd., a firm manufacturing textiles, needs to finance its day-to-day expenses, like, wages, rent, maintain stock of raw material, etc. Other than this, the company also decides to set up a new plant at an estimated cost of ` 5 crores. The finance manager of the company, Mr. Ramakant was asked by the management to do the financial planning by identifying most suitable source of raising long-term funds for financing the investment decision and short-term sources for working capital decision. As per the suggestions of Mr. Ramakant, the company approached their raw material supplier to give them credit for three months, so that the company can get cloth for making garments without making immediate payment. For long-term investment, the company had issued equity and preference shares to meet its requirement. This decision resulted in payment of large amount of taxes to government as dividend on shares is not deducted from total income of the company before calculating income tax. But this situation could be avoided if company had chosen borrowed funds as a source of finance.

Q. State the source of finance which can give the benefit of tax saving.

Detailed Solution for Test: Sources of Business Finance- Case Based Type Questions - Question 7

  • Debentures are a debt instrument used by companies and government to issue the loan.

  • Debentures are also known as a bond which serves as an IOU between issuers and purchaser.

  • Companies use debentures when they need to borrow the money at a fixed rate of interest for its expansion.

Test: Sources of Business Finance- Case Based Type Questions - Question 8
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Direction: Read the following text and answer the questions that follow:

Saksham Ltd., a firm manufacturing textiles, needs to finance its day-to-day expenses, like, wages, rent, maintain stock of raw material, etc. Other than this, the company also decides to set up a new plant at an estimated cost of ` 5 crores. The finance manager of the company, Mr. Ramakant was asked by the management to do the financial planning by identifying most suitable source of raising long-term funds for financing the investment decision and short-term sources for working capital decision. As per the suggestions of Mr. Ramakant, the company approached their raw material supplier to give them credit for three months, so that the company can get cloth for making garments without making immediate payment. For long-term investment, the company had issued equity and preference shares to meet its requirement. This decision resulted in payment of large amount of taxes to government as dividend on shares is not deducted from total income of the company before calculating income tax. But this situation could be avoided if company had chosen borrowed funds as a source of finance.

Q. Identify the fund needed for the day-to-day operations of business.
Detailed Solution for Test: Sources of Business Finance- Case Based Type Questions - Question 8
Working capital is the money used to cover all of a company's short-term expenses, which are due within one year. Working capital is the difference between a company's current assets and current liabilities. Working capital is used to purchase inventory, pay short-term debt, and day-to-day operating expenses.
Test: Sources of Business Finance- Case Based Type Questions - Question 9
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Equity shares are long term sources of Business Finance.
Detailed Solution for Test: Sources of Business Finance- Case Based Type Questions - Question 9
Equity shares are one of the most important financial instruments to raise long-term funds needed for the incorporation, expansion, and growth of an organization. These shares are treated as the base for capital formation of the organization. Equity shareholders are considered as the real owners of the organization.
Test: Sources of Business Finance- Case Based Type Questions - Question 10
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Match the Columns
Detailed Solution for Test: Sources of Business Finance- Case Based Type Questions - Question 10
1. Shareholder: A shareholder, also referred to as a stockholder, is a person, company, or institution that owns at least one share of a company's stock, which is known as equity. Because shareholders are essentially owners in a company, they reap the benefits of a business' success.

2. Commercial Bank: The term commercial bank refers to a financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses.

3. Debenture: A debenture is a bond issued with no collateral. Instead, investors rely upon the general creditworthiness and reputation of the issuing entity to obtain a return of their investment plus interest income. Examples of debentures are Treasury bonds and Treasury bills.

Test: Sources of Business Finance- Case Based Type Questions - Question 11
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Match the Columns
Detailed Solution for Test: Sources of Business Finance- Case Based Type Questions - Question 11
1. International source of finance: FDI has been an important source of finance for the LLDCs in terms of both the value of FDI stock as a percentage of GDP and the contribution of FDI to capital formation (GFCF).

2. Industrial development Bank: Industrial Development Bank of India was established in 1964 by an act to provide credit and other financial facilities for the development of the fledgling Indian industry.

3. Industrial development corporation: The National Industrial Development Corporation LTD is a Non-govt company, incorporated on 20 Oct, 1954. It's a public unlisted company and is classified as company limited by shares'.

Test: Sources of Business Finance- Case Based Type Questions - Question 12
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Match the Columns
Detailed Solution for Test: Sources of Business Finance- Case Based Type Questions - Question 12
1. Indian Industrial finance corporation: IFCI, previously Industrial Finance Corporation of India, is a development finance institution under the jurisdiction of Ministry of Finance, Government of India. Established in 1948 as a statutory corporation, IFCI is currently a company listed on BSE and NSE.

2. First state of state finance corporation: The State Financial Corporations Act, 1951, with the basic objective of promoting and developing small scale and medium scale industries in the State with a special focus on spreading industrial culture in the rural, semi-urban and backward areas of the State.

3. Public Deposit: The deposits that are raised by organisations directly from the public are known as public deposits. Rates offered on public deposits are higher than of bank deposits. But, there is higher risk in public deposits. Public deposits cater to both short term and medium term finance requirements.

Test: Sources of Business Finance- Case Based Type Questions - Question 13
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Direction: Match the following sources of finance given in column I with their merits given in column II.
Detailed Solution for Test: Sources of Business Finance- Case Based Type Questions - Question 13
1. Trade credits: Trade credit is the loan extended by one trader to another when the goods and services are bought on credit.

2. Public Deposits: The deposits that are raised by organisations directly from the public are known as public deposits.

3. Equity shares: Equity shares are long-term financing sources for any company. These shares are issued to the general public and are non-redeemable in nature.

4. Debentures: Debentures are a debt instrument used by companies and government to issue the loan.

Test: Sources of Business Finance- Case Based Type Questions - Question 14
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Direction: Match the following sources of funds given in column I with their salient features given in column II.
Detailed Solution for Test: Sources of Business Finance- Case Based Type Questions - Question 14
1. Trade credit: Trade credit means many things but the simplest definition is an arrangement to buy goods and/or services on account without making immediate cash or cheque payments.

2. Preference shares: Preference shares, more commonly referred to as preferred stock, are shares of a company's stock with dividends that are paid out to shareholders before common stock dividends are issued.

3. Retained earnings: Retained earnings (RE) is the amount of net income left over for the business after it has paid out dividends to its shareholders. The decision to retain the earnings or distribute them among the shareholders is usually left to the company management.

4. Global Depository Receipts: A global depositary receipt (GDR) is a certificate issued by a bank that represents shares in a foreign stock on two or more global markets.

Test: Sources of Business Finance- Case Based Type Questions - Question 15
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Direction: Match the following demerits given in column I with related sources of funds given in column II.
Detailed Solution for Test: Sources of Business Finance- Case Based Type Questions - Question 15
1. Owner’s fund: Owner's funds mean funds which are procured by the owners of a business, which may be a sole entrepreneur or partners or shareholders of a business.

2. Retained earnings: Retained earnings (RE) is the amount of net income left over for the business after it has paid out dividends to its shareholders.

3. Public deposit: The deposits that are raised by organisations directly from the public are known as public deposits. Rates offered on public deposits are higher than of bank deposits. But, there is higher risk in public deposits.

4. Debentures: Debentures are a debt instrument used by companies and government to issue the loan. Debentures are also known as a bond which serves as an IOU between issuers and purchaser.

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