Test: Sources Of Business Finance - 1 - Commerce MCQ

Common stock is what most people think of when they think "stock." Common stock allows its holders to make a profit through rising share prices and dividend payments. Holders of common stock also get to vote on corporate issues, such as electing new directors to the corporation's board. However, should the company end up in bankruptcy, holders of common stock are last on the list to get their money back -- after regular creditors, bondholders, and holders of preferred stock. If you hold common stock and the company goes bust, you are unlikely to get any of your capital back.

The term "redeemable" is typically used for preference shares. Redeemable preference shares are those that can be redeemed by the issuing company after a certain period of time or on a specific date, at a predetermined price. This means that the company can buy back these shares from the shareholders at a fixed price and retire them, thereby reducing its overall share capital. Redeemable preference shares are considered to be a hybrid security, as they have characteristics of both equity and debt.

Funds required for purchasing current assets is an example of working capital requirement.
Working capital refers to the funds required by a company to carry out its day-to-day operations and meet its short-term obligations. It is the difference between current assets and current liabilities. Current assets include cash, inventory, accounts receivable, and other assets that are expected to be converted into cash within one year.
When a company needs to purchase current assets, it requires funds to finance these purchases. This is known as the working capital requirement. It is essential for the smooth functioning of the business and ensures that the company has enough resources to meet its short-term obligations.
Here are some key points to consider:
- Working capital requirement is the funds required to finance the purchase of current assets.
- Current assets include cash, inventory, accounts receivable, and other assets that can be converted into cash within one year.
- Purchasing current assets is necessary for the day-to-day operations of the business.
- The working capital requirement ensures that the company has enough resources to meet its short-term obligations.
- It is important to manage working capital efficiently to maintain liquidity and financial stability.
In conclusion, funds required for purchasing current assets fall under the category of working capital requirement. It is crucial for businesses to have adequate working capital to sustain their operations and meet their short-term financial obligations.

ADRs are issued in the USA

• ADRs, or American Depositary Receipts, are financial instruments that allow non-U.S. companies to list their shares on U.S. stock exchanges.


• ADRs are issued and traded in the United States.


• They represent ownership in shares of non-U.S. companies and are denominated in U.S. dollars.


• ADRs provide investors in the United States with a convenient way to invest in foreign companies without having to directly purchase the shares on foreign exchanges.


• ADRs are subject to U.S. regulations and are traded on major U.S. exchanges, such as the New York Stock Exchange (NYSE) and the Nasdaq.


• They offer investors the opportunity to diversify their portfolios by investing in companies from different countries and industries.

Therefore, the correct answer is D: USA.

Public Deposits:
Public deposits are a form of funding that is raised directly from the public. These deposits are an important source of capital for various types of organizations.
Explanation:
Public deposits refer to the funds collected from individuals or entities outside the organization. These deposits are typically made by individuals who are not the owners, directors, or auditors of the organization. Here's a detailed explanation of each option:
A. The public:
- Public deposits are raised directly from the public, which includes individuals and organizations who are not directly involved in the management or ownership of the organization.
- It includes individuals such as retail investors, small businesses, and other entities that are interested in depositing their funds with the organization.
B. The owners:
- Owners are the individuals or entities who have invested their capital in the organization and have a stake in its ownership.
- While owners can provide funds to the organization, these funds are typically not considered public deposits.
C. The directors:
- Directors are individuals who are responsible for the overall management and decision-making of the organization.
- While directors can contribute funds to the organization, these funds are typically not considered public deposits.
D. The auditors:
- Auditors are independent professionals who review and examine the financial records of an organization to ensure their accuracy and compliance with relevant laws and regulations.
- Auditors do not contribute funds to the organization, and therefore their involvement is not related to public deposits.
Conclusion:
In conclusion, public deposits are raised directly from the public, which includes individuals and organizations outside the management, ownership, and auditing roles. These deposits serve as an important source of funding for organizations.

Lease Agreement: Lessee Rights
The lease agreement is a contractual arrangement between a lessor (the owner of an asset) and a lessee (the party who wants to use the asset). The lessee obtains certain rights under the lease agreement, and one of the key rights is the right to use the asset for a specified period.
Here is a detailed explanation of the rights granted to the lessee under a lease agreement:
1. Use the asset for a specified period:
- The lessee has the right to use the asset for a predetermined period as stated in the lease agreement.
- This allows the lessee to utilize the asset for their specific needs without actually owning it.
- The lessee benefits from the use of the asset without the financial burden of purchasing it outright.
- The lease agreement outlines the terms and conditions regarding the usage, maintenance, and return of the asset.
2. Share profits earned by the lessor:
- Profit sharing is not a typical right granted to the lessee under a lease agreement.
- The lessee's primary obligation is to pay the agreed-upon lease payments to the lessor for the use of the asset.
- Any profits or earnings generated from the asset typically belong to the lessor, not the lessee.
3. Sell the assets:
- Generally, the lessee does not have the right to sell the leased asset.
- Ownership of the asset remains with the lessor, and the lessee is only granted the right to use it.
- If the lessee wishes to transfer the asset to another party, they would need to obtain the lessor's consent and follow any specified procedures outlined in the lease agreement.
4. Participate in the management of the organization:
- The lessee's rights are limited to the use of the leased asset and do not typically extend to participating in the management of the organization.
- The lessor retains the responsibility for managing the asset and making decisions related to its operation and maintenance.
In conclusion, the primary right granted to the lessee under a lease agreement is the right to use the asset for a specified period. Other rights, such as profit sharing, selling the asset, or participating in the management of the organization, are not typically included in a lease agreement.

1. Introduction: Debentures are a form of long-term borrowing for a company. They represent a type of loan capital that a company raises from the public or financial institutions.


2. Definition: Debentures are debt instruments issued by a company to raise funds from the market. They are essentially a form of loan taken by the company.


3. Features of Debentures:
   
   
   
   • Fixed Interest: Debentures carry a fixed rate of interest that is paid to the debenture holders periodically.
   
   
   • Repayment: Debentures have a specific maturity date, after which the company is obligated to repay the principal amount to the debenture holders.
   
   
   • Security: Debentures can be secured or unsecured. Secured debentures are backed by the assets of the company, which act as collateral, whereas unsecured debentures are not backed by any specific assets.
   
   
   • Priority: In case of liquidation or bankruptcy, debenture holders have a higher priority compared to equity shareholders in repayment of their investment.
   
   
   • Transferability: Debentures can be easily transferred from one investor to another, providing liquidity to the investors.
   
   
   
   


4. Types of Debentures:
   
   
   
   • Convertible Debentures: These debentures can be converted into equity shares of the company after a specific period of time.
   
   
   • Non-Convertible Debentures: These debentures cannot be converted into equity shares and are repaid in cash at the end of the maturity period.
   
   
   • Secured Debentures: These debentures are secured by specific assets of the company, which act as collateral for the repayment of the debenture amount.
   
   
   • Unsecured Debentures: These debentures are not backed by any specific assets and rely solely on the creditworthiness of the company for repayment.
   
   
   
   


5. Conclusion: Debentures represent loan capital of a company and are an important source of long-term financing. They provide investors with a fixed return and the company with the necessary funds to finance its operations and growth.

Factoring involves the sale of receivables to a finance company, which is called the factor. Under a factoring arrangement, the customer is notified that it should now remit payments to the factor. The factor assumes collection risk. Thus, the transferor has no further involvement with customer payments. Essentially, a factoring transaction is recorded as a sale of the receivables, and a gain or loss (usually a loss) is recognized on the receivable transferred to the factor Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs.

Commercial paper is an unsecured promissory note issued by a firm to raise funds for a short period, varying from 90 days to 364 days after which it has to be redeemed.

The way of classifying the sources of funds is whether the funds are generated from within the organization or from external sources of the organization. Internal sources of funds are those that are generated inside the business. A business, for example, can generate funds internally by speeding collection of receivables, disposing of surplus inventories and increasing its profit. The internal sources of funds can fulfil only limited needs of the business.