Test: Scope & Sources of Finace - UGC NET MCQ

Assertion (A):

Equity capital is a significant source of long-term finance for businesses, as it provides funding without the obligation of repayment.

• This is true because equity capital (like common stock) is a source of long-term finance.

• Equity capital does not have to be repaid like loans; instead, investors get ownership and dividends.

Reason (R):

Preferred stockholders have voting rights that give them control over company decisions, similar to common stockholders.

• This is false because preferred stockholders generally do NOT have voting rights.

• Voting rights are typically reserved for common stockholders.

• Preferred stockholders usually get fixed dividends but limited or no voting rights.

Conclusion:

• Assertion is true.

• Reason is false.

Correct option:

c) If Assertion is true but Reason is false

Factoring is a financial process where a company sells its accounts receivable to a third party, known as a factor, at a discount. This enables the company to obtain immediate cash, improving its cash flow without having to wait for customers to pay their invoices. This method is particularly beneficial for businesses that need quick access to funds for operations or to manage short-term financial needs. An interesting fact is that factoring can be a more flexible financing option compared to traditional bank loans, as it is often easier to obtain and can be tailored to the company's cash flow requirements.

Explanation of Statements:

Statement 1 is correct because public finance indeed assesses how fiscal policy tools like taxation and government spending can impact economic growth, employment, and inflation. This is a key aspect of public finance, which looks at the effectiveness of these tools in achieving macroeconomic stability.

Statement 2 is incorrect. Capital budgeting is primarily concerned with evaluating long-term investments to maximize a firm's value, using techniques like Net Present Value (NPV) and Internal Rate of Return (IRR). It does not solely focus on short-term financial planning; rather, it emphasizes long-term project viability and return on investment.

Thus, only Statement 1 is correct, making Option A the right choice.

- The Assertion (A) is correct because personal finance does indeed emphasize an individual's management of cash flow, savings, and investments.

- The Reason (R) is also correct; however, it does not explain the assertion about personal finance. Instead, it pertains to corporate finance, which focuses on firm-level financial management.

- Therefore, the correct answer is Option B, as both statements are true but the reason does not explain the assertion.

Revenue serves as the lifeblood of a business, generating cash inflows that are essential for covering operational costs, such as salaries and utilities, as well as funding expansion initiatives. Without sufficient revenue, a business would struggle to maintain its operations and invest in future growth opportunities. An interesting fact is that companies often reinvest a significant portion of their revenue back into the business to stimulate further growth and innovation.

Lease financing allows companies to access necessary assets, such as property and equipment, without the burden of large upfront costs associated with purchasing these items. This flexibility can be particularly beneficial for businesses looking to maintain cash flow while still acquiring the tools they need for operations. An interesting fact about leasing is that it can also provide tax benefits, as lease payments may be deductible as business expenses, further enhancing financial efficiency for companies.

• The Assertion (A) is true because effective financial planning is indeed critical for achieving long-term financial objectives. It involves setting clear goals and developing strategies to meet them.
• The Reason (R) is false as financial planning encompasses much more than just budgeting; it includes forecasting, resource assessment, and adapting to market conditions, which are crucial for long-term success.
• Therefore, while both statements are based on financial concepts, the Reason does not correctly explain the Assertion.

• The Assertion is true because leasing or hire purchase agreements do allow businesses to utilize assets without making an upfront payment.
• The Reason is false because these agreements do not represent a direct infusion of capital; rather, they are arrangements for asset usage.
• Since the Assertion is true and the Reason is false, the Reason does not correctly explain the Assertion.

Statement 1 is correct as one of the primary objectives of corporate finance is indeed to maximize shareholder wealth by ensuring that resources are allocated efficiently and effectively. This includes investment decisions, financing decisions, and dividend decisions that ultimately aim to increase the market value of the firm.

Statement 2 is incorrect because public finance does take into account the influence of global financial systems. Government financial management is interconnected with global economic factors, including international trade, foreign investment, and global monetary policies. Therefore, public finance cannot be viewed in isolation from these external influences.

Thus, the correct answer is Option A: 1 Only.

Owner's Equity is regarded as a primary internal source of finance because it consists of the initial investment made by the owners and the profits that have been reinvested back into the business. This internal funding allows companies to finance growth without relying on external debt or equity, providing greater control to the owners over their business decisions. An interesting fact is that retained earnings, a component of owner's equity, can often become the largest source of internal funding for a growing company over time, helping to support various business expansions and investments.