Multiple Choice Questions
Q1: Which of the following is considered a long-term source of business finance?
(a) Trade Credit
(b) Commercial Paper
(c) Issuance of Shares
(d) Bank Overdraft
Ans: (c) Issuance of Shares
Q2: What is the primary purpose of retained earnings in a business?
(a) To pay dividends to shareholders
(b) To reinvest in the business
(c) To purchase fixed assets
(d) To repay loans
Ans: (b) To reinvest in the business
Q3: Which source of finance is typically used for short-term requirements?
(a) Equity Shares
(b) Debentures
(c) Trade Credit
(d) Retained Earnings
Ans: (c) Trade Credit
Q4: Which of the following is NOT a factor influencing the choice of finance source?
(a) Cost of funds
(b) Control over business
(c) Number of employees
(d) Purpose of funds
Ans: (c) Number of employees
Q5: What type of financing do commercial banks primarily provide?
(a) Long-term financing
(b) Equity financing
(c) Short-term financing
(d) Merchant financing
Ans: (c) Short-term financing
Fill in the Blanks
Q1: The financial requirements of a business for day-to-day operations are known as __________.
Ans: Working Capital
Q2: __________ refers to funds raised through loans from banks and financial institutions.
Ans: Borrowed Funds
Q3: The capital raised by a company through the issuance of shares is termed __________.
Ans: Share Capital
Q4: __________ financing involves renting an asset instead of purchasing it outright.
Ans: Lease
Q5: __________ are issued in the money market for short-term financing needs.
Ans: Commercial Papers
True or False
Q1: Owner’s funds include retained earnings.
Ans: True
Q2: Trade credit is a long-term financing option.
Ans: False
Q3: Debenture holders have voting rights in the company.
Ans: False
Q4: Factoring is a method to improve cash flow by selling receivables.
Ans: True
Q5: Public deposits are an unreliable source of finance for new companies.
Ans: True
Match the Following
Ans:
Short Answer Questions
Q1: What is business finance and why is it important?
Ans: Business finance is the money needed by a business to run its activities. It is important because without enough money, a business cannot pay for things like materials, salaries, or equipment. It helps a business start, grow, and keep running smoothly.
Q2: What are the two main types of capital requirements for a business?
Ans: The two main types of capital requirements are fixed capital and working capital. Fixed capital is used to buy long-term assets like buildings or machinery. Working capital is used for daily operations, like buying materials and paying salaries.
Q3: What is trade credit?
Ans: Trade credit is when a business buys goods and agrees to pay for them later, instead of paying right away. This helps businesses get the supplies they need without having to pay cash immediately, making it easier to manage their money.
Q4: What is retained earnings?
Ans: Retained earnings is the money that a business keeps from its profits instead of paying it out as dividends to shareholders. This money is used to help the business grow or pay for new projects without needing to borrow money.
Q5: Why might a business choose to get a loan from a bank?
Ans: A business might choose to get a loan from a bank because it can provide a large amount of money quickly. Banks also offer flexible repayment plans, making it easier for the business to pay back the loan over time.
Q1: Discuss the various sources of business finance available to entrepreneurs looking to start or expand their businesses. Include a detailed explanation of the advantages and limitations of at least three different sources.
Ans: Business finance is essential for any entrepreneur aiming to start or expand their business. There are several sources from which funds can be procured, each with its own advantages and limitations. Here, we will discuss three common sources: retained earnings, bank loans, and issuing shares.
Retained Earnings: This refers to the portion of net profits that a company retains for reinvestment instead of distributing it as dividends.
Bank Loans: Banks offer loans for various purposes, including purchase of equipment or working capital.
Issuing Shares: Companies can raise capital by issuing equity shares to investors.
In conclusion, the choice of financing sources depends on various factors such as the purpose of funding, the financial health of the business, and the level of risk the entrepreneur is willing to take. Understanding the advantages and limitations of each source helps entrepreneurs make informed decisions to support their business goals.
Q2: Explain the factors that influence the choice of source of finance for a business. Provide detailed explanations for at least five factors that entrepreneurs should consider.
Ans: Choosing the right source of finance is crucial for any business. Entrepreneurs must consider various factors to determine which source best meets their needs. Here are five significant factors to consider:
Cost of Finance: The overall cost of obtaining and using funds is a primary concern for entrepreneurs.
Financial Strength and Stability: The financial health of the business plays a vital role in determining financing options.
Form of Organisation: The type of business structure influences available financing options.
Purpose and Time Period of Funding: Entrepreneurs should match the source of finance with the intended use of funds.
Risk Profile: The perceived risks associated with different sources of finance should be assessed.
In summary, the decision on the source of finance is multi-faceted, requiring careful consideration of costs, financial stability, organizational structure, purpose, and risk. By analyzing these factors, entrepreneurs can make strategic choices that align with their business objectives.
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1. What are the primary sources of business finance? |
2. How do businesses determine their financing needs? |
3. What are the advantages of using equity financing? |
4. What are the risks associated with debt financing? |
5. How can businesses balance different sources of finance effectively? |
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