Test: Resource Mobilization - 1 - CUET Commerce MCQ

Finance is needed for running the life of the business. Business can't run without the availability of appropriate funds. Business finance is mainly needed for various purposes such as to fulfil its fixed and working capital requirements such as fixed assets for the production of goods or services and meet day to day operations, diversification, technology upgradation, and growth and expansion.

Increase in long term liabilities is considered as source of funds because it brings cash into the business. Other options are considered as application of funds as they results in outflow of funds.

Capital markets are a broad category of markets facilitating the buying and selling of financial instruments. In particular, there are two categories of financial instruments in which markets are involved. These are equity securities, which are often known as stocks, and debt securities, which are often known as bonds.

Primary market as a part of the capital market deals with only new securities. When a company publicly sells new stocks and bonds for the first time, it does so in the primary capital market. This market is also called the new issues market. In many cases, the new issue takes the form of an initial public offering (IPO).

Merchant banking is related to capital market. Merchant banks are a very important factor in the capital markets. They have a big role to play, especially in placing equity in the primary markets, through the Initial Public Offers route.

Venture capital financing is a type of financing of venture capital. To start a business, a venture needs funding. It can be done from raising equity shares, debt instruments and conditional loans. Deep discount bonds cannot be used to fund the venture capital.

Financing through debentures is less costly as compared to cost of preference or equity capital as the interest payment on debentures is tax deductible.This is a benefit of issuing debentures. Interest paid on debentures is allowed as deduction in computation of taxable income. This results in tax relief for the company.

Debt is considered cheaper source of financing not only because it is less expensive in terms of interest and issuance costs than any other form of security, but also due to availability of tax benefits; the interest payment on debt is deductible as a tax expense.

Retained earnings are kept aside as a portion of the net earnings. Not all the earnings are distributed among shareholders as a dividend, some part is kept reserved for the business use in future. It is a source of internal financing or self financing. It is also called ploughing back of profits. So, option 2 is incorrect in respect of retained earnings.

Preference shareholders get priority over equity shareholders in two ways. They get a fixed rate of return in form of dividend and they receive their capital after the claims of the company's creditors get settled, but they don't have voting rights unlike equity shareholders. Also, they have preferential rights of repayment over equity shareholders in the event of liquidation. So, option 4 is correct.