Business Finance

NCERT Solution

Short Answer Type

Question 1: What is business finance? Why do businesses need funds? Explain.

Answer: The finance required by business to establish and run its operations is called business finance. Businesses need funds for various purposes; like for buying fixed assets, for carrying out day-to-day operations and for implementing growth and expansion plans. Factory, office and machineries are examples of fixed assets which a company needs for running its business. In case of day-to-day operations, a business firm needs money to procure raw materials and to pay salaries to its employees.

Question 2: List sources of raising long-term and short-term finance.

Answer: Following are the sources of long-term finance:

1. Equity
2. Retained earnings
3. Preferential shares
4. Debentures
5. Loans from financial institutions
6. Loans from banks

Sources of short-term finance:

1. Trade credit
2. Factoring
3. Banks
4. Commercial papers

Question 3: What is the difference between internal and external sources of raising funds? Explain.

Answer: Internal sources of funds are present within the organization, while external sources of fund are present outside the organization. The internal sources of funds can only fulfill limited needs of the business. For greater need of funds, an organization has to resort to external sources of fund. Disposing off surplus inventory and speeding up account receivables are examples of ways to generate funds internally. Borrowing money from banks, financial institutions or public are examples of ways of resorting to external sources of funds.

Question 4: What preferential rights are enjoyed by preference shareholders? Explain.

Answer: The preference shareholders enjoy following rights over equity shareholders:

1. They receive dividend at a fixed rate. Their dividend is paid before announcing the dividend for equity shareholders.
2. They get preference in terms of repayment of capital in case the company is wound up. Their claim is settled after the claim of the creditors is settled.

Question 5: Name any three special financial institutions and state their objectives.

Answer: Following are the three special financial institutions and their objectives:

1. Industrial Finance Corporation of India (IFCI): Its objectives include; assistance towards balanced regional development and encouraging new entrepreneurs to enter priority sectors of the economy.
2. State Financial Corporation (SFC): Providing medium and short term financial assistance to business activities which are outside the scope of IFCI.
3. Industrial Credit and Investment Corporation of India (ICICI): It assists creation, expansion and modernization of industrial enterprises exclusively in the private sector.

Question 6: What is the difference between GDR and ADR? Explain.

Answer: GDR (Global Depository Receipts) are local currency shares in any country other than the home country of the company. ADR (American Depository Receipts) can be purchased only by the US citizens. While GDRs can be traded in any country, ADRs can only be traded in the USA.