Tag: sources of business finance

Questions Related to sources of business finance

The cheapest source of finance is _____.

long-term and short-term finance sources of business finance business studies

  1. Debenture

  2. Equity share capital

  3. Preference share

  4. Retained earning

Show answer
Correct Option: D
Explanation:

Retained Earnings

The portion of net profit distributed to shareholders is called dividend and the remaining portion of the profit is called retained earning. In other word, the amount of undistributed profit which is available for investment is called retained earning. Retained earning is considered as internal source of long-term financing and it is a part of shareholders equity.Generally, retained earning is considered as cost free source of financing. It is because neither dividend nor interest is payable on retained profit. 

Current assets of a business firm should be financed through __________.

long-term and short-term finance sources of business finance business studies

  1. Current Liability Only

  2. Long Term Liability Only

  3. Partly from both types, i.e., long and short term Liabilities

  4. None of the Above

Show answer
Correct Option: C
Explanation:
Current assets refer to those assets held in a business which can be converted in the form of cash within a period of one year. Current assets are more liquid but less profitable.
Current assets of a business firm should be financed through: both types(i.e. long and short term liabilities)

This limit of overdraft is granted purely on the basis of credit-worthiness of the borrower.

long-term and short-term finance sources of business finance business studies

  1. True

  2. False

Show answer
Correct Option: A
Explanation:

True.

When a bank allows its account holders to withdraw money in excess of the balance in their accounts up to a specified limit, it is known as overdraft facility. This limit is granted purely on the basis of credit worthiness of the borrower.

Short-term planning covers short-term financial plan called budget.

long-term and short-term finance sources of business finance business studies

  1. True

  2. False

Show answer
Correct Option: A
Explanation:

Companies develop short-term financial plans to meet budget and investment goals within one fiscal year. These plans have a higher degree of certainty compared to long-term plans. Short-term plans often are amended as financial and investment goals change. Businesses and individuals alike use short-term plans to manage short-term cash deficits

Preference shares are helpful for raising funds for a long period since they do not create any charge over the assets.

long-term and short-term finance sources of business finance business studies

  1. True

  2. False

Show answer
Correct Option: A
Explanation:

The issue of preference shares does not restrict the company's borrowing power, at least in the sense that preference share capital is not secured against assets in the business.

Therefore, it is beneficial for raising funds for a long period since they do not create any charge over the assets.

Which of the following is/are not the reason(s) of short term finance?

long-term and short-term finance sources of business finance business studies

  1. No longer term commitment with this type of loan.

  2. Short term loans are available quickly.

  3. Short term loans could cost less.

  4. All of the above

Show answer
Correct Option: D
Explanation:
  1. Short term loans are available quickly. One of the defining features of short term loans is that you can borrow them fast – sometimes even on the same day or within 24 hours. This makes financing, such as payday loans, ideal if you find yourself in a situation where you need cash fast.
  2. There is no longer term commitment with this type of loan. With short term loans you only need to focus on the immediate future as the loan is paid off within a much shorter space of time. Many people find it intimidating to commit to borrowing over a period of many years, worrying about making the payments and managing the loan with all of life going on around. With short term loans this isn’t an issue as repayment terms can be as short as a month, leaving you free to repay and move on.
  3. Short term loans could cost less. The longer you borrow for, the more interest you will pay. Short term loans offer a simple way to borrow the cash you need and to pay less for it – the shorter the term over which you borrow the money, the less interest you will pay. As you have not secured your home or car with short term borrowing there is also less risk of losing them if you cannot make repayments. While you should always make sure that you only borrow what you can afford to repay, avoiding the risk to your home or car that some longer term loans create can take the pressure off for many people.

Factor(s) determining long-term finance include(s) ________.

long-term and short-term finance sources of business finance business studies

  1. nature of business

  2. nature of goods produced

  3. technology used

  4. all of the above

Show answer
Correct Option: D
Explanation:
Nature of Business:
The nature and character of a business determines the amount of fixed capital. A manufacturing company requires land, building, machines etc. So it has to invest a large amount of capital for a long period. But a trading concern dealing in, say, washing machines will require a smaller amount of long term fund because it does not have to buy building or machines.
Nature of goods produced:
If a business is engaged in manufacturing small and simple articles it will require a smaller amount of fixed capital as compared to one manufacturing heavy machines or heavy consumer items like cars, refrigerators etc. which will require more fixed capital.

Technology used:

In heavy industries like steel the fixed capital investment is larger than in the case of a business producing plastic jars using simple technology or producing goods using labour intensive technique.

Collateral are the most primary condition for the furnishing of long term finance.

long-term and short-term finance sources of business finance business studies

  1. True

  2. False

Show answer
Correct Option: A
Explanation:

Personal assets pledged by a borrower as security for a loan are known as collateral. Business borrowers may use equipment or accounts receivable to secure a loan, while individual debtors often pledge savings, a vehicle or a home as collateral. Applications for a secured loan are looked upon more favorably than those for an unsecured loan, because the lender can collect the asset should the borrower stop making loan payments. Banks measure collateral quantitatively by its value and qualitatively by its perceived ease of liquidation.

A long-term investment decision is also called a Capital Budgeting decision.

long-term and short-term finance sources of business finance business studies

  1. True

  2. False

Show answer
Correct Option: A
Explanation:

A long term investment decision is also called a capital budgeting decision. It involves committing the finance on a long term basis, e.g. making investment in a new machine to replace an existing one or acquiring a new fixed assets or opening a new branch etc.

These decisions are very crucial for any business.

As they are usually for smaller sums, and borrowed over fewer months or years, short term loans tend to be unsecured.

long-term and short-term finance sources of business finance business studies

  1. True

  2. False

Show answer
Correct Option: A
Explanation:

Unsecured loan is a loan that is issued and supported only by the borrower's creditworthiness, rather than by any type of collateral. Because unsecured loans, sometimes referred to as signature loans or personal loans, are obtained without the use of property as collateral, the terms of such loans, including approval and receipt, are most often contingent on the borrower's credit score. Borrowers must generally have high credit ratings to be approved for certain unsecured loans.

Therefore short term loans are issued on the basis of creditworthiness not on the basis of collateral security hence short term loan are unsecured.