the merits and limitations of debentures as a source of finance.

outline
5. ercial banks are considered to be an important source of finance for business. State
6,
its merits and limitations.
what are the merits and limitations of raising funds from financial institutions?

S Describe briefly the various sources of international Finance.

Study based Questions
Case

€1. 1. Jia is planning that mobile a Start medical up to apps launch market smart has phone a
great apps future for healthcare, in the country based The on appthe
study will help the users in doing everything from helping them to manage existing
health conditions and preventing new concerns to arise, there by reducing the need for
faceto_face consultations. In order to assess the financial needs of her business she met
her aunt pragya, who works as a financial advisor for Startup Ventures. Pragya told her
that the financial needs of a business can be divided into two categories. Also, a loan
from commercial bank would be an ideal source of business finance for her business.
(a) Identify and explain the two categories into which the financial needs of Jia's
business can be grouped.
(b) Give any two advantages and two limitations of using commercial any source of
finance by her.
2. Considering the fact that travel industry in India has witnessed a boom in the past
decade, Lalit promoted a travel agency three years back. In order to start the business,
he had then purchased an office space in a popular complex in New Delhi. Moreover,
he continues to make investments on different types of office equipments, besides
meeting the day today running cost of the business. Six months back he decided to
offer a complementary one day trip to local Resorts , to his most privileged customers.
As he thought this promotional initiative, would help to promote loyalty amongst his
customers and help to increase his business manifolds in future.
Identify and explain the different types of funds being described in the above paragraph
on the basis of time period.
3. Nilesh, works as a digital marketing campaign manager in a firm. Over the years, the
business of his firm has increased by leaps and bounds as the marketing has gone
digital. The firm obtains it's stock of office stationery on a one month credit from the
suppliers and al the same time the company offers 15 days credit period to its clients
(business firms)
(a) Identify and explain the source of business finance being described in the above
paragraph.
(b) State any two favourable factors because of which the firm is able to make credit
purchases.
(c)Give any two limitations of the source of business finance as identified in part (a)
of the question.
'Healtho Ltd.' is a popular health management company offering a wide range of
healt
hcare products to the customers. Two years back, the company started a series Of
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 Onl
ine fitnes€ classes and this segment of business has been a big hit right from its
inception, Il has helped the company to make huge profits. By taking into
consideration, the requests from many of its regular clients, the company has now
decided to start

Einznro I
fitness centres at five strategic locations within the country. 'Ibe rnanagerncmt
cotnpany has decided to use the portion of their undistributed earning% to fin
new business venture.
(a) Identify and explain the source of business that the company intend, financing its
expansion plans.
(b) State any two merits and two limitations of this source.
5. Noot• is a student of class XI commerce strcarn in a reputed school in Jammu.
a very confident and intelligent student, she has been asked by her teacher to
a PowerPoint presentation on the topic Return on equity shares'. In order to
the concept of shares in simplified way she has taken an example Of two
Cotnpany A and her presentation are given
Company B. The COMPANY
below.
excerpts from Profit 2 Lakh
COMPANY B
Profit 1 Lakh
Interest on loan
Tax 30%
Dividend

Interet
on
Tax
Dividend

Both Company A and company B have employed a capital of 20 lakh each. The capital
of the company is divided into 2,00,000 equity shares of 10 each. The rate ci their
earnings is 100/0 and 200/0 respectively. Besides owned capital the companies have
also raised a loan for 2 lakh at 100/0 rate of interest from a bank. The rate of tax is
Due 10 some technical errors, she could not run the PowerPoint presentation beyond
ths slide.
You have been asked to calculate the rate at which dividend is payable in case of
both company A and company B, to show that when everything else is constant, the
retum on equity shares vary directly with the profits of the company.
6, Prateek purchased one hundred 120/0 preference shares of ABC Limited. The face
valued each share is 200. Due to insufficient profits, the company did not declare any
dividend last year. Assuming that the company has made substantial profits in the
present and declared to pay dividend, calculate the amount of dividend payable to
Prated case he is holding;
(a) Cumulative Preference Shares

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 (b) Non Cumulative Preference Shares
7. Arun owns 200, 120/0 preferences shares of XYZ Limited of 100 each. During
the year the company made surplus profits. Therefore, besides a regular
dividend received an additional dividend in lieu of surplus profits.
(a) Identify the type of preference shares being discussed in the above
paragraph' (b) Calculate the amount of dividend payable to Arun assuming
that the company declared an additional dividend of 20%.

252 Studies-Xt

was aware of the fact that her father has invested in a company named 'Kuber d'
When she came across, an article about this company in this newspaper, it held
Lirflite The article was referring to the enormous losses that this company had
her attention.
during the year due to mis appropriation of profits by its promoters. This news

had upset Kyra, as her father had promised to buy her a new game from the money he
was expecting as a return on investment from the company. When she shared the
news with her father to her surprise, her father assured her by saying that the return
on his investment from the company is guaranteed, regardless of the profits of the
company.
This is because he owns creditorship securities.
(a) Identify the financial instrument being referred to in the above paragraph.
(b) State any three other advantages of this source of finance besides the point mentioned in the
given paragraph.

9, Riya invested in 300 preference shares of a company. As per the guidelines

mentioned in the prospectus of the company , these shares are to be converted into
equity shares after a duration of two years. After the conversion each preference share
of 100 will be equivalent to 10 equity shares of 10 each.
(a) Identify the type of preference shares that are owned by Riya.
(b) Calculate the number of equity shares that Riya will be holding after conversion of
shares takes place.
(c) Also, discuss how her rights as a shareholder will get affected due to conversion of
the share.s.
10. joyful living Limited issued 80 lakh debentures of 100 each by mortgaging the
assets of the company. Whereas, ten years back the company had issued 20 lakh
debentures of 2()() each w;thout creating any charge on the assets of the company.
(a) identify the types of debentures been described in the above lines.

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 (b)Also, explain any other two types of debentures which are not mentioned in the
above paragraph.
11• After attending a class on 'Sources of Business Finance', Jaideep , a student is not
clear about certain concepts related to the chapter.
(a) A company has made a profit cf 70 lakh, but it has paid tax only on 50 lakh only.
(b) When we consider debt to be a cheaper source of finance than equity, then why can't
a company be promoted purely on debt capital?
Wh
(c) y does an issue of equity additional capital dilute the control of existing equity
shareholders?
(d) Why is the dividend on shares is payable at the discretion of the directors?
You are expected to clarify all his doubts, with the help of suitable examples wherever
required. is planning to set up a srnall scale food processing factory in his village.
But despite hit best efforts, he is not able to arrange adequate finance for his business. His
friend, Shiv telis him that government has established special institutions in the country to
P! Omote industrial development. He must contact any of these institutions to get the
financial assistance for his business.
(a) What do you understand by the term ' special institution'?
(b) Suggest the nanws of any four such institutions that Bhola may approach
(c) Also, provide a brief overview, of the special institutions suggested by you
13. Hira Limited, is a company dealing in organic products. The company requires
funds
es Ival season. The financial

manager of the company has suggested that the company can borrow funds from p
Limited. Panna Limited is a company dealing in glassware. anna (a) Name the
source the of raising funds that has been suggested by the

(b) Also state any three features of the source of finance as identified in part (a) of the

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