Chapter sources-of-business-finance: Sources of Business Finance Application Questions | business studies Class 11 CBSE

Chapter sources-of-business-finance: Sources of Business Finance Application Questions | business studies Class 11 CBSE | ByteNotes.in

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 1

Applied Concept

Mr. Anil Singh, a restaurant owner, wants to open a chain of restaurants but lacks sufficient personal funds. With reference to the chapter, suggest two suitable sources of finance and justify your recommendation.

Since Mr. Singh needs long-term funds for expansion, he could consider entering a partnership to bring in additional capital. A partner will contribute funds, though profits and control must be shared. Alternatively, a company form may allow him to issue shares.
A bank loan is another viable option — commercial banks provide medium-term loans with confidentiality and flexibility; the loan amount can be calibrated to the expansion cost and repaid in installments, matching cash flows from new outlets.
The best combination would depend on the scale of expansion, willingness to share control, and available security for a bank loan. For large-scale expansion, issue of shares via company formation offers permanent capital without repayment obligation.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 2

Applied Concept

A textile company has stable earnings and does not want to dilute the voting power of its existing shareholders. With reference to the chapter, identify the most appropriate source of long-term finance and justify your answer.

Debentures are the most suitable source as they raise long-term debt capital without carrying any voting rights; existing equity shareholders retain full control of the company.
Debentures are specifically recommended when sales and earnings are stable — the fixed interest obligation can be met comfortably from predictable profits without risk of default.
Additionally, interest paid on debentures is tax-deductible, reducing the effective cost of capital for the company compared to equity or preference shares where dividends are not tax-deductible.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 3

Applied Concept

A start-up technology company with good credit rating needs short-term funds for three months without creating any charge on its assets. Which source of finance would you recommend and why?

Commercial Paper (CP) is the ideal source as it is an unsecured short-term instrument that does not require any charge or security on the company's assets.
Being a highly rated firm, the company qualifies to issue CP, which can be structured for maturities between 7 days and one year — a 3-month tenure is well within the permissible range.
CP is freely transferable and its cost is generally lower than commercial bank loans, making it both economical and convenient for a company wishing to preserve its asset base for other potential uses.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 4

Applied Concept

Meenakshi Textiles Ltd. sells goods on credit to its dealers and faces a persistent cash flow problem. A financial consultant suggests factoring as a solution. Explain how factoring would help the company.

By selling its receivables (outstanding dues from dealers) to a factor at a discount, Meenakshi Textiles can immediately convert credit sales into cash, resolving its cash flow problem.
The factor takes over the responsibility of credit control and debt collection from the dealers, freeing the company's management to focus on core production and marketing activities.
Under non-recourse factoring, the factor also bears the risk of bad debts, protecting Meenakshi Textiles from losses arising from dealer defaults — an added financial security benefit.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 5

Applied Concept

A pharmaceutical company wants to upgrade its laboratory equipment, which becomes technologically obsolete every three years. Suggest the most appropriate source of finance with justification.

Lease financing is the most appropriate source as it allows the company to use the latest laboratory equipment without purchasing it outright, enabling cost-effective access to advanced technology.
Since equipment becomes obsolete every three years, the risk of obsolescence rests with the lessor (not the lessee), allowing the pharmaceutical company to replace outdated equipment at the end of each lease term.
Lease rentals are tax-deductible, reducing the company's taxable income, and the arrangement does not dilute ownership or control. It also preserves capital for investment in research and core business activities.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 6

Applied Concept

An established manufacturing company wants to raise Rs. 50 crore from the public to meet medium-term financial requirements without approaching banks. Suggest a suitable source and explain the conditions under which it would be successful.

Public deposits are the most suitable source as they allow the company to raise funds directly from the public for medium-term requirements without involving banks or financial institutions.
The success of mobilising public deposits depends largely on the company's reputation and track record — only established companies with a strong financial history can attract the public to deposit their savings.
The company must offer an interest rate higher than bank deposit rates to make it attractive to depositors; the acceptance of deposits is regulated by the RBI, which sets limits and conditions on the amounts and periods for which deposits can be accepted.

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 7

Applied Concept

Reliance Industries plans to raise $500 million from global investors without giving them voting rights in the company. Which international financial instrument would be most appropriate? Explain its features.

Global Depository Receipts (GDRs) are the most appropriate instrument as GDR holders do not carry any voting rights but receive dividends and benefit from capital appreciation.
Reliance would deliver its local currency shares to a depository bank abroad; the bank issues GDRs denominated in US dollars against these shares, which are then listed and traded on foreign stock exchanges.
GDRs allow Reliance to tap international capital markets to raise foreign currency, diversify its investor base globally, and access cheaper funds while retaining complete management control — since GDR holders carry no voting rights.

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Application Question

Easy difficulty • Concept in a practical situation

Easy

Question 8

Applied Concept

A small grocery shop owner needs funds for building up inventory for the festive season. Identify the most suitable source of finance and explain why it is appropriate for such a business.

Trade credit from suppliers is the most suitable source as it allows the grocery shop owner to build up festive season inventory by purchasing goods on credit without immediate payment.
Trade credit is a convenient and continuous source of short-term finance that requires no formal documentation or creation of charge on assets, making it ideal for small businesses with limited formal financial standing.
The festive season inventory will be converted to cash quickly after sales, allowing repayment within the credit period; this seasonal matching of credit period with sales cycle makes trade credit perfectly suited for this need.

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 9

Applied Concept

Shreya Ltd., a company with fluctuating profits, is planning to raise long-term finance. The finance manager cautions against fixed charge instruments. Explain this caution with reference to the chapter.

Fixed charge instruments like preference shares and debentures require payment of a fixed return (dividend or interest) regardless of whether the company earns profits or incurs losses.
For a company with fluctuating profits, this creates a heavy financial burden during loss periods — interest on debentures must be paid even when the company is not earning, risking default and damaging creditworthiness.
The chapter explicitly states that when earnings of an organisation are not stable, fixed charge funds should be carefully selected as they add to the financial burden; equity finance, which carries no fixed payment obligation, may be safer for companies with volatile earnings.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 10

Applied Concept

With reference to the chapter, explain why a partnership firm cannot raise funds by issuing equity shares, and suggest two alternative sources it can use.

According to the chapter, equity shares can only be issued by a joint stock company. The legal form of organisation influences the choice of source of finance, and a partnership firm is not permitted by law to issue shares to the public.
A partnership firm can raise funds by taking bank loans — commercial banks provide term loans to firms of all sizes with timely assistance, flexible repayment, and confidentiality.
The firm can also raise funds through public deposits (if it meets the relevant criteria) or through borrowings from partners' personal sources, friends, and relatives — avenues mentioned as appropriate for proprietary and partnership concerns in the chapter.

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Chapter sections

Chapter sources-of-business-finance: Sources of Business Finance | Application Questions

Mr. Anil Singh, a restaurant owner, wants to open a chain of restaurants but lacks sufficient personal funds. With reference to the chapter, suggest two suitable sources of finance and justify your recommendation.

A textile company has stable earnings and does not want to dilute the voting power of its existing shareholders. With reference to the chapter, identify the most appropriate source of long-term finance and justify your answer.

A start-up technology company with good credit rating needs short-term funds for three months without creating any charge on its assets. Which source of finance would you recommend and why?

Meenakshi Textiles Ltd. sells goods on credit to its dealers and faces a persistent cash flow problem. A financial consultant suggests factoring as a solution. Explain how factoring would help the company.

A pharmaceutical company wants to upgrade its laboratory equipment, which becomes technologically obsolete every three years. Suggest the most appropriate source of finance with justification.

An established manufacturing company wants to raise Rs. 50 crore from the public to meet medium-term financial requirements without approaching banks. Suggest a suitable source and explain the conditions under which it would be successful.

Reliance Industries plans to raise $500 million from global investors without giving them voting rights in the company. Which international financial instrument would be most appropriate? Explain its features.

A small grocery shop owner needs funds for building up inventory for the festive season. Identify the most suitable source of finance and explain why it is appropriate for such a business.

Shreya Ltd., a company with fluctuating profits, is planning to raise long-term finance. The finance manager cautions against fixed charge instruments. Explain this caution with reference to the chapter.

With reference to the chapter, explain why a partnership firm cannot raise funds by issuing equity shares, and suggest two alternative sources it can use.

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