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

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

Case Study

Passage with linked questions

Case Set

Case Set 1

Case Analysis

Passage

Priya started a small garment manufacturing unit two years ago using her personal savings. Initially, the business ran smoothly, but as demand for her products grew, she realised that her working capital was becoming insufficient. She needed funds to purchase more raw materials, pay wages on time, and manage day-to-day expenses. Her chartered accountant advised her to look into trade credit from suppliers, but also mentioned that she could approach commercial banks for a short-term loan. Priya was also informed that retaining a portion of her profits instead of withdrawing everything could help build internal reserves. She is now evaluating which combination of sources would be most cost-effective and suitable for her working capital requirements without putting undue burden on the business.

Question 1: What is working capital and why does Priya need it?

Working capital refers to funds required for day-to-day operations of a business.
Priya needs it to purchase raw materials, pay wages, and meet current expenses like rent and taxes.

Question 2: How does trade credit help Priya in managing her working capital needs?

Trade credit allows Priya to purchase raw materials and supplies without making immediate payment.
It is a convenient and continuous source that does not create a charge on assets, helping her manage short-term fund requirements.

Question 3: Compare retained earnings and commercial bank loans as sources of working capital for Priya, highlighting the advantages and limitations of each.

Retained earnings involve no explicit cost like interest or dividend, and provide operational freedom without creating a charge on assets; however, they depend on profits and excessive retention may cause dissatisfaction.
Commercial bank loans provide timely assistance and are flexible, but they require security, involve detailed investigation, and carry interest obligations even during low-profit periods.
For a small business like Priya's, retained earnings are more cost-effective, while bank loans are useful when funds needed exceed internal capacity.

ByteNotes

Case Study

Passage with linked questions

Case Set

Case Set 2

Case Analysis

Passage

Rajan Textiles Pvt. Ltd. is a medium-sized company planning to set up a new manufacturing plant worth ₹5 crore. The management is considering different options for long-term finance. One director suggests issuing equity shares to the public, while another prefers issuing debentures to avoid dilution of ownership. The finance manager points out that equity shares come with no obligation to pay dividends but may dilute control, whereas debentures carry a fixed interest burden. The company's current earnings are stable and it has a good credit rating. The board is also exploring loans from financial institutions like IDBI or IFCI. They want a mix that balances cost, control, and risk, ensuring the plant becomes operational without financial strain.

Question 1: Why are equity shares considered a suitable source for long-term finance?

Equity share capital is permanent — it need not be repaid except during liquidation.
No compulsory dividend payment reduces financial burden; funds can be raised without creating a charge on assets.

Question 2: Why would Rajan Textiles prefer debentures over equity shares to avoid dilution of control?

Debentures do not carry voting rights, so existing shareholders retain full managerial control.
Interest on debentures is tax deductible, making it a less costly option compared to equity dividends.

Question 3: Evaluate the role of financial institutions as a source of long-term finance for Rajan Textiles. What are the key merits and limitations?

Financial institutions like IDBI provide long-term loans not generally available from commercial banks, with repayment in easy instalments.
They also offer financial, managerial, and technical advice, and borrowing from them enhances the company's goodwill in the capital market.
However, they follow rigid criteria, involve excessive formalities, may restrict dividend payments, and can place nominees on the Board of Directors, limiting company autonomy.

ByteNotes

Case Study

Passage with linked questions

Case Set

Case Set 3

Case Analysis

Passage

Technocraft Ltd. is a well-established company with a strong credit rating and stable revenue streams. The CFO is exploring short-term financing options for bridging a temporary cash gap of ₹50 lakh caused by delayed receivables. The company's bank has offered a cash credit facility, but the interest rate seems high. An alternative option is to issue a Commercial Paper (CP) in the money market. The CFO notes that CPs are unsecured and can be issued at a discount, making them cheaper than bank credit. However, the finance team is concerned that CPs cannot be extended in case of financial difficulties and are only available to highly rated companies. A decision must be made quickly to ensure smooth operational continuity.

Question 1: What is a Commercial Paper and who can issue it?

A Commercial Paper is an unsecured money market instrument issued in the form of a promissory note to raise short-term funds.
Only highly rated corporate borrowers, primary dealers, and all-India financial institutions with strong creditworthiness can issue CPs.

Question 2: What makes Commercial Paper a more attractive option than a bank loan for Technocraft Ltd.?

CPs are generally cheaper than commercial bank loans and are sold on an unsecured basis with no restrictive conditions.
They are freely transferable, have high liquidity, and can be tailored to suit the maturity requirements of the issuer.

Question 3: Discuss the limitations of Commercial Paper that the finance team of Technocraft Ltd. should consider before making the final decision.

CPs can only be issued by financially sound and highly rated firms; new or moderately rated firms cannot access this market.
The amount that can be raised is limited to the excess liquidity available with suppliers of funds at a given time.
CP is an impersonal method of financing — if the firm faces financial difficulty, extending the maturity of CP is not possible, making it a rigid instrument.

ByteNotes

Case Study

Passage with linked questions

Case Set

Case Set 4

Case Analysis

Passage

Meghna Exports Ltd. is an Indian company looking to expand its operations globally and needs foreign currency funds. The company has been advised by its investment banker to consider raising funds through Global Depository Receipts (GDRs) or Foreign Currency Convertible Bonds (FCCBs). The management wants to understand the features, advantages, and differences between these two instruments. The CFO is particularly interested in knowing whether the holders of these instruments would have any voting rights or management control. The legal advisor has also cautioned that the company must comply with SEBI guidelines and RBI regulations before proceeding with any international financing instrument.

Question 1: What is a GDR and how is it created?

A GDR (Global Depository Receipt) is a negotiable instrument issued by a depository bank against local currency shares of an Indian company.
The Indian company deposits its shares with a depository bank, which then issues GDRs denominated in US dollars, listed and traded on foreign stock exchanges.

Question 2: How are FCCBs different from GDRs as instruments for international financing?

FCCBs are equity-linked debt securities that carry a fixed interest rate and can be converted into equity shares or depository receipts after a specified period.
GDRs are depository receipts representing existing equity shares and do not carry interest, while FCCBs are bonds and carry a fixed (lower) rate of interest.

Question 3: Explain the rights of GDR and FCCB holders with respect to voting rights, dividends, and conversion. How does this affect management control at Meghna Exports Ltd.?

GDR holders do not carry any voting rights; they are entitled only to dividends and capital appreciation, so they do not affect management control.
FCCB holders have the option to convert bonds into equity shares at a predetermined rate; upon conversion, they become equity shareholders and may gain voting rights.
Until FCCBs are converted, management control remains intact; however, post-conversion, there may be dilution of control if a large number of bonds are converted into equity.

ByteNotes

Case Study

Passage with linked questions

Case Set

Case Set 5

Case Analysis

Passage

Sunrise Pharma Ltd. is a growing pharmaceutical company that requires funds for modernising its existing machinery. Instead of purchasing the equipment outright, the finance manager suggests lease financing. Under this arrangement, a leasing company will purchase the equipment and Sunrise Pharma will use it by paying periodic lease rentals. The company believes this will conserve cash and avoid the risk of technological obsolescence. However, one of the directors raised concerns about the loss of ownership rights and restrictions that might be imposed by the lessor on the use of the equipment. The company wants to weigh the pros and cons before making a final decision.

Question 1: What is lease financing? Who are the parties involved?

Lease financing is a contractual arrangement whereby the owner of an asset (lessor) grants the right to use the asset to another party (lessee) in return for periodic lease rentals.
The parties involved are the lessor (owner of the asset) and the lessee (user of the asset).

Question 2: How does lease financing help Sunrise Pharma avoid technological obsolescence?

Under lease financing, the risk of obsolescence is borne by the lessor, not the lessee.
At the end of the lease period, Sunrise Pharma can return the old equipment and lease newer technology, giving it greater flexibility to upgrade.

Question 3: Analyse the limitations of lease financing that Sunrise Pharma's director is concerned about. Are these concerns valid?

Lease agreements may impose restrictions on modifying or altering the equipment, limiting operational flexibility for the lessee.
If the lease is not renewed, normal business operations may be disrupted — a valid concern for critical manufacturing equipment.
The lessee never becomes the owner of the asset and is deprived of its residual value; premature termination may lead to higher financial obligation, making the director's concerns entirely valid.

ByteNotes

Premium Access

Unlock all Case Study sets

You are viewing 5 free case study sets from this chapter. Upgrade to Premium to unlock the remaining 10 sets.

Upgrade to Premium10 questions locked

Chapter sections

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

Passage

Question 1: What is working capital and why does Priya need it?

Question 2: How does trade credit help Priya in managing her working capital needs?

Question 3: Compare retained earnings and commercial bank loans as sources of working capital for Priya, highlighting the advantages and limitations of each.

Passage

Question 1: Why are equity shares considered a suitable source for long-term finance?

Question 2: Why would Rajan Textiles prefer debentures over equity shares to avoid dilution of control?

Question 3: Evaluate the role of financial institutions as a source of long-term finance for Rajan Textiles. What are the key merits and limitations?

Passage

Question 1: What is a Commercial Paper and who can issue it?

Question 2: What makes Commercial Paper a more attractive option than a bank loan for Technocraft Ltd.?

Question 3: Discuss the limitations of Commercial Paper that the finance team of Technocraft Ltd. should consider before making the final decision.

Passage

Question 1: What is a GDR and how is it created?

Question 2: How are FCCBs different from GDRs as instruments for international financing?

Question 3: Explain the rights of GDR and FCCB holders with respect to voting rights, dividends, and conversion. How does this affect management control at Meghna Exports Ltd.?

Passage

Question 1: What is lease financing? Who are the parties involved?

Question 2: How does lease financing help Sunrise Pharma avoid technological obsolescence?

Question 3: Analyse the limitations of lease financing that Sunrise Pharma's director is concerned about. Are these concerns valid?

Unlock all Case Study sets