Maharashtra Board Class 12 Secretarial Practice Important Questions Chapter 2 Sources of Corporate Finance

Balbharti Maharashtra State Board Class 12 Secretarial Practice Important Questions Chapter 2 Sources of Corporate Finance Important Questions and Answers.

Maharashtra State Board 12th Secretarial Practice Important Questions Chapter 2 Sources of Corporate Finance

1A. Select the correct answer from the options given below and rewrite the statements.

Question 1.
____________ is considered as Supreme controlling factor in business.
(a) Finance
(b) Material
(c) Machinery
Answer:
(a) Finance

Question 2.
A Company with share capital must issue ____________ shares.
(a) preference
(b) equity
(c) right
Answer:
(b) Equity

Question 3.
A person who purchases shares of a company is known as ____________
(a) Bondholder
(b) Shareholder
(c) creditor
Answer:
(b) Shareholder

Question 4.
A ____________ is indivisible unit of share capital.
(a) Debenture
(b) Share
(c) Bond
Answer:
(b) Share

Question 5.
A shareholder is entitled to receive ____________ as return on investment.
(a) Dividend
(b) Interest
(c) Discount
Answer:
(a) Dividend

Question 6.
____________ shares bear ultimate risk associated with ownership
(a) equity
(b) preference
(c) deferred
Answer:
(a) Equity

Question 7.
The control of the company is vested in ____________ shareholders.
(a) preference
(b) equity
(c) deferred
Answer:
(b) Equity

Question 8.
Bonus shares are issued as free gift to ____________ shareholder.
(a) equity
(b) deferred
(c) preference
Answer:
(a) Equity

Question 9.
Debentures are issued to raise ____________ capital.
(a) owned
(b) borrowed
(c) internal
Answer:
(b) Borrowed

Question 10.
Debentures are secured through ____________
(a) agreement
(b) trust deed
(c) contract
Answer:
(b) Trust Deed

Question 11.
Overdraft facility is allowed to ____________ account holder.
(a) savings
(b) current
(c) fixed
Answer:
(b) Current

Question 12.
Small retailers rely on ____________ credit from their suppliers.
(a) cash
(b) trade
(c) bank
Answer:
(b) Trade

Question 13.
____________ is the Depository receipt traded in countries other than USA.
(a) GDR
(b) ADR
(c) Fixed Deposit
Answer:
(a) GDR

1B. Match the pairs.

Question 1.

Group ‘A’	Group ‘B’
(1) Debenture holder	(a) Owners of the company
(2) Retained profit	(b) Capitalisation of profit
(3) Public deposit	(c) Savings account holder
(4) Overdraft facility	(d) Creditor of the company
(5) Equity shares	(e) Maximum 3 years
	(f) Maximum 5 years
	(g) Current account holder
	(h) Ploughing back of profit
	(i) Permanent capital
	(j) Temporary capital

Answer:

Group ‘A’	Group ‘B’
(1) Debenture holder	(d) Creditor of the company
(2) Retained profit	(h) Ploughing back of profit
(3) Public deposit	(e) Maximum 3 years
(4) Overdraft facility	(g) Current account holder
(5) Equity shares	(i) Permanent capital

1C. Write a word or a term or a phrase that can substitute each of the following statements.

Question 1.
The type of shareholders who can participate in the management of the company.
Answer:
Equity shareholders

Question 2.
Name the shareholder who attends a particular meeting when his interest is affected.
Answer:
Preference shareholder

Question 3.
Shareholders who are residual claimants against assets and income.
Answer:
Equity share

Question 4.
The type of shares which can be redeemed after a certain period of time.
Answer:
Redeemable preference shares

Question 5.
Debentures that can be redeemed after a particular date.
Answer:
Redeemable debentures

Question 6.
Debentures can be converted into equity shares after a specific period.
Answer:
Convertible debentures

Question 7.
A definite promise in writing from the buyer for paying a certain amount on a specific date.
Answer:
Bill of exchange

1D. State whether the following statements are true or false.

Question 1.
Preference shareholders do not enjoy normal voting rights.
Answer:
True

Question 2.
Equity shareholders are real owners and controllers of the company.
Answer:
True

Question 3.
Retained earnings is a difficult and costly method of raising capital.
Answer:
False

Question 4.
Debenture holders get a fixed rate of dividend.
Answer:
False

Question 5.
Debentures are secured with some property of the company.
Answer:
True

Question 6.
Public deposits are a good source of long-term financing.
Answer:
True

Question 7.
A private company can collect deposits from the general public.
Answer:
False

Question 8.
Providing loans to businesses is the primary function of banks.
Answer:
True

Question 9.
Financial institutions play an important role in financing industrial firms.
Answer:
True

1E. Find the odd one.

Question 1.
An equity share, Preference share, Bond
Answer:
Bond

Question 2.
Debenture, Bond, Preference share
Answer:
Preference share

Question 3.
Public deposits, Debentures, Retained earning
Answer:
Retained earnings

Question 4.
ADR, GDR, Fixed Deposit
Answer:
Fixed Deposit

Question 5.
6, 24, 36
Answer:
24

Question 6.
Bonds, Debentures, Shares
Answer:
Shares

1F. Complete the sentences.

Question 1.
The value of share which is determined by demand and supply forces in the share market is ____________
Answer:
Market value

Question 2.
The shares which have a preferential right over equity shares in respect of dividend and return of capital are ____________
Answer:
Preference shares

Question 3.
____________ preference shares which are redeemed after a certain period of time.
Answer:
Redeemable Preference Shares

Question 4.
____________ is the value of share which is written on the share certificate and mentioned in the Memorandum of Association.
Answer:
Face value

1G. Select the correct option from the bracket.

Question 1.

Group ‘A’	Group ‘B’
(1) Debentures	(a) …………………….
(2) ……………………	(b) Public deposit
(3) Bondholder	(c) ……………………..
(4) …………………..	(d) Equity share capital
(5) Depository Receipt traded in the USA	(e) ……………………..

(Maximum 36 months, Trust Deed, ADR, Creditor, Permanent Capital)
Answer:

Group ‘A’	Group ‘B’
(1) Debentures	(a) Trust Deed
(2) Maximum 36 months	(b) Public deposit
(3) Bondholder	(c) Creditor
(4) Permanent capital	(d) Equity share capital
(5) Depository Receipt traded in the USA	(e) ADR

1H. Answer in one sentence.

Question 1.
Who can accept the deposit?
Answer:
A public company having a net worth of not less than 100 crore rupees or a turnover of not less than 500 crore rupees; has obtained the prior consent of shareholders and resolution filed with Registrar before inviting deposits can accept deposits.

Question 2.
What are the minimum and maximum periods of deposits that can be accepted by the general public?
Answer:
Minimum 6 months and maximum 36 months is the period for accepting deposits from the general public.

Question 3.
Who is given overdraft facility?
Answer:
A current account holder of a bank is given an overdraft facility.

1I. Correct the underlined word/s and rewrite the following sentences.

Question 1.
Bondholders are owners of the company.
Answer:
Bondholders are creditors of the company.

Question 2.
Private companies can collect deposits from the public.
Answer:
Private companies cannot collect deposits from the public.

1J. Arrange in proper order.

Question 1.
Equity Shares, Preference Share, Debenture.
Answer:
Debentures, Preference shares, Equity Shares

Question 2.
Forecasting, Board Meeting, Issue of Securities
Answer:
Forecasting, Board Meeting, Issue of Securities

Question 3.
Call loans, debentures, short term loans
Answer:
Call Loans, Short term loans, Debentures

2 Explain the following terms/concepts.

Question 1.
Public Deposits
Answer:

Public deposits are unsecured deposits invited by public limited company’s to finance working capital needs.
Prior consent from shareholders must be with the passing of the special resolution and a copy of the same to be filed with the Registrar.

Question 2.
Bonds
Answer:

A bond is a debt security and a formal contract to repay borrowed money with interest.
A bondholder is a lender to the institution hence, the creditor.

Question 3.
Discounting of the bill of exchange
Answer:

Discounting of a bill of exchange is a facility in which the holder of the bill can convert the bill to cash by discounting (giving as security) the bill with the bank before the date of maturity.
The bank charges its commission (discounting charges) and pays the balance to the holder.
It is an advance/short-term loan given to the holder of the bill.

3. Study the following case/situation and express your opinion.

1. There are 2 companies namely company A and company B with the same financial positions and in the same line (producing the same type of products) willing to issue debentures to more than 500 people. Company A is issuing 12% redeemable debentures to be redeemed after 5 years and Company B is issuing 12% convertible debentures which will be converted after 5 years. As an investor.

Question (a).
Which company would one like to invest in?
Answer:
As an investor one would like to invest in Company B.

Question (b).
Is it worth investing or going for convertible or redeemable? Why?
Answer:
‘It is wise and worth investing in 12% Convertible debentures as for 5 years both companies are going to give same returns but after 5 years Company B gives conversion facility due to which creditor becomes a member and can enjoy all rights of membership.

Question (c).
Is there any party to be appointed to look into the safety of debenture holders?
Answer:
As the number of persons to whom the debentures are to be issued is more than 500, there has to be a party known as Debenture Trustee to be appointed who will look into the safety of Debenture holders.

2. A public limited company wants to invite depositor from the public at large as it neither wants to dilute its shareholdings nor at present want to use its reserves.

Question (a).
Does it require prior approval from shareholders?
Answer:
Yes, prior approval from shareholders is a must.

Question (b).
What type of resolution does the company need to pass?
Answer:
The company needs to pass a special resolution for allowing to invite and accept deposits.

Question (c).
Is it necessary to file the resolution with the Registrar?
Answer:
Yes, a copy of the special resolution passed in the general meeting has to be filed before inviting the deposits.

3. A Company has an export order which is to be completed by June 15. It feels it may fall short of funds (₹ 5,00,000) as all its investments are likely to mature after July 15.

Question (a).
Does it cancel the export order?
Answer:
No, it need not cancel the order as it can approach a bank in which it has its current account for providing the funds.

Question (b).
What financial arrangements are to be made if it has to complete the order?
Answer:
It can enter into or avail overdraft facility for the required term period so that in case it falls short of funds, it can overdraw the required amount.

Question (c).
What is the amount of interest it has to pay?
Answer:
It will have to pay interest on excess amount overdrawn and for the term, it has used this extra amount.

4. A trader has drawn a bill of exchange for ₹ 50,000 on the sales made to a trader. The bill is drawn on the 1st of March 2020 for a period of 4 months. It is already a month from the date of the drawing.

Question (a).
Is there any source of finance available to him?
Answer:
Yes, a bill of exchange can act as a security and on the basis of the security, finance can be available to the trader.

Question (b).
Can he in present situation avail any facilities?
Answer:
Yes even though a month has been completed, discounting facility with the bank is available.

Question (c).
How will the charges be calculated?
Answer:
Discounting charges will be calculated on the bill amount for 3 months at the prevailing rate decided by the bank.

4. Answer in brief.

Question 1.
What are the different sources of finance?
Answer:
(i) A business organisation requires finance

for various purposes
at different stages
for different term/period

(ii) The nature and size of the business determine the actual requirement of funds.

(iii) The company collects huge funds through different sources depending on the time period the funds are needed.

The various sources of finance available to the business may be as follows.
(a) External Sources: When capital is raised from outsiders/ outside the firm.

Used for collecting initial capital

The important external sources are:

Issue of shares
Issue of debentures/bonds
Public deposits
A loan from financial institutions
Bank Credit

(b) Internal Sources:

The capital is made available from within the organisation.
This is developed after a few years of profitable working of the firm.
The important internal source of finance is retained profit also known as ‘ploughing back of profit.’
The undistributed profit of the firm is re-invested in the business.

The external sources and internal sources can be further classified depending upon the financial requirements as:
(a) Long-term source: A business requires long-term finance for meeting fixed capital needs i.e. for a long duration.

The main sources of long term finance may be:

Owned capital
Debt capital

(b) Short-term source: The short-term funds are required for meeting short-term requirements i.e. working capital requirement. The short term funds are arranged by means of

Public deposits
Bank credit
Trade credit
Loans from Directors
Advance from customers
Native money lenders
Government assistance

Question 2.
Describe different types of equity shares.
Answer:
The equity shares can be of two types:
(i) Equity share (with normal) with voting rights

The voting right of such equity holders is in proportion to his shareholdings.

(ii) Equity shares with differential voting right

Such equity shareholders shall have varying rights regarding dividend voting or otherwise in accordance with Rule 4 of Companies Act (Share Capital and Debenture) Rules 2014.
A company can thus, issue shares with limited voting rights or no voting rights.
They may be entitled to an extra rate of dividend.

Question 3.
What are retained earnings? What are the determinants of retained earnings?
Answer:

A part of the profit is retained by the company in the form of the reserve fund.
It is sum total of those profits, accumulated over the years and are reinvested in the business rather than distributed as dividends.
The process of accumulating corporate profits and their utilization in business is called ‘self-financing or ploughing back of profit.
It is the simple and cheapest method of raising finance by established companies.

Determinants of retained profits.
(i) Total earning of the company:

The company can save and retain some part of the profit, if there is ample profit ‘Larger the earnings, larger the savings.’
It is subject to the attitude of top management to determine the part of retained earnings.

(ii) Taxation policy:

The taxation policy of the government is an important determinant of corporate savings.
If the taxes rates charged/levied are high, a company cannot save much in the form of reserves.

(iii) Dividend policy:

The policy of the Board of Directors as regards to the distribution of profit is another determinant.
A conservative dividend policy helps to have a good accumulation of profit.
The conservative policy affects the shareholders as they get dividends at a low rate.

(iv) Government Control:

A Government is a regulatory body of the economic system of the country.
Its policies, rules, and regulations compel the companies to work in that direction.
A Company has to formulate its dividend policy in accordance with the rules and regulations formed by the government.

(v) Expenditure policy of the company:

The expenditure of the company is classified as capital expenditure and revenue expenditure.
More and more expenditure of the company towards various projects and needs will be responsible to lesser saving and lesser retain earning.

Question 4.
List out the Financial Institutions in India.
Answer:

The Government has established special financial institutions for providing industrial finance.
These institutions provide medium and long-term finance.
They provide assistance to new companies as well as ongoing companies in the form of term loans, subscribing for shares and debentures, underwriting securities, and guaranteeing loans raised by cost.

(i) Development Banks:
They provide risk capital for economic development projects on a non-commercial basis. They play a crucial role in providing credit in the form of high-risk loans, equity positions, and risk guarantee instruments.
They include:

Industrial Development Bank of India (IDBI)
Industrial Finance Corporation of India Ltd. (IFCI)
Industrial Credit and Investment Corporation of India Ltd. (ICICI)
Small Industries Development Bank of India (SIDBI)
Industrial Reconstruction Bank of India (IRBI)

(ii) Financial Institutions:
They are institutions engaged in business dealing with financial and monetary transactions such as deposits, loans, investments, and currency exchange.
They include:

Risk Capital and Technology Finance Company Ltd. (RCTC)
Technology Development and Information Company of India Limited (TDICI)
Tourism Finance Corporation of India Limited (TFCI)

(iii) Investment Institutions:
Institutional investors are organisations that pool together on behalf of others and invest those funds in a variety of different financial instruments and asset classes.

They may be investment funds like Mutual funds, ETFs, (Exchange Traded Funds) Insurance Funds, Pension plans as well as investment banks and hedge Funds (alternative investment designed to protect investment portfolios from market uncertainty) They include:

Life Insurance Corporation of India (LIC)
Unit Trust of India (UTI)
General Insurance Corporation of India (GIC)

(iv) State Level Institutions:

They are financial agencies at the state level for the development of medium and small-scale industries. They include:
State Financial Corporations (SFC)
State Industrial Development Corporation (SIDC)

Question 5.
Explain the need/Importance/Significance of Institutional Financing.
Answer:
Financial Institutions provide debt capital to business enterprises and their need and importance may be as follows:
(i) To develop a sound capital market:

Financial Institutions help in developing a sound financial capital market.
They help in promoting and financing business enterprises either by underwriting issues or by subscribing to shares.

(ii) To mobilize financial resources:

Financial, institutions mobilize the scattered savings, merge them and provide the same to industries.
Capital is reluctantly provided to new ventures.
Financial Corporations have become important for the economic development of economically backward countries that fail to mobilize financial resources for development.

(iii) Capital Formation:

The rate of capital formation is very low in developing countries due to low per capita income and a lack of sufficient savings.
The gap between saving and investment is filled by financial institutions.

(iv) Planned Economy:

Financial institutions play an important role in the planned economic development of the country.
The projects of national importance are taken up by them.
Scarce finance resources are utilized at the optimum level.
Certain basic industries like iron and steel, cement, etc. are developed by the government through these institutions.

(v) Financing Small Business:

Special Corporations like SIDBI have been established for financing small-scale industries.
The problems related to small business are of different nature which is tackled by such setup corporations.

(vi) Foreign Exchange Need:

Foreign exchange requirement is also one of the needs of such institutions.
They provide long-term loans in foreign curries.

(vii) Government taxation policy:

Business enterprises depend more on debt capital as investment/amount paid against debt is tax-deductible expenditure.
Financial institutions provide such debts to business organisations.

(viii) Rate of Interest:

The corporations charge a uniform rate of interest, irrespective of the amount of loan in relation to the total cost.
This also has become the reason for heavy borrowing from such institutions.

5. Justify the following statements.

Question 1.
Public Companies can accept deposits from the public.
Answer:

Public companies having a net worth of not less than ₹ 100 crores or a turnover of fewer than ₹ 500 crores can accept deposits from the general public.
A meeting has to be convened to get the approval of shareholders.
After consent, a special resolution has to pass and the same has to be filed with the Registrar.
Advertisements in newspapers have to be given to let people know regarding the acceptance of deposits.
Deposits thus can be accepted for a minimum period of 6 months and a maximum period of 36 months or 3 years.
Thus, it is rightly said, that public companies can accept deposits from the public.

6. Attempt the following questions.

Question 1.
Explain any five features of equity shares?
Answer:
Features of equity shares:
(i) Permanent Capital:

Equity shares are irredeemable shares. It is permanent capital.
The amount received from equity shares is not refunded by the company during its lifetime.
Equity shares become redeemable/refundable only in the event of the winding-up of the company or the company decides to buy back shares.
Equity shareholders provide long-term and permanent capital to the company.

(ii) Fluctuating dividend:

Equity shares do not have a fixed rate of dividend.
The rate of dividend depends upon the amount of profit earned by the company.
If a company earns more profit, the dividend is paid at a higher rate.
If there is insufficient profit, the Board of Directors may postpone the payment of dividends.
The shareholders cannot compel them to declare and pay the dividend.
The dividend is thus, always uncertain and fluctuating.
The income of equity shares is uncertain and irregular.

(iii) Controlling power:

The control of a company vests in the hands of equity shareholders.
They are often described as real masters of the company as they enjoy exclusive voting rights.
Equity shareholders may exercise their voting right by proxies, without attending the meeting in person.
The Act provides the right to cast vote in proportion to the number of shareholdings.
They participate in the management of the company.
They elect their representatives called the Board of Directors for management of the company.

(iv) Market value:

Market value fluctuates according to the demand and supply of shares.
The demand and supply of equity shares depend on profits earned and dividends declared.
When a company earns huge profits, the market value of shares increases.
When it incurs loss the market value of shares decreases.
There are frequent fluctuations in the market value of shares in comparison to other securities.
Equity shares are more appealing to speculators.

(v) Capital Appreciation:

Share capital appreciation takes place when the market value of a sharp increase in the share market.
The profitability and prosperity of the company enhance the reputation of the company in the share market and thus, facilitates appreciation of the market value of equity shares.

Question 2.
Explain any four types of preference shares?
Answer:
(i) Cumulative Preference Shares:

Cumulative preference shares are those shares on which dividend accumulates until it is fully paid.
That is, if the dividend is not paid in one or more years due to inadequate profit, then such unpaid dividend gets accumulated and is carried forward till next year.
The accumulated dividend is paid when the company performs well.
The arrears of dividends are paid before making payment to equity shareholders.
The preference shares are always cumulative unless otherwise stated in Articles of Association.

(ii) Participating Preference Shares:

The holders of these shares are entitled to participate in surplus profit besides preferential dividends.
They participate in the high-profit condition of the company.
Surplus profit here means excess profit that remains after making payment of dividends to equity shareholders.
Such surplus profit up to a certain limit is distributed to preference shareholders.

(iii) Non-Convertible Preference Shares:

These shares are not converted into equity shares.
They will remain as preference shares forever till paid back.

(iv) Irredeemable Preference Shares:

Shares which are not redeemable are payable only on winding up of the company and are called irredeemable preference shares.
As per section 55(1) of the Companies Act 2013, the company cannot issue irredeemable preference shares in India.

Question 3.
Explain features of debentures.
Answer:
Features of Debenture:
(i) Written Promise:
A debenture is a written promise by a company that it owes a specified sum of money to the holder of the debenture.

(ii) Priority of Payment:
Debenture holders have a priority in repayment of their capital over other claimants of the company. The amounts of debentures are settled before shareholders.

(iii) Assurance of repayment:

Debenture constitutes a long-term debt.
They carry an assurance of repayment on the due date.

(iv) Terms of issue and redemption of Debenture:

Debenture can be issued at par, premium, and even at discount.
Its redemption takes place only at par and premium.

(v) Interest:

A fixed-rate of interest is agreed upon and is paid periodically.
The rate of interest that a company pays/offers, depends upon the market conditions and nature of the business.
Payment of interest is a liability of a company. It has to be paid whether the company makes a profit or not.

(vi) Status of Debenture holder:

The debenture holder is a creditor of the company.
Debenture being loan taken by the company interest is payable on it at fixed internal and fixed-rate till redeemed/paid.
They cannot participate in the management of the company.

(vii) No Voting Right:

According to sec. 71(2) of Companies Act 2013, no company shall issue debenture carrying voting rights.
Debenture holders do not have the right to vote in the general meetings of the company.

(viii) Security:

Debenture can be secured with some property of the company by fixed or floating charge.
Debenture holders can sell of charged property of the company and recover their money if the company is not in a position to make payment of interest or repayment of capital.

Question 4.
Explain the features of bonds.
Answer:
(i) Nature of finance:

It is debt or loan finance.
It provides long-term finance 5 years, 10 years, 25 years, 50 years.

(ii) Status of investor:

The bondholders are creditors.
They are non-owners and hence, not entitled to participate in the general meetings.
The bondholder has no right to vote.

(iii) Return on bonds:

The bondholders get a fixed rate of interest.
It is payable on maturity or at a regular interval.
Interest is paid to the bondholder at a fixed rate.

(iv) Repayment:

A bond is a formal contract to repay borrowed money.
Bonds have a specific maturity date, on which the principal amount is repaid.