RBSE Solutions Class 11 Business Studies Chapter 5 Business Capital Finance

RBSE Class 11 Business Studies Chapter 5 Textual Questions and Answers

RBSE Class 11 Business Studies Chapter 5 Multiple Choice Questions

 

Question 1. Equity shareholders are called -
(a) Owners of the company
(b) Partners of the company
(c) Officers of the company
(d) Employees of the company
Answer: (a) Owners of the company
In simple words: Equity shareholders are the people who actually own a part of the company. They share in the company's success and risks, making them the true proprietors.

🎯 Exam Tip: Remember that equity shareholders are distinct from debenture holders (creditors) and preference shareholders (who have specific prior rights). Understanding their role is key.

 

Question 2. Public deposits are those deposits which are collected from -
(c) public
Answer: (c) public
In simple words: Public deposits are funds gathered directly from the public by companies, usually to meet their short-term financial needs. It is a way for companies to borrow money from individuals.

🎯 Exam Tip: Public deposits offer a simple way for companies to raise capital, but they also carry risks for depositors, as they are often unsecured.

 

Question 3. In lease financing, the lessee gets the right to -
(a) profits earned by the lessor
(b) use the assets for a specific period
(c) sell the assets
(d) participate in the management of the organisation
Answer: (b) use the assets for a specific period
In simple words: When you lease something, you get to use it for a certain time, but you don't own it. The owner lets you use their item for rent.

🎯 Exam Tip: Lease financing is beneficial because it allows businesses to use expensive assets without buying them outright, thus saving capital expenditure.

 

Question 4. The maturity period of commercial papers is between -
(a) 20 - 40 days
(b) 60 - 90 days
(c) 120 - 165 days
(d) 90 - 364 days
Answer: (d) 90 - 364 days
In simple words: Commercial papers are like short-term loans that companies use for a few months to a year. They help companies get quick cash.

🎯 Exam Tip: Commercial papers are typically unsecured and issued by highly creditworthy companies to meet short-term funding needs, making them a common money market instrument.

 

Question 5. The duration of long term loans is -
(a) one year
(b) three years
(c) two years
(d) five or more years
Answer: (d) five or more years
In simple words: Long-term loans are for big plans that take a lot of time, like building a new factory. These loans are paid back over many years.

🎯 Exam Tip: Long-term loans are crucial for funding large projects and investments that yield returns over an extended period, ensuring stable financial planning for growth.

RBSE Class 11 Business Studies Chapter 5 Very Short Answer Type Questions

 

Question 2. Give the meaning of Preference shares.
Answer: Preference shares are a type of share that gives special rights to their holders. These shareholders receive a fixed amount of return (dividend) before equity shareholders. They also get priority for repayment of capital if the company closes down. This makes them a safer investment than equity shares.
In simple words: Preference shares give special benefits like getting paid dividends first and getting money back first if the company shuts down.

🎯 Exam Tip: Highlight "fixed rate of return" and "preferential priority" as key terms when defining preference shares to ensure full marks.

 

Question 3. What is lease financing?
Answer: Lease financing is a type of contract where the owner of an asset, called the lessor, allows another party, the lessee, to use that asset for a specific time. In return, the lessee makes regular payments to the lessor. It is like renting an asset for business use. This method helps businesses use necessary equipment without having to buy it fully.
In simple words: Lease financing is when you rent an asset from its owner for a set period and pay them regularly for its use.

🎯 Exam Tip: When explaining lease financing, clearly state the roles of the 'lessor' (owner) and 'lessee' (user) and mention the 'periodic payment' as a core component.

 

Question 4. What is a Bank Overdraft?
Answer: A bank overdraft is a special arrangement that allows current account holders to withdraw more money than they have in their bank account, up to a certain limit. This facility helps businesses manage temporary cash shortages. Interest is charged only on the extra amount used and for the period it is overdrawn.
In simple words: A bank overdraft lets you take out more money than you have in your account, up to a limit, and you pay interest on the extra amount used.

🎯 Exam Tip: Emphasize that bank overdrafts are typically for current account holders and are a short-term financing option for managing liquidity.

 

Question 5. What is Owner's fund?
Answer: Owner's fund refers to the money put into a business by its owners. This includes the capital they directly contribute and any profits the company has kept over time instead of paying them out to shareholders. These funds are considered permanent capital for the business. They form the base of the company's financial structure.
In simple words: Owner's fund is the money put into the business by the owners, plus any profits the company has saved.

🎯 Exam Tip: When discussing owner's funds, distinguish between initial capital contributions and retained earnings, as both are crucial components.

 

Question 6. What do you mean by retained Earnings?
Answer: Retained earnings are the portion of a company's net profits that are not given out to shareholders as dividends. Instead, this money is kept by the company and can be used for reinvestment in its core business operations, for future expansion, or to pay off existing debts. They represent accumulated profits saved over time. This makes the company stronger financially.
In simple words: Retained earnings are the profits a company keeps instead of paying them as dividends, using them to grow or pay debts.

🎯 Exam Tip: Emphasize that retained earnings are an internal source of finance, signifying a company's ability to self-fund its growth without taking on new debt or equity.

RBSE Class 11 Business Studies Chapter 5 Short Answer Type Questions

 

Question 1. Give four differences between overdraft and cash credit.
Answer: Four differences between overdraft and cash credit are:
1. Bank loan/cash credit can be given to any person/firm/business, while bank overdraft facility is given only to current account holders.
2. In cash credit, the sanctioned loan amount is put into a separate account. For a bank overdraft, no such separate account is needed.
3. For cash credit, businesses usually need to offer physical assets as security. In contrast, bank overdrafts are often given without requiring any security.
4. The interest rate for cash credit is generally higher than that for a bank overdraft. This is because cash credit typically involves larger amounts and longer terms.
In simple words: Overdrafts are mainly for current account holders without security, while cash credit can be for anyone with security and has a higher interest rate.

🎯 Exam Tip: When comparing overdraft and cash credit, focus on the eligibility (current account vs. any business), the need for a separate account, security requirements, and the interest rate differences.

 

Question 2. Distinguish equity and preference shares (any four).
Answer:

In simple words: Equity shares come with higher risk and voting rights, while preference shares have lower risk, no voting rights, and get fixed dividends first.

🎯 Exam Tip: For distinction questions involving tables, ensure a clear "Basis of Difference" column and concise, parallel points for comparison to earn full marks.

 

Question 3. What are Redeemable and Non - Redeemable Debentures?
Answer: Redeemable debentures are those that a company promises to pay back to the holders after a specific period of time or on a specific date. These debentures are typically paid back at the end of their fixed term. This provides a clear exit for investors. Non-redeemable debentures, on the other hand, are not paid back during the company's lifetime. They are repaid only when the company is closing down. These are often seen as permanent capital for the company.
In simple words: Redeemable debentures are paid back by the company after a set time, while non-redeemable ones are paid back only when the company closes.

🎯 Exam Tip: The key difference lies in the repayment timeline: "specific period" for redeemable and "winding up of the company" for non-redeemable debentures.

 

Question 4. Difference between shares and Debentures as a source of finance.
Answer: Difference between shares & Debentures:

In simple words: Shares represent ownership with voting rights and variable returns, while debentures are loans with no ownership, no voting rights, but fixed returns.

🎯 Exam Tip: Focus on the fundamental difference: shares represent ownership and equity, while debentures represent debt and a creditor relationship. This helps understand control, risk, and return.

 

Question 5. What is portfolio Investment?
Answer: Portfolio investment is when foreign investors buy shares and debentures of Indian companies. This type of investment is a way for foreign capital to enter the country without direct control over the management of the company. It is also known as foreign direct investment, but specifically refers to financial assets rather than creating new facilities. It helps bring capital for company growth.
In simple words: Portfolio investment is when foreigners buy shares or bonds in Indian companies without taking control of the business.

🎯 Exam Tip: Differentiate portfolio investment from foreign direct investment (FDI) by noting that portfolio investment involves buying existing securities without management control, whereas FDI often involves creating new assets or significant ownership.

RBSE Class 11 Business Studies Chapter 5 Essay Type Questions

 

Question 1. Explain in detail Trade Credit as Internal Source of finance to business enterprise.
Answer: Trade credit is a type of financing where one business allows another business to buy goods or services now and pay for them later. It is essentially a short-term loan extended by a supplier to a customer. This means a buyer can get inventory or services without needing to make an immediate payment. It acts as an internal source of finance because it involves managing cash flow within the business's operational cycle, by delaying payments to suppliers. Many businesses use this to keep their operations smooth.
**Merits of Trade Credit:**
1. It is a very reliable and easy process to get. Businesses can often arrange it quickly.
2. Getting credit from suppliers can make it easier to get credit from other places too.
3. It helps increase sales because businesses can offer flexible payment terms to customers.
4. It does not affect the physical property or assets of the business, as no assets are pledged.
**Demerits of Trade Credit:**
1. Sometimes, relying too much on trade credit can lead to risks if the business cannot pay its suppliers on time.
2. It can become an expensive way to get money if the business misses out on cash discounts by not paying early.
3. It is a non-economic source of finance because it does not involve actual cash transfer, but rather delayed payment for goods or services.
**Bank Credit:**
Bank credit is a type of short-term loan provided by commercial banks to businesses. It helps companies meet their working capital needs. It can be divided into two main parts:
1. **Direct Credit:** This is a loan given directly to bank employees or specific individuals, with the amount depending on their current status.
2. **Cash Credit:** This is an agreement where the bank allows a customer to withdraw a certain sanctioned amount as a loan, which is then added to their account.
**Merits of Bank Credit:**
1. It provides loans to businesses or individuals who need money.
2. It offers secrecy, meaning the loan details are kept private.
3. It is relatively easy to get a loan if all requirements are met.
4. The interest rate on bank credit can be changed based on market conditions.
**Limitations of Bank Credit:**
1. Renewing short-term loans can be difficult, as they are not meant for long periods.
2. If a business takes another loan, banks might find it harder to check their creditworthiness. This makes investigating new loan requests difficult.
3. Banks often have many strict conditions for loan applications, which can limit how easily businesses can get funds.
In simple words: Trade credit lets businesses buy now and pay later, helping sales and cash flow, but it can be risky and expensive if cash discounts are missed. Bank credit is short-term loans from banks, helpful for quick cash, but renewal can be hard and banks have strict rules.

🎯 Exam Tip: When detailing trade credit and bank credit, ensure you explain both their benefits (ease of access, sales growth) and drawbacks (cost, risk, strict conditions) to show a comprehensive understanding.

 

Question 2. Name the sources of long term finance.
Answer: Sources of long term finance are as follows:
1. **By Issue of Shares:** The money raised by selling shares is known as share capital. The people who own these shares are called shareholders. Shares can be of two types:
    • **Equity Shares:** These are shares where the owners are not promised a fixed dividend and do not have a priority right to get their capital back if the company closes. The share capital is considered equity shares.
    • **Preference Shares:** These are shares that offer a fixed return rate and get special priority for receiving dividends and getting capital back during company closure.
2. **Issue of Debentures:** Debentures are tools used to raise long-term debt capital. Regular interest is paid on debentures at a fixed rate, similar to a loan taken by the company.
3. **Public Deposits:** This involves collecting money from the public for a set period at a fixed interest rate. Public deposits are a cheaper source of finance compared to bank loans for companies, and they offer higher interest rates to depositors.
4. **Reinvestment of Earnings (Retained Earnings):** This refers to the portion of a company's profits that are not distributed to owners as dividends but are kept and reinvested in the business. These earnings are recorded in the current account of the balance of payment.
5. **Loans from Commercial Banks:** Commercial banks play a big role in providing funds to large industrial businesses. They offer loans to companies to help them achieve their various goals.
6. **Institutional Finance:** Governments have set up special financial institutions to provide long-term finance to businesses. These institutions also offer services like marketing support. These different methods allow companies to get the money they need for big projects over many years.
In simple words: Long-term finance comes from selling shares (equity or preference), issuing debentures, taking public deposits, reinvesting profits, getting bank loans, or from specialized financial institutions.

🎯 Exam Tip: When listing long-term finance sources, ensure you briefly describe each, mentioning key features like ownership (shares), debt (debentures), or internal funding (retained earnings).

 

Question 3. Explain in detail different kinds of long term sources of finance.
Answer: Long term sources are the funds needed for more than 5 years. Examples include shares, debentures, institutional loans, lease financing, and foreign investment. These funds are used for major investments in fixed assets and to meet the permanent needs of the business. Such sources ensure stable financial backing for long-term growth. These are of following types:
(i) **Issue of Shares:** The money raised by issuing shares is known as share capital. This is a primary source of long-term funding for businesses, representing ownership in the company.
(ii) **Issue of Debentures:** Debentures are common financial instruments that represent borrowed money. They are a way for companies to raise long-term debt capital from investors.
    Debentures are of following types:
    1. **Redeemable and non-redeemable debentures:** Redeemable debentures are paid back after a set time, while non-redeemable ones are paid back only when the company closes.
    2. **Convertible and non-convertible debentures:** Convertible debentures can be changed into equity shares later, while non-convertible ones cannot.
    3. **Secured and unsecured debentures:** Secured debentures are backed by assets, meaning if the company cannot pay, the assets can be sold. Unsecured debentures are not backed by any specific assets.
    4. **Registered and Bearer debentures:** Registered debentures have the owner's name recorded by the company, while bearer debentures belong to whoever holds them.
    5. **Zero per cent interest debentures:** These debentures do not pay regular interest but are often issued at a discount and redeemed at their full face value.
(iii) **Institutional loans:** Governments set up specialized financial institutions to give long-term money to businesses. These institutions also offer advice and help new businesses grow and improve. They play a vital role in industrial development.
    These institutions are:
    1. Industrial Finance Corporation of India.
    2. Industrial Credit and Investment Corporation of India.
    3. Industrial Development Bank of India.
    4. Industrial Investment Bank of India.
    5. Small Scale Industry Development Bank of India.
    6. State Finance Corporation.
    7. State Industrial Development Corporation.
    8. Life Insurance Corporation of India.
    9. General Insurance Corporation of India.
    10. Unit Trust of India.
    11. Export-Import Bank of India.
    12. Venture capital fund institutions.
(iv) **Retention of funds:** Companies usually do not give all their profits to shareholders as dividends. They keep some of the profits to use as security or for future financing needs. This is also called retained earnings and serves as a financial cushion for the company.
In simple words: Long-term finance includes shares (equity/preference), debentures (redeemable, convertible, secured, registered, zero-interest), loans from special financial institutions, and keeping company profits for future use.

🎯 Exam Tip: When explaining long-term sources, break down complex concepts like debenture types into simple terms. For institutional loans, listing a few examples shows depth of knowledge.

RBSE Class 11 Business Studies Chapter 5 Additional Questions and Answers

RBSE Class 11 Business Studies Chapter 5 Multiple Choice Questions

 

Question 1. Every business needs finance for -
(a) Regular activities
(b) To meet day to day expenses
(c) For the growth of the business
(d) All of the options
Answer: (d) All of the options
In simple words: Businesses need money for everything: daily tasks, covering expenses, and growing bigger. Finance is the lifeblood of any business.

🎯 Exam Tip: Remember that finance is essential for all aspects of a business, from initial setup to daily operations and future expansion, making option (d) the most comprehensive answer.

 

Question 2. On the basis of ownership, which of these is not a source of finance?
(a) short term finance
Answer: (a) short term finance
In simple words: Short-term finance is about how long you have the money, not who owns it. So it's not a type of finance based on ownership.

🎯 Exam Tip: Distinguish between classification bases: ownership-based sources include owner's funds and borrowed funds, whereas short-term finance is a time-based classification.

 

Question 3. The source of business finance whose period ranges less than 7 years -
(a) short term finance
(b) medium-term finance
(c) long term finance
(d) None of them
Answer: (a) short term finance
In simple words: Money needed for a short time, usually less than seven years, is called short-term finance. It is for immediate needs.

🎯 Exam Tip: While some definitions might slightly vary, "less than 7 years" typically points to short-term or sometimes medium-term finance; in this context, short-term is implied as the primary answer.

 

Question 4. The owner's fund that is arranged by the owner's enterprise, those owners are -
(a) Sole trader
(b) Partnership
(c) Company
(d) All of the options
Answer: (d) All of the options
In simple words: Owners' funds are the money that the actual owners put into the business, whether it's a single person, partners, or a company with shareholders.

🎯 Exam Tip: Recognize that all forms of business ownership (sole proprietorship, partnership, company) rely on owner's funds, though the specific mechanisms for raising and managing them differ.

 

Question 5. This is not the source of short term finance -
(a) Business credit
(b) Bank credit
(c) Issue of shares
(d) Equity shares
Answer: (c) Issue of shares
In simple words: Selling shares is a way to get money for a long time, not a short time. Business and bank credit are for short periods.

🎯 Exam Tip: Understand that issuing shares (especially equity shares) is primarily a source of long-term capital for funding growth and fixed assets, not short-term operational needs.

 

Question 6. Provision of short term sources of finance by banks is called -
(a) Bank credit
(b) Cash credit
Answer: (a) Bank credit
In simple words: When banks give money for a short time to businesses, it's called bank credit. This helps businesses with their quick money needs.

🎯 Exam Tip: Bank credit encompasses various short-term facilities like overdrafts, cash credit, and discounting bills, all provided by banks to meet immediate financial requirements.

 

Question 7. The source of short term finance in the unorganized sector is -
(a) Moneylenders
(b) Indigenous bankers
(c) friends and family
(d) All of the options
Answer: (d) All of the options
In simple words: In places without formal banks, people often borrow money for a short time from moneylenders, local bankers, or even friends and family.

🎯 Exam Tip: The unorganized sector plays a significant role in providing short-term finance, especially in rural or underserved areas, often characterized by informal lending practices.

 

Question 8. Which is not the source of long term finance?
(a) Institutional debt
(b) Consolidated fund
(c) Bills of Discount
(d) Foreign Investment
Answer: (c) Bills of Discount
In simple words: Bills of discount are usually for very short periods, helping with immediate cash flow. They are not a way to get money for many years.

🎯 Exam Tip: Bills of exchange or bills of discount are typically instruments for very short-term credit, used for trade transactions, not for long-term capital needs of a business.

 

Question 9. Those preference shares which are determined by the date of maturity to pay in part are -
(a) Redeemable preference shares
(b) Non - Redeemable preference shares
(c) Cumulative Preference shares
(d) None of these
Answer: (a) Redeemable preference shares
In simple words: Redeemable preference shares are special because the company promises to buy them back and pay money to the owners after a certain time has passed.

🎯 Exam Tip: The term "redeemable" explicitly refers to shares or debentures that can be bought back or repaid by the issuing company at a predetermined date or period.

 

Question 10. A debenture holder is -
(a) customer of the company
(b) a creditor of the company
(c) owner of the company
Answer: (b) a creditor of the company
In simple words: A debenture holder is someone who has lent money to the company, making them a creditor, not an owner. They expect their loan to be repaid with interest.

🎯 Exam Tip: Always remember that debenture holders are creditors, meaning they have a claim against the company's assets but no ownership rights or voting power.

 

Question 11. The bonds in which pay-back of money has a specified date are known as -
(a) Redeemable debentures
(b) Non Redeemable debentures
(c) Registered debentures
(d) Bearer debentures
Answer: (a) Redeemable debentures
In simple words: Bonds that have a clear date when the company will pay back the money are called redeemable debentures. This means investors know when they will get their money back.

🎯 Exam Tip: The term "redeemable" implies a fixed maturity date or a period after which the principal amount is returned to the investor.

 

Question 12. Mortgage Debentures are called -
(a) Unsecured Debentures
(b) Secured Debentures
(c) Registered Debentures
(d) None of these
Answer: (b) Secured Debentures
In simple words: Mortgage debentures are a type of secured debenture, meaning they are backed by specific assets like land or buildings. If the company fails to pay, these assets can be sold.

🎯 Exam Tip: "Mortgage" indicates that the debentures are secured by immovable property, offering a layer of protection to investors.

 

Question 13. The function of Institutional Debt are -
(a) to provide loans to industrial concerns.
(b) establishment of the undertaking.
(c) to provide assistance for rapid economic development.
(d) All of the options
Answer: (d) All of the options
In simple words: Institutional debt helps industries by giving them loans, helping new businesses start, and speeding up the country's economic growth.

🎯 Exam Tip: Institutional debt plays a multi-faceted role in economic development, supporting businesses from inception to expansion and contributing to overall industrial progress.

 

Question 14. When was Industrial Finance Corporation of India established?
(a) In the year 1956
(b) In the year 1973
(c) In the year 1948
(d) In the year 1973
Answer: (c) In the year 1948
In simple words: The Industrial Finance Corporation of India was set up in 1948 to help industries get the money they needed for long-term projects right after independence.

🎯 Exam Tip: Knowing the establishment dates of key financial institutions like IFCI helps in understanding the historical context of India's industrial development policies.

 

Question 15. When was the name of Industrial Finance Corporation of India changed to IFCI?
(a) In June 1993
(b) In June 1973
(c) In June 1948
(d) In June 1992
Answer: (a) In June 1993
In simple words: The Industrial Finance Corporation of India became known as IFCI in June 1993. This was a change to update its identity and operations.

🎯 Exam Tip: Keep track of important name changes and their dates for financial institutions, as they often reflect shifts in their mandate or legal status.

 

Question 16. IFCI provides loan for up to how many years?
(a) 5
(b) 10
(c) 20
(d) 25
Answer: (d) 25
In simple words: IFCI gives out loans that can last for as long as 25 years. This helps big businesses get the money they need for very long-term projects.

🎯 Exam Tip: Note the typical loan duration provided by Development Financial Institutions (DFIs) like IFCI, as it signifies their role in long-term industrial financing.

 

Question 17. When was Industrial Credit and Investment Corporation of India established?
(a) In the year 1956
(b) In the year 1982
(c) In the year 1955
(d) None of them
Answer: (c) In the year 1955
In simple words: The Industrial Credit and Investment Corporation of India (ICICI) was started in the year 1955. It aimed to provide financial support for India's growing industries.

🎯 Exam Tip: Remember the founding dates of key financial institutions like ICICI, as they are significant milestones in India's economic history.

 

Question 18. The dissolution of ICICI was done on 3rd May 2002 in -
(a) IDBI Bank Ltd.
(b) ICICI Bank Ltd.
(c) Industrial Reconstruction Bank of India
Answer: (b) ICICI Bank Ltd.
In simple words: On May 3rd, 2002, ICICI, which was a financial institution, merged with its banking arm, ICICI Bank Ltd., to form a larger bank.

🎯 Exam Tip: The merger of ICICI with ICICI Bank marked a major restructuring in India's financial sector, transforming a development financial institution into a universal bank.

 

Question 19. When was Industrial Development Bank of India established?
(a) In the year 1964
(b) In the year 1956
(c) In the year 1997
(d) In the year 1973
Answer: (a) In the year 1964
In simple words: The Industrial Development Bank of India (IDBI) was set up in 1964 to help develop industries in the country. It played a major role in financing industrial projects.

🎯 Exam Tip: The establishment of IDBI in 1964 was a crucial step in creating a robust institutional framework for industrial financing in India.

 

Question 20. The institute whose establishment was as a primary agency for the rehabilitation and revival of sick and weak industries -
(a) State Finance Corporation
(b) IDBI bank
(c) Industrial Investment Bank of India
(d) None of them
Answer: (a) State Finance Corporation
In simple words: State Finance Corporations were created mainly to help struggling and weak industries in their respective states get back on track. They provide financial support for their revival.

🎯 Exam Tip: Remember that State Finance Corporations (SFCs) are regional bodies focused on supporting small and medium industries, including their rehabilitation, within their state.

 

Question 21. The Industrial Investment bank of India was renamed as Industrial Reconstruction Bank of India in the year -
(a) 1997
(b) 1985
(c) 2004
(d) 1964
Answer: (b) 1985
In simple words: The Industrial Investment Bank of India changed its name to Industrial Reconstruction Bank of India in 1985. This reflected a shift towards helping sick industries recover.

🎯 Exam Tip: The name change to Industrial Reconstruction Bank of India highlights its specialized role in rehabilitating industrial units, which is distinct from general development finance.

 

Question 22. State Industrial Development Corporation was established in -
(a) 1973
(b) 1964
Answer: (a) 1973
In simple words: The State Industrial Development Corporations (SIDCs) were set up in 1973. Their main purpose was to boost industrial growth within each state.

🎯 Exam Tip: SIDCs play a crucial role in promoting industrial development at the state level by providing financial assistance, infrastructure, and other support to industries.

 

Question 23. State Finance Corporation provides finance to -
(a) Sole trading
(b) Partnership
(c) Company
(d) All of these
Answer: (d) All of these
In simple words: State Finance Corporations offer financial help to all types of businesses: sole traders, partnerships, and companies. This means they support a wide range of business structures.

🎯 Exam Tip: When answering questions about financial institutions, remember they often cater to various business structures to promote economic growth.

 

Question 24. The main objective behind the incorporation of LIC is -
(a) Life Insurance Business
(b) To give assistance to businesses
(c) To provide loans
(d) All of the options
Answer: (a) Life Insurance Business
In simple words: The main purpose of creating the Life Insurance Corporation of India (LIC) was to conduct life insurance activities. This helps people secure their future financially.

🎯 Exam Tip: Understand the primary function of each financial institution; for LIC, it is life insurance, distinct from direct business loans.

 

Question 25. Unit Trust of India was established in -
(a) 1982
(b) 1985
(c) 1964
(d) 1990
Answer: (c) 1964
In simple words: The Unit Trust of India was set up in the year 1964. It played an important role in encouraging small savings.

🎯 Exam Tip: Memorize the establishment years of key financial institutions as these are common factual questions.

 

Question 26. The Unit Trust of India was incorporated by -
(a) RBI
(b) Export-Import Bank of India
(c) IDBI
(d) None of the options
Answer: (b) Export-Import Bank of India
In simple words: The Unit Trust of India was founded by the Reserve Bank of India. It was established by the RBI.

🎯 Exam Tip: Note the founding body or primary regulator of important financial organizations, as this often indicates their initial purpose and authority.

 

Question 27. How many crores were incorporated for Unit Trust of India -
(a) 5 Crore
(b) 10 Crore
(c) 15 Crore
(d) 20 Crore
Answer: (a) 5 Crore
In simple words: The Unit Trust of India started with a capital of 5 crore rupees. This initial amount helped to get the organization running.

🎯 Exam Tip: Initial capital figures for significant institutions are worth remembering, as they reflect the scale of their establishment.

 

Question 28. The important institute for International financial Resources is -
(a) Unit Trust of India
(b) Export-Import Bank of India
(c) IDBI
(d) None of the options
Answer: (b) Export-Import Bank of India
In simple words: The Export-Import Bank of India is a key organization that handles money matters for international trade. It helps businesses that import and export goods.

🎯 Exam Tip: Relate the name of an institution (e.g., Export-Import Bank) to its primary function (facilitating international trade) for easier recall.

 

Question 29. When was Export-Import Bank of India established?
(a) In the year 1956
(b) In the year 1973
(c) In the year 1982
(d) None of these
Answer: (c) In the year 1982
In simple words: The Export-Import Bank of India was set up in 1982. It started working to help India's foreign trade grow.

🎯 Exam Tip: Pay attention to specific dates of establishment for major financial bodies, as they often appear in objective questions.

 

Question 30. An International financial resource is -
(a) International Monetary Fund
(b) Asian Development Bank
Answer: (a) International Monetary Fund
In simple words: The International Monetary Fund (IMF) is an example of a financial resource that works worldwide. It helps countries with their money problems.

🎯 Exam Tip: Distinguish between international and regional financial institutions; the IMF is global, while the Asian Development Bank is regional.

 

Question 32. Who are Non - Resident Indians?
Answer: Non-Resident Indians (NRIs) are people of Indian origin who live in other countries. They are an important source of long-term funds for India. NRIs contribute to foreign exchange, NRI accounts, and NRI money accounts, significantly boosting foreign capital.
In simple words: Non-Resident Indians are people with Indian roots who live outside India. They send money to India, which helps the country get long-term funds.

🎯 Exam Tip: When defining a term like NRI, include both who they are and their economic significance, especially as a source of finance.

RBSE Class 11 Business Studies Chapter 5 Short Answer Type Questions (SA – I)

 

Question 1. What do you mean by Business Finance? Why are funds required for Business?
Answer: Business finance refers to the money a business needs for its activities. Funds are essential for various reasons:
1. To purchase fixed assets, such as land, buildings, and machinery.
2. To meet daily expenses, like paying salaries, utility bills, and purchasing raw materials.
3. For the expansion and growth of the business, including new projects or increasing production capacity. This ensures the business can operate smoothly and expand.
In simple words: Business finance is the money a business uses. It needs funds to buy things like machines, pay for daily costs, and grow bigger.

🎯 Exam Tip: Clearly define business finance and then list at least three distinct reasons for its requirement to score well on such descriptive questions.

 

Question 2. What is the difference between internal and external sources of business?
Answer: The differences between internal and external sources of business finance are:

In simple words: Internal funds come from inside the business itself, like using saved profits. External funds come from outside, like loans or selling shares. Internal sources are usually for smaller, shorter needs, while external sources are for larger, longer-term needs.

🎯 Exam Tip: Use a clear table format to compare and contrast, ensuring each point of difference has corresponding information for both categories. Provide relevant examples for clarity.

 

Question 4. What is Cash Credit?
Answer: Cash credit is a financial arrangement where a bank grants a loan to a customer, and this loan amount is credited directly to their account. The customer is then allowed to withdraw money as per their business needs, up to a sanctioned limit. Interest is charged only on the amount that is actually withdrawn, not on the entire sanctioned limit. This provides flexibility for businesses to manage their working capital.
In simple words: Cash credit is like a flexible bank loan where a business can take money up to a limit and only pays interest on the amount they use.

🎯 Exam Tip: Emphasize that interest is charged only on the amount utilized in cash credit, which is a key distinguishing feature from regular loans.

 

Question 5. What do you mean by factoring?
Answer: Factoring is a financial service where a business sells its accounts receivable (money owed by customers) to a third party, called a factor, at a discount. The factor then takes on the responsibility for collecting these debts from the customers. This process helps the business get immediate cash flow and also provides protection against potential bad debts, as the factor assumes the risk of non-payment. It's a way to quickly convert credit sales into cash.
In simple words: Factoring is when a business sells its unpaid customer bills to another company. This company then collects the money and the business gets cash right away, without worrying about collecting the debt.

🎯 Exam Tip: Highlight that factoring provides immediate liquidity and protection from bad debts, which are two major benefits for businesses.

 

Question 6. What do you mean by Customer's advance?
Answer: Customer's advance refers to situations where a business person receives some money from their customers beforehand, against a future order of goods or services. This advance acts as a pre-payment for the goods the customer will receive later. It helps the business meet its immediate cash requirements and shows a commitment from the customer. Often, this is used for custom orders or large purchases.
In simple words: A customer's advance is when a customer pays some money upfront for an order they will get later. This helps the business get cash early.

🎯 Exam Tip: Explain that customer advances act as both a source of finance for the business and a confirmation of the customer's order.

 

Question 7. Explain loans from the unorganized sector.
Answer: Loans from the unorganized sector involve finance sources like local moneylenders, indigenous bankers, friends, and relatives. These lenders usually provide money based on personal trust or against basic assets as security. The major drawback is that the interest rates charged by these unorganized sector lenders are often much higher compared to formal institutional sources like banks. This can make repayment difficult for borrowers.
In simple words: Loans from the unorganized sector come from people like moneylenders or family, not banks. They often charge very high interest rates.

🎯 Exam Tip: When discussing the unorganized sector, always mention both the sources (moneylenders, relatives) and the key negative aspect (high interest rates).

 

Question 9. What are commercial papers?
Answer: Commercial papers are unsecured promissory notes issued by highly creditworthy firms to raise funds for short periods, typically ranging from one month to one year. These papers are often bought by other firms, insurance companies, pension funds, and banks. Only companies with a strong credit rating can issue them, and their issuance is strictly regulated by the Reserve Bank of India (RBI). They offer a quick way for large companies to borrow money for short-term needs.
In simple words: Commercial papers are short-term loan notes that big, trustworthy companies sell to get money quickly for a few months to a year. Banks and other companies buy them.

🎯 Exam Tip: Remember that commercial papers are unsecured (no collateral) and are only available to firms with excellent credit ratings for short-term financing.

 

Question 10. Which are the long term financial sources for small and big businesses and also for joint-stock companies?
Answer: The long-term financial sources available for small and big businesses, including joint-stock companies, are:
1. Issue of shares: Companies raise capital by selling ownership stakes.
2. Issue of debentures: Companies borrow money by issuing debt instruments.
3. Institutional loans: Funds obtained from specialized financial institutions.
4. Retention of the fund: Using accumulated profits within the business.
5. Lease financing: Renting assets instead of buying them outright.
6. Foreign Investment: Money brought into the company by investors from other countries. These sources provide stable capital for projects that take a long time to complete.
In simple words: Businesses get money for a long time by selling shares, taking loans (debentures, institutional loans), using saved profits, leasing assets, or getting money from foreign investors.

🎯 Exam Tip: When listing long-term finance sources, ensure you cover both equity-based (shares, retained earnings) and debt-based (debentures, loans) options, as well as newer methods like lease financing and foreign investment.

 

Question 11. What are Equity Shares?
Answer: Equity shares represent a form of share capital where shareholders are not guaranteed a fixed dividend. They also do not have a priority right for capital repayment during liquidation. These shareholders participate in the company's profits only after all other preferential rights, such as those of preference shareholders, have been satisfied. They are considered the true owners of the company and bear the highest risk, but also have the potential for the highest returns. Equity shareholders have voting rights.
In simple words: Equity shares are parts of a company owned by people who don't get a fixed payment and are paid last if the company closes. They are the real owners and can vote.

🎯 Exam Tip: Key characteristics of equity shares to remember are variable dividends, no priority in repayment, voting rights, and the highest risk/reward potential.

 

Question 12. What are preference shares? How many types of preference shares are there?
Answer: Preference shares are a type of share capital that offers shareholders preferential rights over equity shareholders. These rights typically include a fixed rate of dividend and priority in receiving dividends and repayment of capital during the company's liquidation. They offer more stability than equity shares but usually do not carry voting rights. There are generally four main types of preference shares:
1. Convertible and Non - convertible: Can or cannot be converted into equity shares.
2. Cumulative and Non - cumulative: Accumulate unpaid dividends or not.
3. Participating and Non-participating: Share in extra profits or not.
4. Redeemable and Non - redeemable: Can be repaid by the company or only during liquidation.
In simple words: Preference shares give special rights to shareholders, like getting a fixed payment first and getting their money back first if the company closes. There are four main kinds of these shares.

🎯 Exam Tip: For preference shares, focus on the 'preferential rights' regarding dividends and capital repayment, and be ready to list and briefly explain the main types.

 

Question 13. What are the rights given to preference shareholders?
Answer: Preference shareholders are granted specific rights that make their investment more secure compared to equity shareholders. These rights include:

• Preference shareholders get special priority when receiving dividends and repayment of capital at the time of company liquidation.
• They typically receive a fixed rate of return, ensuring regular income.
• Safety of investment is ensured, especially with redeemable preference shares, as their capital can be returned.
• There is no dilution of management control for equity shareholders, as preference shares usually do not carry voting rights.
• The rate of return is often determined in advance, providing predictability.

These rights make preference shares attractive to investors seeking stable income and capital safety.
In simple words: Preference shareholders get money payments first and also get their original investment back first if the company closes. They receive a set amount of money regularly, and their investment is safer.

🎯 Exam Tip: When listing rights, clearly state the advantages (priority, fixed income, safety) that preference shareholders have over equity shareholders.

 

Question 14. What do you mean by redeemable and non - redeemable shares?
Answer: Redeemable preference shares are those shares that the company can buy back or repay to the shareholders after a specific, predetermined period. This means the investment is not permanent, and shareholders will get their capital back. In contrast, non-redeemable preference shares are paid back only when the company is dissolved or liquidated. This type of share represents a more permanent form of capital for the company until its closure.
In simple words: Redeemable shares are those that a company can buy back from owners after some time. Non-redeemable shares are only paid back if the company closes down completely.

🎯 Exam Tip: The key difference lies in whether the shares can be bought back by the company during its normal operation (redeemable) or only upon winding up (non-redeemable).

 

Question 15. What are convertible and Non - convertible preference shares?
Answer: Convertible preference shares give shareholders the option to convert their preference shares into equity shares after a specific period of time. This feature allows investors to potentially gain from the growth of the company's equity value. On the other hand, non-convertible preference shares do not offer this advantage; they remain preference shares throughout their existence and cannot be changed into equity shares. This means their returns are fixed and they don't participate in potential higher equity gains.
In simple words: Convertible preference shares can be changed into normal company shares later, but non-convertible shares cannot.

🎯 Exam Tip: Focus on the "conversion option" as the defining characteristic. Convertible shares offer flexibility and potential capital appreciation, while non-convertible shares provide only fixed income.

 

Question 16. What is Zero Percent Interest Debentures?
Answer: Zero percent interest debentures are a type of debenture that does not carry any explicit interest payment to the holders. Instead of paying regular interest, these debentures are typically issued at a discount to their face value and redeemed at their full face value upon maturity. The difference between the discounted issue price and the full redemption price is the return for the investor. This allows the company to raise capital without regular interest outflow. They are also known as deep discount bonds.
In simple words: Zero percent interest debentures do not pay regular interest. Instead, they are sold cheaper and bought back at full price later, so the profit comes from the price difference.

🎯 Exam Tip: Clarify that while no explicit interest is paid, investors still earn a return through the difference in issue and redemption prices.

 

Question 17. What were the objectives behind the establishment of Industrial Finance Corporation of India?
Answer: The Industrial Finance Corporation of India (IFCI) was established in 1948 through a special act of parliament with several key objectives:

• To provide medium and long-term credit to eligible industrial concerns, helping them with their financial needs.
• To grant loans and advances for the establishment, expansion, diversification, and modernization of industries, supporting industrial growth.
• To offer technical, legal, and marketing assistance to industrial concerns for their promotion, management, and expansion.
• To subscribe to the issue of shares and debentures by industries, investing in their capital structure.

The IFCI aimed to bridge the gap in long-term finance availability for Indian industries and support their development. Loans were provided for up to 25 years.
In simple words: The Industrial Finance Corporation of India (IFCI) was set up to give long-term loans and support to industries. It helped new industries start, grow, and become modern, also providing expert advice.

🎯 Exam Tip: When detailing objectives, categorize them (e.g., financial aid, developmental support, advisory roles) for a structured and comprehensive answer.

 

Question 18. Comment on 'Small - Scale Industrial Development Bank of India'.
Answer: The Small Industries Development Bank of India (SIDBI) was established in April 1990. It serves as the principal financial institution in India dedicated to promoting, financing, and developing small-scale industries. SIDBI plays a crucial role in providing venture capital assistance to entrepreneurs, offering leasing and factoring facilities, and supporting small-scale units. Its main goal is to strengthen the small-scale industrial sector, which is vital for employment and economic growth. SIDBI also refinances loans provided by other banks and financial institutions to small industries.
In simple words: The Small Industries Development Bank of India (SIDBI) started in 1990 to help small businesses. It gives them loans and financial support to grow and develop.

🎯 Exam Tip: For institutions like SIDBI, highlight its specific focus (small-scale industries), its establishment year, and its main functions (financing, promotion, development).

 

Question 19. Explain the important functions of Export-Import Bank of India.
Answer: The Export-Import Bank of India (EXIM Bank) performs several important functions to promote India's international trade:
1. Providing funds for the imports of goods and services, helping Indian businesses purchase from abroad.
2. Providing long-term and medium-term loans for export trade, supporting Indian exporters.
3. Financing the import of capital goods, software, and consultancy services, which are crucial for industrial development.
4. Providing loans to foreign governments and companies to enable them to buy goods from India, thus boosting Indian exports.
5. Undertaking export market studies and providing merchant banking services, helping Indian businesses explore and succeed in international markets. This bank acts as a key facilitator for India's global trade.
In simple words: The Export-Import Bank of India helps businesses by giving money for buying and selling goods with other countries. It also lends money to foreign buyers and helps Indian companies understand global markets.

🎯 Exam Tip: Remember that EXIM Bank's functions are two-fold: facilitating both imports (especially capital goods) and exports (through loans and market support).

 

Question 20. What do you mean by Retention of funds?
Answer: Retention of funds, also known as retained earnings, refers to the portion of a company's net profits that is not distributed to shareholders as dividends but is instead kept back and reinvested in the business. This serves as an internal source of finance. Companies retain funds to finance expansion projects, repay debts, or strengthen their financial position, especially during times of need. It's a way for a company to grow using its own generated profits rather than borrowing or issuing new shares. This practice is a cost-effective way to raise capital.
In simple words: Retention of funds means a company keeps some of its profits instead of giving them to owners. It uses this money to grow the business or pay debts.

🎯 Exam Tip: Define retained earnings as undistributed profits reinvested in the business and highlight its significance as an internal, cost-effective source of finance.

 

Question 21. Explain Non - Resident Indians in context to getting long term Financial Sources.
Answer: Non-Resident Indians (NRIs) are people of Indian origin who reside outside India. They serve as an important and continuously growing source of long-term finance for India. Their significant contribution to finance comes in the form of foreign currency remittances, NRI accounts, and NRI money accounts. NRI deposits in foreign capital contribute more than 30% and are constantly increasing. However, it's important to note that NRI sources of finance can sometimes be costlier for the country due to incentives or exchange rate risks. Their investments provide stability for long-term projects.
In simple words: Non-Resident Indians (NRIs) are people from India living abroad who send money to India. This money is a big and growing source of long-term funds for the country, even though it can sometimes be expensive.

🎯 Exam Tip: Focus on NRIs as a vital source of foreign capital for India, mentioning their financial contributions (remittances, deposits) and also noting the potential cost factor.

RBSE Class 11 Business Studies Chapter 5 Short Answer Type Questions (SA – II)

 

Question 1. Explain sources of Business finance on the basis of the period.
Answer: Business finance sources can be classified based on the period for which funds are required:
1. Short term sources - These funds are needed to meet the day-to-day operational needs of the business, such as purchasing raw materials or paying daily expenses. They are also known as short-term capital and are typically required for a period not exceeding one year. Examples include trade credit and bank overdrafts.
2. Medium-term finance - These funds are required for purposes like modernization, sales promotion, or introducing innovation in the business. They are taken for a period ranging between one to three years. This helps businesses invest in improvements without long-term commitments.
3. Long term finance - These funds are required for a period of more than five years. They are primarily used for making investments in fixed assets (like land and machinery) and to meet the permanent working capital needs of the business. Examples include equity shares, debentures, and institutional loans.
In simple words: Business money comes from different time periods: short-term for daily needs (under 1 year), medium-term for small improvements (1-3 years), and long-term for big investments (over 5 years).

🎯 Exam Tip: When explaining finance sources by period, clearly state the typical duration and provide examples of what each type of finance is used for.

 

Question 2. What is Equity Share Capital? Explain its merit and demerits.
Answer: Equity share capital is the part of a company's capital raised by issuing equity shares. If the shareholders are not entitled to a fixed dividend in preference to others, or if there is no prior right for the capital to be repaid during liquidation, then the share capital is considered equity share capital. These shareholders are the true owners, bearing the most risk and having voting rights.
Merits of Equity shareholders:

• No compulsory dividend is required to be paid to equity shareholders, meaning the company can retain profits.
• Equity capital is a permanent source of finance for the business, as it is not repayable during the company's life.
• Equity shares are issued without requiring any security or charge on assets, keeping assets free for other long-term borrowings.

Demerits of Equity Shares:

• They do not provide regular income to shareholders, as dividends are variable and dependent on profits.
• The holders bear a high risk of returns, as their investment is directly linked to company performance.
• Frequent changes in share price can cause capital loss for investors.
• Compliance with many legal formalities in issuing equity shares can delay fund acquisition.

In simple words: Equity share capital is money from owners who get a share of profits but no fixed payments and are paid last if the company closes. It's good because there are no fixed payments, but it's risky for investors and can be slow to raise.

🎯 Exam Tip: For equity share capital, ensure you balance the benefits (no fixed dividend, permanent capital) for the company with the drawbacks (high risk, no regular income) for the investors.

 

Question 3. Explain the merits and demerits of preference share capital.
Answer: Preference share capital involves shares that provide certain advantages to their holders. These shares offer a blend of debt and equity features.
Merits of Preference share capital:

• Regular income is received, as preference shareholders typically get a fixed rate of dividend.
• Preference shareholders have preferential rights to receive capital repayment, meaning they are paid before equity shareholders during liquidation.
• They can be a good alternative to debentures for raising capital.
• Safety of investment is ensured, especially for redeemable preference shares.
• There is no dilution of management control for equity shareholders, as preference shares usually do not carry voting rights.
• The rate of return is often determined in advance, providing predictability for investors.

Demerits of Preference Share Capital:

• The dividend rate on preference share capital is usually higher than the interest rate on debentures.
• Dividends are paid only when the company earns profits, unlike debenture interest which is a fixed obligation.
• The fixed rate of return restricts investors from enjoying higher profitability during boom periods.
• There is no tax-saving benefit on preference shares, unlike the interest paid on debts which is tax-deductible.
• Shareholders typically do not have any say in the management of the company's affairs.

In simple words: Preference shares give fixed income and safer investment but can be expensive and don't offer high profits when the company does very well. They also don't give voting rights.

🎯 Exam Tip: When discussing merits and demerits, clearly present points from both the company's and the investor's perspective, covering income, risk, control, and cost aspects.

 

Question 4. What are Debentures? Explain their merits and demerits.
Answer: Debentures are instruments used by companies to raise long-term debt capital. They are essentially a loan taken by the company, and the document issued acknowledges this debt. Debenture holders are creditors of the company, not owners, and receive a fixed rate of interest regardless of the company's profits.
Merits of Debentures:

• Low Cost - The cost of issuing and maintaining debentures is comparatively low.
• No change in company control - Debenture holders do not have voting rights, so they don't affect the control of equity shareholders.
• Accepted Interest Expenditure - Interest paid to debenture holders is a fixed expense and often tax-deductible.
• Flexible - Debenture holders have priority in getting their loan refunded before shareholders.
• Low Rate of Interest - Generally, the interest rate on debentures is lower than on equity, especially if the company is stable.
• Attraction for More Investors - They attract investors who prefer a fixed income with minimum risk.

Demerits of Debentures:

• Fixed Burden - Interest payments are a fixed obligation, which can be a burden even when the company incurs losses.
• Lack of Confidence - Too many debentures can reduce the company's creditworthiness, making it harder to get further loans.
• Burden on Assets - Debentures are often secured against company assets, reducing the creditworthiness of the company by tying up its assets.
• No Voting Rights - Debenture holders have no say in the company's management.

In simple words: Debentures are like loans a company takes, paying fixed interest. They are cheap to get and don't change who controls the company. But, the company must always pay interest, which can be a burden, and debenture holders can't vote.

🎯 Exam Tip: Define debentures as a debt instrument, then clearly list advantages like low cost and no loss of control, and disadvantages like fixed interest burden and asset encumbrance.

 

Question 5. Name and state the objectives of three institutional finance companies.
Answer: Three important institutional finance companies are:
1. **Industrial Finance Corporation of India (IFCI):** The main goal of IFCI is to provide loans for a long time to industries. It helps with setting up, expanding, improving, and modernizing factories. IFCI also offers technical, legal, and marketing advice to businesses. It can also help by buying shares and debentures issued by companies.
2. **Industrial Development Bank of India (IDBI):** IDBI aims to support all industrial businesses without any limits. It collects savings from the public through schemes like US-64 and master shares. IDBI also works to promote growth and provides direct help to industrial units. It partners with other financial institutions to boost economic development.
3. **Unit Trust of India (UTI):** UTI focuses on collecting savings from the public and encouraging economic growth. It provides direct financial assistance to various industries. UTI works with other financial institutions to help businesses grow and develop.
In simple words: Financial institutions like IFCI, IDBI, and UTI help industries grow by giving them long-term loans, offering advice, and collecting savings from people to invest in businesses.

🎯 Exam Tip: When listing objectives, use clear bullet points or numbered lists for each institution to make the answer easy to read and understand. Remember to mention both financial aid and advisory roles where applicable.

 

Question 6. What are Financial Institutions? Describe their main functions.
Answer: Financial institutions are special organizations set up by central and state governments to provide long-term money to businesses. They play a key role in the economy by connecting savers with investors.
Main functions of financial Institutions:
1. They provide long-term funding for industrial businesses.
2. They help in setting up new businesses that need a lot of money and have a long time before they start making profits.
3. They assist in the fast economic growth of less developed regions.
4. They offer specialized and professional services like finding new projects, checking if they are financially and technically possible, and helping to carry them out.
5. These institutions also provide foreign currency loans to businesses that need to import capital goods.
In simple words: Financial institutions are government-backed bodies that give long-term money to companies. They help new businesses, support growth in backward areas, offer expert advice, and provide foreign money for imports.

🎯 Exam Tip: Focus on distinguishing financial institutions from regular banks by highlighting their long-term funding and development-oriented roles, especially for industrial growth and backward areas.

 

Question 7. What is lease financing? Explain its merits and demerits.
Answer: Lease financing is a contract where the owner of an asset (Lessor) gives another party (Lessee) the right to use that asset for a certain period in exchange for regular payments. It's like renting an asset for a specific time. This method is crucial for modernizing and diversifying businesses, especially for equipment that changes quickly, like computers and electronics.
**Merits (Advantages):**
* Lease financing does not affect who owns the company.
* It has no impact on getting other loans.
* It is very useful for assets where technology changes often, such as electronic equipment.
**Limitations (Demerits):**
* There are some limits on who can use lease agreements, especially for individual owners.
* If the lease is not officially registered, it can cause problems for the business.
* If the financer ends the lease agreement early, the lessee might have to pay extra money.
In simple words: Lease financing is like renting an asset instead of buying it. It's good because it doesn't change who owns the company and is helpful for tech that updates fast. But it can have rules, might cause issues if not registered, and could cost extra if ended early.

🎯 Exam Tip: Clearly define lease financing by identifying the Lessor and Lessee. When discussing merits and demerits, think from the perspective of both the company using the asset and the implications for ownership and risk.

 

Question 8. Which financial documents are required for collecting finance from international financial resources?
Answer: The financial documents needed to get money from international sources are:
1. **Global Depository Receipts (GDRs):** These are bank certificates issued in more than one country representing shares in a foreign company. The original shares are held by an international bank's foreign branch, allowing these receipts to be traded globally.
2. **American Depository Receipts (ADRs):** These are similar to GDRs but are specifically negotiable certificates of title for shares of non-US companies. They are deposited in an overseas bank and traded in the US market.
3. **Foreign Currency Convertible Bonds (FCCBs):** These are a type of bond issued in a foreign currency different from the issuer's local currency. They combine features of both debt and equity, meaning they can be converted into shares after a certain period.
In simple words: To get money from other countries, businesses use special papers like GDRs and ADRs (which are like receipts for shares traded internationally) or FCCBs (bonds that can turn into shares later).

🎯 Exam Tip: Remember that these instruments help companies raise capital in foreign markets. Distinguish between GDRs and ADRs primarily by their trading location, and highlight that FCCBs offer a blend of debt and equity features.

 

RBSE Class 11 Business Studies Chapter 5 Essay Type Questions

 

Question 1. What do you mean by commercial papers? State their merits and demerits.
Answer: **Commercial Papers (CPs):** A commercial paper is a short-term, unsecured promissory note. It is issued by companies with a good credit history to raise money for a short period, usually ranging from 1 month to 1 year. These papers are typically sold to other companies, insurance firms, pension funds, and banks. Only financially strong companies with high credit ratings can issue CPs. The Reserve Bank of India (RBI) controls how commercial papers are issued.
**Merits (Advantages):**
* CPs are unsecured, meaning they do not require any company assets as collateral, keeping assets free for other uses.
* Having a good credit rating helps reduce the cost of raising capital through CPs.
* CPs are a quick way to get funds for short-term needs.
**Demerits (Disadvantages):**
* CPs are only available to a select few well-known and profitable companies, limiting access for smaller businesses.
* Issuing CPs can reduce the amount of credit a company can get from banks.
* The issuance of commercial papers is strictly regulated by RBI guidelines, which can make the process complex.
In simple words: Commercial papers are short-term loans given by strong companies, but they don't need security. They are good for quick money and can be cheaper if a company has a good reputation. However, only big companies can use them, and getting bank loans might be harder afterward.

🎯 Exam Tip: When defining commercial papers, emphasize that they are unsecured and short-term debt instruments. For merits and demerits, consider both the issuer's and the market's perspective, especially regarding credit availability and regulation.

 

Question 2. What do you mean by Equity share capital? State its merits and demerits.
Answer: **Equity Share Capital:** This refers to the capital raised by issuing equity shares. Equity shareholders are not promised a fixed dividend and do not have a special right to get their capital back first if the company closes down. They are the true owners of the company and share in the profits after all other payments, like preference dividends, are made. They also participate in the growth and risks of the business.
**Merits (Advantages) of Equity Shares:**
1. **Source of fixed capital:** Equity capital is a permanent source of funds for the business, as it is not usually repaid during the company's lifetime.
2. **No compulsion of dividend:** Companies are not forced to pay a dividend to equity shareholders, especially if profits are low, which reduces the financial burden.
3. **High Credit level:** The strength of a company's financial standing and creditworthiness is often judged by its equity capital.
4. **No burden on company:** Since there's no fixed dividend, the company doesn't have a constant payment burden.
5. **Suitable for risk-taking investors:** This is the best choice for investors who are ready to take more risks in return for potentially higher profits.
6. **High Funds:** Equity share capital helps raise a lot of money, and personal property can be used as security in some cases to get more funds.
**Demerits (Disadvantages) of Equity Shares:**
1. **No regular income:** Equity shareholders face uncertainty because dividends are not fixed and depend on company profits.
2. **High cost:** The return on these shares is not guaranteed, so shareholders bear a high risk.
3. **Delay in getting funds:** Issuing equity shares involves many legal steps, which can make it slow to raise money.
4. **No regular income:** There is no certainty of regular dividends or their amount for equity shareholders.
5. **High cost/risk:** Since the returns are not regular, holders of equity shares bear a high level of risk.
6. **Capital loss:** Frequent changes in share prices can lead to a loss of capital for investors.
7. **Delay in funds:** The many legal steps involved in issuing equity shares can cause delays in getting funds.
In simple words: Equity shares are like owning a part of a company without a guaranteed payment, but you can earn a lot if the company does well. They provide stable long-term money for the company and attract brave investors. However, there's no fixed income, high risk for investors, and it can be a slow process to get funds.

🎯 Exam Tip: Remember that equity shareholders are true owners, bearing the highest risk but having the potential for the highest returns. When explaining merits and demerits, contrast them with preference shares or debentures to highlight their unique characteristics like control and permanence of capital.

 

Question 3. Explain the types of preference shares.
Answer: Preference shares are a type of shares that give certain special rights to their holders, usually related to dividends and repayment of capital. Here are the different types:
1. **Cumulative Preference Shares:** If a company cannot pay dividends in a bad year, these dividends add up and must be paid in future profitable years before any equity dividends are distributed. For example, if a company misses dividends in 2010-11 but earns profit in 2011-12, both years' cumulative dividends must be paid then.
2. **Non-cumulative Preference Shares:** Unlike cumulative shares, if the company doesn't make enough profit to pay a dividend in a particular year, these shareholders lose that year's dividend forever; it does not carry forward.
3. **Participating Preference Shares:** These shares allow holders to receive their fixed preference dividend and then also share in any remaining profits with equity shareholders, after a specific fixed dividend has been paid to both groups.
4. **Non-participating Preference Shares:** These shareholders only receive their fixed preference dividend and do not get a share in any extra profits the company might earn.
5. **Convertible Preference Shares:** Holders of these shares have the option to convert them into a certain number of equity shares of the company after a specific period. This offers them potential for higher returns associated with equity.
6. **Non-convertible Preference Shares:** These preference shares cannot be converted into equity shares. Their holders will only receive preference dividends and capital repayment as per the terms of issue.
7. **Redeemable Preference Shares:** These shares can be bought back by the company at the end of a specified period or even earlier, at the company's choice. This means the company can return the share capital to the holders.
8. **Non-redeemable Preference Shares:** These shares are not repaid until the company is closed down (liquidated). Their capital is returned only at the time of the company's winding up.
In simple words: Preference shares come in many types, offering different benefits. Some collect missed dividends (cumulative), some don't (non-cumulative). Some let you share extra profits (participating), others just pay fixed (non-participating). Some can be changed into regular shares (convertible), some cannot. And some can be paid back by the company (redeemable), while others are paid back only when the company closes (non-redeemable).

🎯 Exam Tip: Focus on the key differentiator for each type: "cumulative" means dividends accumulate, "participating" means sharing extra profits, and "convertible" means they can be changed into equity. Use simple examples to illustrate the concepts.

 

Question 4. Explain 'Debentures'. Also, state their merits and demerits.
Answer: **Debentures:** Debentures are financial instruments used by companies to borrow money for the long term. A debenture is essentially a document that acknowledges a company's debt to its holder. Debenture holders are creditors of the company, not owners, and typically receive a fixed rate of interest.
**Merits (Advantages) of Debentures:**
1. **Low Cost:** Issuing and managing debentures generally costs less compared to shares.
2. **No change in company control:** Debenture holders do not have voting rights, so issuing debentures does not dilute the control of existing equity shareholders.
3. **Accepted Interest Expenditure:** The fixed interest paid to debenture holders is an allowable business expense, which helps in reducing tax liability for the company.
4. **Flexible:** Debenture holders have a priority right to receive their money back before shareholders if the company liquidates.
5. **Low Rate of Interest:** The interest rate on debentures is often lower than the dividend rate expected by equity shareholders.
6. **Attracts More Investors:** Debentures appeal to investors who prefer a fixed, regular income with lower risk, making them an attractive investment source.
**Demerits (Disadvantages) of Debentures:**
1. **Fixed Burden:** Interest payments on debentures are a fixed obligation for the company, which must be paid regardless of whether the company makes a profit or a loss. This can create a significant financial burden.
2. **Lack of Confidence:** Companies that rely heavily on debentures might be seen as financially risky, which can reduce confidence among other financial institutions when they need more loans.
3. **Burden on Assets:** Debentures are often secured by the company's assets. This means if the company fails to pay, those assets can be claimed by debenture holders, which can reduce the company's overall creditworthiness.
4. **No Voting Rights:** Debenture holders do not have any voting rights, meaning they cannot participate in the management of the company. They are always dependent on shareholders for major decisions.
5. **Limited borrowing capacity:** Every company has a limited amount it can borrow. Issuing too many debentures can reduce the company's ability to raise more funds in the future.
In simple words: Debentures are like company loans that pay fixed interest and don't give away company control. They are cheaper to manage and attract investors who want safe, steady income. But, the company must always pay interest, even in losses, and securing them uses up assets, which can make it harder to borrow more money later.

🎯 Exam Tip: Remember that debentures represent debt, so their holders are creditors. Highlight the fixed interest payment as both a merit (tax benefit) and a demerit (fixed obligation), and contrast their lack of voting rights with equity shares.

 

Question 5. Explain the types of Debentures.
Answer: Debentures are instruments that companies use to borrow money, and they come in different forms depending on their features. Here are the main types:
1. **Redeemable Debentures:** These are debentures that the company promises to pay back to the holders after a specific period of time, according to the terms of their issue. They have a maturity date.
2. **Irredeemable Debentures:** Also known as perpetual debentures, these are not repaid within a specific period. Their repayment is not certain and usually happens only when the company is winding up or if it decides to buy them back.
3. **Convertible Debentures:** These debentures give the holder the option to convert them into equity shares of the company after a certain period or at a specific ratio. This can provide a potential upside if the company's shares perform well.
4. **Non-convertible Debentures:** These debentures do not have the option of being converted into equity shares. They are redeemed on their specified maturity date, and their holders remain creditors.
5. **Secured Debentures:** These debentures are backed by a charge (mortgage or lien) on the company's assets, either specific assets or all assets. This security gives holders a claim on those assets if the company defaults on payments.
6. **Unsecured Debentures:** These debentures are not backed by any specific assets of the company. Their repayment relies solely on the company's creditworthiness and financial health, making them riskier.
7. **Registered Debentures:** For these debentures, the names and addresses of the debenture holders are recorded in a register maintained by the company. Ownership can only be transferred through a formal transfer deed.
8. **Bearer Debentures:** These debentures are transferable simply by physical delivery, meaning whoever holds the debenture is considered the owner. Their names are not registered with the company.
9. **Zero Percent Interest Debentures:** These debentures do not pay any periodic interest. Instead, they are issued at a discount to their face value and redeemed at par (full face value) at maturity. The difference between the issue price and redemption price is the return for the investor.
In simple words: Debentures are company loans that come in different types. Some are paid back (redeemable), some are not until the company closes (irredeemable). Some can change into shares (convertible), some cannot. Some have assets backing them up (secured), some don't (unsecured). Some have owner names recorded (registered), others can be passed on by hand (bearer). Some even come with no interest but are bought cheaper and paid back fully (zero percent interest).

🎯 Exam Tip: Classify debentures based on convertibility, security, and repayment terms. For each type, highlight the key feature that distinguishes it, such as how interest is paid or whether it has collateral.

 

Question 6. What are the merits of debenture issue in comparison of equity shares?
Answer: Issuing debentures has several benefits compared to issuing equity shares, especially for the company:
1. **Low Cost:** The expenses involved in issuing and managing debentures are generally lower than those for equity shares. This makes debentures a more cost-effective way to raise capital.
2. **No Interference in Management:** Debenture holders do not have any voting rights in the company. This means that issuing debentures does not give new parties any control over the company's management, allowing existing shareholders to retain full control.
3. **Attraction for Investors:** Debentures are appealing to investors who seek a guaranteed and fixed return on their investment with less risk. This makes it easier for companies to attract specific types of investors, especially those who prioritize stability over potential high growth.
In simple words: Debentures are cheaper to issue than shares and don't take away control from current owners. They also attract investors who want a fixed, safe income.

🎯 Exam Tip: Focus on the company's perspective when comparing debentures and equity shares. The main advantages of debentures are cost efficiency, preserving owner control, and attracting a different investor base looking for stability.

 

Question 7. Explain the merits and demerits of Public Deposits.
Answer: Public deposits are funds collected from the general public by companies to meet their short-term and medium-term financial needs. These deposits offer an alternative source of finance.
**Merits (Advantages) of Public Deposits:**
1. **Easy Process:** Collecting public deposits is a simple and straightforward process compared to issuing shares or debentures, which involve extensive legal and procedural complexities.
2. **Low Cost:** There is a very low cost involved in raising funds through public deposits, as there are no brokerage fees or heavy administrative expenses, leading to savings for the company.
3. **No Security:** Public deposits are typically unsecured, meaning the company does not have to pledge any assets as collateral. This leaves the company's assets free for other purposes.
**Demerits (Disadvantages) of Public Deposits:**
1. **Limited Quantity:** There are legal limits on how much money a company can raise through public deposits, restricting the total funds available from this source.
2. **Uncertainty:** Public deposits are not a reliable source of finance because depositors might not respond favorably when economic conditions are unstable or uncertain, making the funds unpredictable.
3. **Not for Long-term Investment:** Public deposits are primarily suitable for short-term and medium-term financial needs; companies cannot rely on them for long-term projects or investments.
4. **Not Efficient for New Ventures:** New companies or those with a less established credit history find it difficult to attract public deposits, as investors prefer to deposit with well-known, financially sound companies.
5. **Obstacles in Money Market Development:** Excessive reliance on public deposits can hinder the growth of a robust and healthy capital market in the country.
6. **Suitable Only for Conservative Investors:** Public deposits primarily appeal to investors who prefer lower risk and are content with moderate returns. Investors seeking higher returns and willing to take more risk might look for other investment options.
In simple words: Public deposits are an easy and cheap way for companies to get money for a short time, without needing to pledge assets. However, a company can only raise a limited amount, and this source of money can be unpredictable, especially during tough economic times. It is not good for long-term projects and is hard for new companies to get.

🎯 Exam Tip: When explaining public deposits, emphasize their short-to-medium term nature and the simplicity of the process. For demerits, highlight the limits on quantity and the uncertainty, especially for new or risky ventures.

 

Question 8. Explain the specialised financial institutions in context to long term source of Investment.
Answer: Specialized financial institutions are organizations established by central and state governments to provide long-term finance to businesses. They play a crucial role in promoting industrial development and modernization. Some key institutions and their objectives include:
1. **Industrial Credit and Investment Corporation of India (ICICI):** Established in 1955 as a private sector joint-stock company, ICICI's main goal is to provide long-term loans, typically up to 15 years, to industrial concerns. It also helps by subscribing to new share issues and underwriting them. Even sole proprietorships and partnership firms can get loans from ICICI. This promotes various business ventures in India.
2. **State Finance Corporation (SFC):** SFCs were set up to offer financial aid to different types of industrial businesses, including sole traders, partnerships, and cooperative sectors. Their purpose is to meet the financial needs of small and medium-sized enterprises and to foster rapid industrial growth within their respective states.
3. **State Industrial Development Corporation (SIDC):** SIDCs are wholly-owned government companies established in various states to promote industrial development. Their objectives include promoting, expanding, and reviving medium and large-scale industries. They also help implement various promotional schemes from central and state governments for industrial growth.
4. **Industrial Development Bank of India (IDBI):** IDBI functions as an apex bank in the field of foreign exchange financing and provides financial support to all industrial concerns without restrictions. It aims to mobilize public savings and promote industrial growth by offering direct assistance to industrial units and collaborating with other financial institutions.
In simple words: Special financial institutions are government-backed bodies that give long-term money to businesses. ICICI, SFCs, and SIDCs help industries with loans, shares, and advice for growth and new projects, especially for small and medium businesses in different states. IDBI also supports industries and helps with foreign money.

🎯 Exam Tip: Focus on identifying the key financial institutions and briefly stating their primary roles. Emphasize their contribution to long-term industrial finance and regional development.

 

Question 9. What do you mean by Retained Earnings? Explain its merits and demerits.
Answer: **Retained Earnings:** A company's net income has two parts: the portion paid out as dividends to shareholders and the portion kept within the company for reinvestment or to pay debts. This portion of profit that is not distributed but kept by the corporation is known as retained earnings. These funds serve as an internal source of finance for business expansion and stability.
**Merits (Advantages) of Retained Earnings:**
1. **Costless Means:** Retained earnings are considered one of the least expensive sources of finance because they do not involve any flotation costs, such as issuing fees or underwriting commissions.
2. **Permanent Means of Capital:** These funds act as a permanent source of capital for the business, similar to equity, providing a strong financial base.
3. **No fixed Liability:** There is no fixed obligation to pay dividends or interest on retained earnings, which offers financial flexibility to the company.
4. **Increase in Market Price of Equity Shares:** When a company uses retained earnings effectively for growth, its profits often increase, leading to a rise in the market price of its equity shares.
5. **No Security:** Retained earnings do not require pledging any company assets as security, keeping assets free for other borrowing needs.
6. **Helpful in unexpected loss:** Retained earnings can act as a financial cushion during unexpected losses or economic downturns, helping the company maintain stability.
**Demerits (Disadvantages) of Retained Earnings:**
1. **Discontentment in shareholders:** If a company keeps a large portion of its profits as retained earnings, shareholders might receive less in dividends, which can lead to dissatisfaction among them.
2. **Indefinite Source of Capital:** Retained earnings cannot be a definite source of capital because the amount depends on the company's profits, which can vary year by year.
3. **Carelessness in Use:** Because these funds are generated easily without external scrutiny, company directors might become careless in how they utilize them, leading to inefficient investments.
4. **More Capitalization:** The continuous retention of profits can sometimes lead to over-capitalization, where the company has more capital than it can productively use, potentially reducing its return on investment.
5. **Negative impact on company image:** High capitalization due to retained earnings can sometimes negatively affect the company's image in the market.
In simple words: Retained earnings are company profits that are kept and reused for the business instead of being paid to owners. They are a cheap, steady source of money that helps the company grow and stay stable without needing to pledge assets. However, it can upset shareholders who want dividends, and if not used wisely, it might mean the company has too much money sitting idle.

🎯 Exam Tip: Define retained earnings as internal financing. For merits, highlight cost-effectiveness and permanence. For demerits, focus on shareholder dissatisfaction and the risk of inefficient capital allocation due to lack of external oversight.