Sources Of Business Finance - Class 10 Elements Of Business - Extra Questions

What are Owners' funds?

Owners' funds consist of equity share capital, preference share capital and reserves, and surpluses or retained earnings. These are called owners' funds as they are provided by or belong to the shareholders of the company which is, in fact, its owners.


How are shareholders likely to gain with the loan component in the capital structure?

When there is a loan component in the share capital,shareholders are likely to have  benefit of higher rate of return in the share capital.This is because loan carries a fixed charge that is interest which is deductible from Earnings before tax.Although this is possible when the rate of return of the compny is greater than the rate of interest of borrowed capital.


Write short answer for the following.
Explain in brief capital raising stage.

After incorporation of the company, the next stage is known as capital raising stage as capital is of utmost requirement to ensure the smooth functioning of the firm. A company can raise capital by applying for a loan or opening new lines of credit from the banking and financial companies.


Essay Type Question.
Explain in brief capital subscription stage?

After getting the certificate of incorporation the private companies get formulated and can commence their business activities but a public limited company has to perform the third stage that is the capital subscription stage:-
The steps involved in the stage of commencement of business are:-
1. SEBI Approval:- SEBI (Security Exchange Board of India) is a regulatory body, which controls the capital market of India to protect the interest of investors. The Public Ltd. companies must submit all the relevant information with the SEBI before issuing their securities in the capital market. 
2. Prospectus or a Statement in Lieu of Prospectus:- A public company has to prepare another important document called a prospectus. It is a circular or invitation issued to invite the general public for subscribing to the shares of the company. This document has to be deposited with the registrar.
3. Appointment of Bankers, Brokers, and Underwriters:- To receive and deposit the application money banker is appointed. To sell the shares brokers are appointed. They encourage the public to buy the shares and charge a commission for the same. If the company is not sure of selling the whole lot of shares it may appoint underwriters. They underwrite the shares and charge commission for the same. 
4. Minimum Subscription:- To make sure that the company does not have a shortage of funds, it is made compulsory that company must receive an application for some minimum number of shares. A public limited company cannot make an allotment of shares unless a minimum subscription is received.
5. Application to stock exchange:- A firm must get itself listed in stock exchange before selling its securities to the general public. The company may apply in any of the recognized stock exchanges to get permission.
6. Allotment of Shares:- After getting the name listed, the company prepares a return of allotment. Return of allotment is a statement giving details about the names and addresses of all the shareholders.


Select the proper option from the options given below and rewrite the sentence:
Perishable goods are stored in_________.

(c) cold storage warehouses

Cold storage warehouse is an example of climate-controlled warehouse and is used to store frozen products. It is primarily used to keep food (dairy, produce, meat) from spoilage, prior to transportation or sale.


What is Stock Index Future?

Stock Index Future is the derivative based on the senses started by the National Stock Exchange sometime back. These are futures contracts whereby a trader can buy or sell a financial index today to be settled at a future date.


Answer briefly:
What is the importance of finance to a business concern?

Finance is needed for the following purpose:
1. Establish a business.
2. Run a business .
3. Modernize, expand and diversify the activities of business.
4. For Acquisition of assets for the business. 
5. For running day-to-day operations of a business. 


What do you mean by Inter-corporate deposits?

Deposits made by one firm to another are known as inter-corporate deposits. All public companies, whether they have share capital or not, have the option of using this finance. It consists of
  1. When a company acquires security of another company 
  2. When a company gives loans to another company.
  3. When a company gives a guarantee to any person or institution who provides a loan to another company. In general, we can say when companies arrange funds from another company it is known as Inter-corporate deposits.


What are Borrowed funds?

Borrowed funds can be in the form of loans, debentures, public deposits, etc. These may be borrowed from banks, other financial institutions, debenture holders, and the public. They, generally, carry a rate of interest that is to be paid at specific time intervals and are repayable after a certain amount of time.


What is required to tackle the uncertainty in respect of availability and timings of funds? 
Name the concept involved and explain any three points of its importance.

 Financial planning helps in determining the objectives, policies, procedures, programmes and budgets to deal with the financial activities of an enterprise.
The following points highlight the  importance of financial planning:
  •  Helps in coordinating: By providing clear policies and procedures, it helps in coordinating various business functions.
  • Proper utilisation of funds Finance acts as the life-blood for an organisation. For smooth functioning, it is required by every organisation. Financial planning ensures availability of funds whenever required. Thus, it helps in proper utilisation of funds.
  • Base for financial control It helps in providing the base for checking and comparing activities from the financial viewpoint.


How are shareholders likely to gain with loan component in the capital employed? Explain with a suitable example.

With a debt component in the total capital, shareholders are likely to have the benefit of a higher rate of return on the share capital. This is because debt/loan carries a fixed charge and the amount of interest paid is deductible from the earnings before tax payment. The benefit to the shareholders will be realized only if the average rate of return on total capital invested is more than the rate of interest payable on loan/debt.
For example, Trading on equity refers to the use of fixed cost sources of finance such as debentures and
preference share capital in the capital structure so as to increase the return on equity shares. There
are two conditions to use trading on equity:
(i) The rate of interest on loan/debentures should be less than the rate of Return on Investment.
(ii) The interest should be deducted from profit before tax.
For example, let us consider two public companies X Ltd and Y Ltd.
Y ltd have 35lacs as equity shares and 15 lacs as 12% debentures hence int on debentures= 12% of 15 lacs
                    rupees(X)rupees (Y)
 Capital 5000000 5000000
 Ebit 1000000 100000
 less intrest  180000
 less tax@50% 500000 410000
 earning after tax 500000 410000
 Therefore earning per share= earning after-tax / no. of shareholders
For X ltd. 500000/500000 = re 1
For Y ltd   410000/350000 = re 1.17
Thus, it can be concluded that Y Ltd using fixed cost sources, i.e. debentures, earn a relatively high rate of return on equity capital.


Class 10 Elements Of Business Extra Questions