Tag: sources of business finance - 2

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Questions Related to sources of business finance - 2

Multiple choice organisation of commerce and management sources of business finance - 2 equity and preference shares equity shares and preference shares non-institutional sources - long-term

Which one is more appropriate for cost of retained earnings?

  1. Weighted Average Cost of Capital.

  2. Opportunity cost to the firm.

  3. Expected rate of return by the investor.

  4. None of the above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Opportunity cost to the firm is the more appropriate for cost of retained earnings. The opportunity cost of the firm  includes explicit cost as well as implicit cost.

Multiple choice organisation of commerce and management sources of business finance - 2 equity and preference shares equity shares and preference shares non-institutional sources - long-term

state the following statements are True or False:

An individual can become a part of the company if the individual purchases the companies debt. 

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

An individual can become a part of the company if the individual purchases the companies debt- this is a false statement as debt is known as borrowed fund of the company and the person who purchases companies debt are known as the borrowers.

Multiple choice organisation of commerce and management sources of business finance - 2 equity and preference shares equity shares and preference shares non-institutional sources - long-term

Which one of the statements applies only to Preference Shareholders?

  1. Shareholders risk the loss of investment.

  2. Shareholders bear the risk of no dividends in the year of losses.

  3. Shareholders usually have the right to vote.

  4. Dividends are usually a fixed amount in every financial year.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The preference shares are the ones which preferential rights like prior payment of dividend and return of capital.The dividend also remains the same for every financial year and the company has a fixed liability to pay the interest and the amount of profits cannot define the payment of interest on preference shares.

Multiple choice organisation of commerce and management sources of business finance - 2 equity and preference shares equity shares and preference shares non-institutional sources - long-term

Which of the following is not a merit of retained earnings?

  1. As the funds are generated internally, there is a greater degree of operational freedom and flexibility.

  2. Retained earnings is a permanent source of funds available to an organisation.

  3. It is an uncertain source of funds as the profits of business are fluctuating.

  4. It enhances the capacity of the business to absorb unexpected losses.
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

A part of the net profits that are usually kept for use in the future is termed as retained earnings. Retained earnings are uncertain sources of funds as the profits of a business are fluctuating and can't be always determined. This is a demerit of retained earnings.

Multiple choice organisation of commerce and management sources of business finance - 2 equity and preference shares equity shares and preference shares non-institutional sources - long-term

Portion of the net earnings retained in the business for future use is known as _______.

  1. Net profit

  2. Retained earnings

  3. Gross profit

  4. None of the above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The a company or a business revolves around earning profits, for the same, it has to perform financial planning to keep the business running. Some parts of the profits that are earned are usually kept for use in the future. This foresight of retaining a portion of the net earnings is known as retained earnings.

Multiple choice organisation of commerce and management sources of business finance - 2 equity and preference shares equity shares and preference shares non-institutional sources - long-term

Retained earnings is a ___________ source of funds available to an organisation.

  1. Temporary

  2. Permanent

  3. Higher

  4. Both a and b
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

A part of the net profit that is usually kept for use in the future is known as retained earnings. Retained earnings are a permanent source of funds available to the organisation as it is the amount that has been retained from the net earnings by the organisation and can be flexibly used.

Multiple choice organisation of commerce and management sources of business finance - 2 equity and preference shares equity shares and preference shares non-institutional sources - long-term

Retained earnings is a source of ___________.

  1. Internal financing

  2. Ploughing back of profits

  3. Self financing

  4. All of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Retained earnings are the funds which have been kept by the company for their future expenses out of the net earnings gained by the company over the course of business. These retained earnings can be a source of funds for internal financing, as a help in the low business turnover or self financing for the smooth functioning of the business or company.

Multiple choice organisation of commerce and management sources of business finance - 2 equity and preference shares equity shares and preference shares non-institutional sources - long-term

The money raised by issue of preference shares is called as _________ share capital.

  1. Equity

  2. Preference

  3. Right

  4. Bonus
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The capital raised by issue of preference shares is called as preference share capital.  The preference share holders enjoy a preferential position over equity shareholder in receiving fixed dividend out of the net profits of the company and receiving capital at the time of liquidation.

Multiple choice organisation of commerce and management sources of business finance - 2 equity and preference shares equity shares and preference shares non-institutional sources - long-term

The rate of dividend on preference shares is generally _________ than the rate of interest on debentures.

  1. lower

  2. higher

  3. equal

  4. medium
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
The capital raised by issue of preference shares is called preference share capital.Debentures are an important instrument for raising long term debt capital. A company can raise funds through issue of debentures, which bear a fixed rate of interest. The rate of dividend on preference shares is generally higher than the rate of interest on debentures.
Multiple choice organisation of commerce and management sources of business finance - 2 equity and preference shares equity shares and preference shares non-institutional sources - long-term

Preference shares resemble debentures as they bear ________ rate of return.

  1. fixed

  2. fluctuating

  3. higher

  4. lower
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The capital raised by issue of preference shares is called preference share capital.Debentures are an important instrument for raising long term debt capital. Both resembles each other as they bear fixed rate of return on the capital that has been raised.