Tag: non-institutional sources - long-term

Questions Related to non-institutional sources - long-term

A project has an equity beta of 1.2 and debt beta of 0. This project is finance by combination of $30\%$ debt and $70\%$ equity, then project beta is _______.

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

  1. 0

  2. 1

  3. 0.84

  4. 0.64

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Correct Option: C
Explanation:

$\beta _p$ = $\frac{{\beta equity X E}}{D + E}$ + $\frac{{\beta debt X D}}{D + E}$.

Assets of the company belongs to the _______________.

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

  1. company

  2. share holders

  3. members

  4. promoters

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Correct Option: B
Explanation:
The shareholders are the owners of the company while the Board of Directors is the chief managing body elected by the shareholders. The capital of the company is divided into smaller parts called ‘shares’. Thus the assets of the company belongs to share holders.

Tick mark the correct answer.
Identify the source of finance that does not pose a burden on a company's finance.

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

  1. Debentures

  2. Public deposit

  3. Loans from financial institutions

  4. Retained earnings

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Correct Option: D

Identify the limitation of retained earnings ___________________.

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

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

  2. It does not create any charge on the assets of the firm while providing funds.

  3. It is a convenient and continuous source of funds.

  4. It needs to promote the sales of an organisation.

Show answer
Correct Option: A
Explanation:
Limitation of retained earnings:It is an uncertain source of funds as the profits of business are fluctuating. Retained earning refers to the accummulated net income of a company or a business organization.

Retained earnings does not involve any explicit cost in the form of ________.

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

  1. Interest

  2. Dividend

  3. Floatation cost

  4. All of the above

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Correct Option: D
Explanation:

Retained earning refers o the accumulated net income of a company or a business organization.Retained earnings does not involve any explicit cost in the form of interest, dividend and floating cost.

The opportunity cost associated with _____ is not recognized by many firms.

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

  1. Trade credit

  2. Debentures

  3. Retained earning

  4. Preference shares

Show answer
Correct Option: C
Explanation:

Retained earning refers o the accumulated net income of a company or a business organization.The opportunity cost associated with retained earning is not recognized by many firms. The opportunity cost refers to the cost of letting go the next best alternative use.

 Excessive ploughing-back may cause dissatisfaction among the shareholders as they would get _______ dividends.

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

  1. Higher

  2. Lower

  3. No

  4. Constant

Show answer
Correct Option: B
Explanation:

Excessive ploughing-back may cause dissatisfaction among the shareholders as they would get lower dividends. Excessive ploughing back of profits will result in over capitalization which will in turn lead to decrease in ROI.

The funds available with a company after paying all claims including tax and dividend is called _______.

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

  1. new profit

  2. net operating profit

  3. capital profit

  4. retained earnings

Show answer
Correct Option: D
Explanation:

A company generally does not distribute all its earnings among the shareholders as dividends. A portion of the net earnings may be retained in the business for use in the future. This is known as retained earnings. It is a source of internal financing or self-financing or ‘ploughing-back of profits’.

Which one is more appropriate for cost of retained earnings?

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

  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

Show answer
Correct Option: B
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.

state the following statements are True or False:

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

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

  1. True

  2. False

Show answer
Correct Option: B
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.