Financial Services
Question : Case Study: XYZ Ltd. - Raising Finance for Expansion
XYZ Ltd. is a growing company that manufactures electronic gadgets. The company has been successful in the market and is planning to expand its operations. To finance this expansion, XYZ Ltd. is considering various sources of business finance.
Questions : Equity Shares and Preference Shares
What is the main characteristic of equity shares?
Option 1: Fixed dividend payments
Option 2: No voting rights
Option 3: Ownership in the company
Option 4: Guaranteed redemption
Correct Answer: Ownership in the company
Solution : The correct answer is (c) Ownership in the company
Equity shares represent ownership or equity ownership in a company. Shareholders who hold equity shares have ownership rights in the company, which typically includes voting rights, the right to share in the company's profits (through dividends), and the right to participate in decision-making processes related to the company's operations and policies. Unlike debt securities (e.g., debentures), equity shares do not guarantee fixed dividend payments or redemption; instead, the dividend payments to equity shareholders are variable and based on the company's profitability and the decisions of the board of directors.
Question : Case Study 32
UVW Inc. is a technology startup aiming to raise funds for its innovative projects. The company's management is considering different methods of raising capital from the capital market.
Question:
If UVW Inc. chooses to issue new shares to the public, what is this process called?
Option 1: IPO (Initial Public Offering)
Option 2: Follow-on Public Offering (FPO)
Option 3: Private Placement
Option 4: Rights Issue
Correct Answer: IPO (Initial Public Offering)
Solution : The correct answer is (a) IPO (Initial Public Offering)
An IPO is the first sale of a company's shares to the public, allowing the company to raise capital by selling ownership stakes to a wide range of investors. It's a significant event for a company, as it transitions from being privately held to becoming a publicly traded entity.
Question : Identify the principle of management violated in the below case. The marketing manager has asked his subordinate to grant 15% discount to its regular customer where as the finance minister asked not to give more than 10% discount to any customer.
Option 1: Unity of direction
Option 2: Unity of command
Option 3: Division of work
Option 4: Scaler chain
Correct Answer: Unity of command
Solution : Unity of command is being violated here. It involves each subordinate should receive orders from only one superior. The subordinate is accountable to his single Boss only. Hence Option B is correct.
Question : Comprehension
In the following passage, some words have been deleted. Fill in the blanks with the help of the alternatives given. Select the most appropriate option for each blank.
Unemployment is a major issue in India that (1)________millions of people across the country. Despite being one of the fastest-growing economies in the world, India has struggled to create (2)________jobs to keep up with its rapidly expanding population. The unemployment rate in India varies widely (3)________ different states and regions. Young people, in particular, face significant challenges in finding employment. Many are highly educated but lack the skills and experience needed to (4)________ in a highly competitive job market. There are many factors contributing to the high levels of unemployment in India. Some of these include a lack of investment in infrastructure, a mismatch between the skills of workers and the needs of employers, and a lack of access to finance for small and medium-sized businesses. The Indian government has launched several initiatives to address the issue of unemployment in the country. These include programs to support small businesses, increase investment in infrastructure and provide vocational training to young people. However, much more needs to be done to create sustainable, long-term employment opportunities for all Indians. Unemployment can have serious social and economic consequences, including poverty, crime and social (5)________.
Select the most appropriate option to fill in blank no. 3.
Option 1: from
Option 2: between
Option 3: across
Option 4: amongst
Correct Answer: across
Solution : The correct answer is the third option.
Explanation: The phrase "varies widely across different states and regions" indicates that the unemployment rate differs significantly in various areas of India. "Across" here means in different parts or areas, emphasising the wide-ranging differences in unemployment rates throughout the country.
Question : Case Study: ABC Corporation - Financing Growth Strategies
ABC Corporation, a leading manufacturing company, is looking to finance its growth strategies. The company is exploring various sources of business finance to achieve its expansion goals.
If ABC Corporation issues non-cumulative preference shares, what does this mean?
Option 1: Dividends on these shares must be paid before equity shareholders
Option 2: The company cannot issue any more preference shares
Option 3: Dividends on these shares can be postponed
Option 4: Shareholders have no voting rights
Correct Answer: Dividends on these shares can be postponed
Solution : The correct answer is (c) Dividends on these shares can be postponed
Non-cumulative preference shares do not carry the right to accumulate unpaid dividends. If the company is unable to pay dividends in a particular period, the shareholders of non-cumulative preference shares do not have the right to claim those unpaid dividends in the future. This is in contrast to cumulative preference shares, where any unpaid dividends accumulate and must be paid in future periods before any dividends are distributed to equity shareholders.
Questions : Different Sources of Finance
What is the primary characteristic of equity shares?
Option 2: Ownership in the company
Option 3: Guaranteed redemption
Option 4: No voting rights
Solution : The correct answer is (b) Ownership in the company
Equity shares represent ownership in a company, conferring the shareholder with ownership rights and an ownership stake in the company. Equity shareholders have a claim on the company's assets and earnings and typically have voting rights, allowing them to participate in key decisions and the governance of the company. Unlike debt instruments such as debentures, equity shares do not entail fixed dividend payments or guaranteed redemption. Instead, dividends to equity shareholders are subject to profitability and the decisions of the company's board of directors.
Question : Case Study 34
ABC Ltd. is a conglomerate planning to expand its operations. The company's management is considering the roles of SEBI in the financial market.
Question :
Which of the following is not a function of SEBI?
Option 1: Regulatory functions
Option 2: Protective functions
Option 3: Allocation of resources
Option 4: Developmental functions
Correct Answer: Allocation of resources
Solution : The correct answer is (c) Allocation of resources
Allocation of resources is not a function of SEBI. SEBI primarily focuses on regulatory, protective, and developmental functions within the securities market. The allocation of resources is a broader economic concept related to efficient distribution and utilization of resources in the economy, and it is not specifically a role of SEBI.
Question : Assertion-Reason Questions: Chapter - Sources of Business Finance
Questions : Business Finance and Its Meaning
Assertion: Need for business finance arises due to uncertainties and risks.
Reason: Business operations are always predictable and stable.
Option 1: Both assertion and reason are true, and the reason is the correct explanation of the assertion.
Option 2: Both assertion and reason are true, but the reason is not the correct explanation of the assertion.
Option 3: Assertion is true, but the reason is false.
Option 4: Both assertion and reason are false.
Correct Answer: Both assertion and reason are true, and the reason is the correct explanation of the assertion.
Solution : The correct answer is (a) Both assertion and reason are true, and the reason is the correct explanation of the assertion.
The assertion is true. The need for business finance does indeed arise due to uncertainties and risks that businesses face in their operations. Uncertainties in the market, economic fluctuations, competition, changes in consumer behavior, and various other unpredictable factors necessitate financial planning and resources to mitigate risks and sustain the business.
The reason is the correct explanation. Business operations are not always predictable and stable. The business environment is characterized by uncertainties, and operations can be affected by various factors, leading to fluctuations and risks. Due to this unpredictability, businesses need financial resources to navigate through challenges, ensure stability, and seize opportunities that arise. Finance helps in managing and mitigating the impact of uncertainties and risks on business operations.
Questions : Debentures and Financial Instruments
What is the primary difference between debentures and equity shares?
Option 1: Debentures provide ownership rights
Option 2: Equity shares pay fixed interest
Option 3: Debentures are issued to employees only
Option 4: Equity shares require repayment at maturit
Correct Answer: Debentures provide ownership rights
Solution : The correct answer is (a) Debentures provide ownership rights
Debentures represent a form of debt where the holders (debenture holders) are creditors to the company and do not possess ownership rights in the company. They are entitled to receive a fixed rate of interest and the repayment of the principal amount at maturity.
On the other hand, equity shares represent ownership in the company and provide shareholders with ownership rights, including voting rights and the right to share in the company's profits (through dividends). Unlike debentures, equity shares do not involve fixed interest payments or repayment at maturity.
Question : Case Study 18:
LMN Corporation is a conglomerate planning to diversify its operations by entering the healthcare industry.
To finance its entry into the healthcare industry, LMN Corporation is considering issuing bonds. What type of market activity is this?
Option 1: Secondary market
Option 2: Primary market
Option 3: Money market trading
Option 4: Equity share issuance
Correct Answer: Primary market
Solution : The correct answer is (b) Primary market
Issuing bonds to finance its entry into the healthcare industry would involve engaging in the primary market. The primary market is where new securities, like bonds, are issued and sold for the first time by the issuing company or entity to investors. In this case, LMN Corporation is issuing bonds to raise capital for its expansion into the healthcare industry.
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