Unit 8: Sources of Business Finance
1. **What is meant by business finance?**
A) The money required for daily expenses only
B) The funds necessary for both starting and running a business
C) Only the money borrowed from banks
D) Funds raised exclusively through selling shares
**Answer:** B) The funds necessary for both starting and running a business
2. **Which of the following is classified as a long-term source of finance?**
A) Trade Credit
B) Debentures
C) Commercial Paper
D) Bank Overdraft
**Answer:** B) Debentures
3. **In a business, working capital is mainly used to finance:**
A) Fixed assets like machinery
B) Long-term investments
C) Current assets like raw materials
D) Company shares
**Answer:** C) Current assets like raw materials
4. **Which source of finance is known for providing funds without diluting ownership?**
A) Issue of equity shares
B) Lease financing
C) Retained earnings
D) Trade credit
**Answer:** C) Retained earnings
5. **Public deposits are generally used by companies to meet their:**
A) Day-to-day working capital requirements
B) Long-term expansion projects
C) Short-term and medium-term requirements
D) Equity capital requirements
**Answer:** C) Short-term and medium-term requirements
6. **What type of financing is factoring considered?**
A) Long-term financing
B) Medium-term financing
C) Short-term financing
D) Owner’s fund financing
**Answer:** C) Short-term financing
7. **Which of the following statements is true about equity shares?**
A) Equity shareholders receive a fixed rate of dividend.
B) Equity shares provide voting rights to shareholders.
C) Equity shares must be repaid within five years.
D) Equity shareholders do not bear any risk in the company.
**Answer:** B) Equity shares provide voting rights to shareholders.
8. **What is a common limitation of using trade credit as a source of finance?**
A) High-interest cost
B) Limited availability of funds
C) Reduction in company assets
D) Need for shareholder approval
**Answer:** B) Limited availability of funds
9. **Commercial paper is best suited for companies that require:**
A) Long-term financing
B) High-interest loans
C) Short-term, unsecured financing
D) Loans with asset-backed security
**Answer:** C) Short-term, unsecured financing
10. **What is a major benefit of lease financing for a lessee?**
A) Ownership of the asset
B) Low documentation requirements
C) Ability to alter the asset
D) Control over residual value of the asset
**Answer:** B) Low documentation requirements
11. **Which factor does NOT generally influence the choice of a source of finance?**
A) Tax benefits
B) Flexibility and ease of obtaining funds
C) Personal credit score of employees
D) Cost of procurement and utilization
**Answer:** C) Personal credit score of employees
12. **Which of the following is an example of owner’s funds?**
A) Bank loan
B) Trade credit
C) Equity shares
D) Commercial paper
**Answer:** C) Equity shares
13. **What type of shares gives shareholders a preferential right to dividends and repayment during liquidation?**
A) Equity shares
B) Preference shares
C) Debentures
D) Convertible bonds
**Answer:** B) Preference shares
14. **The term ‘ploughing back of profits’ is associated with which source of finance?**
A) Public deposits
B) Retained earnings
C) Commercial banks
D) Trade credit
**Answer:** B) Retained earnings
15. **Which of the following financing options requires no collateral?**
A) Commercial paper
B) Bank loan
C) Debentures
D) Mortgage financing
**Answer:** A) Commercial paper
16. **Which form of financing might reduce the current voting power of existing shareholders?**
A) Retained earnings
B) Public deposits
C) Issue of additional equity shares
D) Lease financing
**Answer:** C) Issue of additional equity shares
17. **Which is a key limitation of retained earnings as a source of finance?**
A) High-interest costs
B) Limited funds depending on profits
C) Dilution of ownership
D) High administrative costs
**Answer:** B) Limited funds depending on profits
18. **Which financial instrument is commonly used for international financing by companies?**
A) Treasury bills
B) Convertible bonds
C) Letters of credit
D) Global Depository Receipts (GDRs)
**Answer:** D) Global Depository Receipts (GDRs)
19. **A business that needs financing for 3-5 years is most likely to consider which type of funds?**
A) Short-term sources
B) Medium-term sources
C) Long-term sources
D) Venture capital
**Answer:** B) Medium-term sources
20. **Which financing method allows a company to sell its receivables to a third party to receive immediate funds?**
A) Leasing
B) Trade credit
C) Factoring
D) Issue of bonds
**Answer:** C) Factoring
21. **What does the term ‘cumulative preference shares’ imply?**
A) Shareholders accumulate voting rights each year.
B) Unpaid dividends accumulate and are paid in future years.
C) Preference shareholders can convert shares to equity.
D) Shares accumulate interest instead of dividends.
**Answer:** B) Unpaid dividends accumulate and are paid in future years.
22. **In case of liquidation, which shareholders have a secondary claim after creditors?**
A) Preference shareholders
B) Debenture holders
C) Equity shareholders
D) Trade creditors
**Answer:** A) Preference shareholders
23. **Which type of debenture allows conversion to equity shares at a later date?**
A) Secured debentures
B) Non-convertible debentures
C) Convertible debentures
D) Bearer debentures
**Answer:** C) Convertible debentures
24. **Why might a business choose public deposits over bank loans?**
A) Lower interest rates than banks
B) Voting rights provided to depositors
C) Less procedural complexity
D) Guaranteed long-term funds
**Answer:** C) Less procedural complexity
25. **Which financial institution provides long-term finance and technical assistance to businesses?**
A) Commercial banks
B) Development banks
C) Insurance companies
D) Credit unions
**Answer:** B) Development banks
26. **Commercial banks are best suited for providing which type of financing?**
A) Only long-term financing
B) Medium and short-term financing
C) Owner’s capital
D) Venture capital
**Answer:** B) Medium and short-term financing
27. **An advantage of equity shares is:**
A) Guaranteed dividends for shareholders
B) Tax-deductible dividends
C) Permanent capital for the business
D) No effect on existing voting rights
**Answer:** C) Permanent capital for the business
28. **A limitation of commercial paper as a financing option is that it:**
A) Requires asset-backed collateral
B) Is limited to highly rated companies
C) Is considered a permanent source of finance
D) Lacks flexibility in repayment terms
**Answer:** B) Is limited to highly rated companies
29. **Which of the following is NOT a characteristic of debentures?**
A) Fixed interest rate
B) No voting rights
C) Ownership capital
D) Credit rating requirement
**Answer:** C) Ownership capital
30. **What type of financial arrangement involves one party using an asset owned by another party in exchange for periodic payments?**
A) Trade credit
B) Leasing
C) Factoring
D) Debentures
**Answer:** B) Leasing
31. **Which of the following sources of finance is an internal source?**
A) Loans from financial institutions
B) Retained earnings
C) Commercial paper
D) Lease financing
**Answer:** B) Retained earnings
32. **The funds provided by owners of a company that do not need to be repaid during the life of the business are called:**
A) Owner's funds
B) Borrowed funds
C) Public deposits
D) Debentures
**Answer:** A) Owner's funds
33. **Which type of capital is primarily used for purchasing long-term assets like land and buildings?**
A) Working capital
B) Fixed capital
C) Loan capital
D) Public capital
**Answer:** B) Fixed capital
34. **The primary advantage of using retained earnings as a source of finance is that it:**
A) Increases liabilities
B) Does not dilute ownership
C) Is tax-deductible
D) Requires shareholder approval
**Answer:** B) Does not dilute ownership
35. **Which type of financing allows companies to use assets without purchasing them, commonly used for equipment or technology?**
A) Debentures
B) Lease financing
C) Trade credit
D) Public deposits
**Answer:** B) Lease financing
36. **Public deposits are considered a viable source for which type of business needs?**
A) Only long-term projects
B) Short-term and medium-term needs
C) Equity investments
D) Purchasing machinery and real estate
**Answer:** B) Short-term and medium-term needs
37. **Which source of funds is generally associated with a fixed interest rate and requires repayment at a future date?**
A) Equity shares
B) Preference shares
C) Debentures
D) Retained earnings
**Answer:** C) Debentures
38. **The issuance of which financial instrument can help a business increase its cash flow by selling accounts receivable?**
A) Lease financing
B) Factoring
C) Commercial paper
D) Public deposits
**Answer:** B) Factoring
39. **What is the key benefit of raising funds through equity shares?**
A) Tax savings on dividends
B) Repayment obligation
C) No dilution of ownership
D) Permanent capital for the company
**Answer:** D) Permanent capital for the company
40. **Which of the following allows companies to secure short-term funds by issuing an unsecured promissory note?**
A) Trade credit
B) Retained earnings
C) Commercial paper
D) Preference shares
**Answer:** C) Commercial paper
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41. **The funds generated by selling goods or services on credit are termed as:**
A) Factoring
B) Trade credit
C) Public deposits
D) Retained earnings
**Answer:** B) Trade credit
42. **Which type of debentures offers investors the option to convert them into equity shares?**
A) Non-convertible debentures
B) Convertible debentures
C) Secured debentures
D) Registered debentures
**Answer:** B) Convertible debentures
43. **A business that needs funds for seasonal inventory build-up is best suited to use:**
A) Long-term loans
B) Equity shares
C) Commercial paper
D) Trade credit
**Answer:** D) Trade credit
44. **In which of the following does the lessee never gain ownership of the asset?**
A) Lease financing
B) Equity shares
C) Debentures
D) Retained earnings
**Answer:** A) Lease financing
45. **Which is a major limitation of relying on commercial banks for business finance?**
A) High flexibility of loans
B) Secrecy of business information
C) Detailed investigation of business operations
D) No fixed repayment terms
**Answer:** C) Detailed investigation of business operations
46. **For financing long-term projects, companies may issue which of the following?**
A) Trade credit
B) Preference shares
C) Commercial paper
D) Factoring
**Answer:** B) Preference shares
47. **Which financial instrument is often associated with high liquidity and short maturity, ideal for companies with good credit ratings?**
A) Debentures
B) Preference shares
C) Commercial paper
D) Public deposits
**Answer:** C) Commercial paper
48. **A business's choice of source of finance based on the repayment period exceeding five years is known as:**
A) Short-term financing
B) Medium-term financing
C) Long-term financing
D) Equity financing
**Answer:** C) Long-term financing
49. **When a business needs short-term financing without affecting its assets, which source is most suitable?**
A) Commercial paper
B) Secured debentures
C) Equity shares
D) Retained earnings
**Answer:** A) Commercial paper
50. **If a company requires funds quickly for a project without issuing new shares, it may opt for:**
A) Public deposits
B) Preference shares
C) Retained earnings
D) Trade credit
**Answer:** C) Retained earnings
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