This page contains the entrepreneurship class 11 cbse book chapter/unit Resource Mobilization: Sources of Finance notes where in the questions/answers/solutions for this chapter/unit 7.3 are covered.
This page contains Resource Mobilization: Sources of Finance related solutions. If you’re looking for other questions/solutions in the Resource Mobilization chapter, you can find them at
•
•
•
•
•
Q.1. Answer in not more than 15 words:
Question Q.1.(i)
Q.1.(i) What is public financing?
Answer Q.1.(i)
Public financing means raising funds from the general public through shares, debentures, or deposits.
Question Q.1.(ii)
Q.1.(ii) Define debentures as a source of finance.
Answer Q.1.(ii)
A debenture is a written instrument acknowledging debt, repayable with fixed interest after a period.
Question Q.1.(iii)
Q.1.(iii) Why is Equity Share capital called “Risk Capital’?
Answer Q.1.(iii)
It is called risk capital because equity shareholders are true risk bearers of the company.
Question Q.1.(iv)
Q.1.(iv) From which type of capital are raw-materials purchased?
Answer Q.1.(iv)
Raw materials are purchased from working capital, meant for day-to-day operational expenses.
Q.2. Answer in not more than 50 words:
Question Q.2.(i)
Q.2.(i) On the basis of duration, classify the sources of finance.
Answer Q.2.(i)
On the basis of duration, sources of finance are classified into:
1.
Short-term sources
2.
Medium-term sources
3.
Long-term sources
Question Q.2.(ii)
Q.2.(ii) What are the major sources of capital of a Public Limited Company?
Answer Q.2.(ii)
The major sources of capital of a Public Limited Company are:
1.
Equity Share Capital
2.
Preference Share Capital
3.
Debentures
4.
Public Deposits
Question Q.2.(iii)
Q.2.(iii) In terms of tax benefits, which of the two-preference shares or debentures will be preferred by the organization? Give reasons.
Answer Q.2.(iii)
Debentures will be preferred because interest on debentures is a charge against profit and is tax-deductible, while dividend on preference shares is paid out of profit and does not provide such tax benefit. Therefore, debentures are more beneficial in terms of tax advantage.
Q.3. Answer in not more than 75 words:
Question Q.3.(i)
Q.3.(i) Define ‘personal financing’. Give its sources.
Answer Q.3.(i)
Personal financing means the finance arranged by the entrepreneur from personal and informal sources. The entrepreneur may invest personal cash, convert personal assets into cash, or use help from family and close persons. Its sources are:
1.
Personal savings
2.
Friends and relatives
3.
Chit funds
4.
Deposits from dealers
Question Q.3.(ii)
Q.3.(ii) Differentiate between ‘equity shares’ and ‘preference shares’.
Answer Q.3.(ii)
Basis
Equity Shares
Preference Shares
Meaning
Shares which are not preference shares.
Shares having priority in dividend and return of capital.
Risk
Equity shareholders are true risk bearers.
Preference shareholders have safer position than equity holders.
Dividend
No fixed obligation of dividend.
Fixed dividend is paid before equity dividend.
Control
Maximum voting rights and control.
Normally limited voting rights.
Question Q.3.(iii)
Q.3.(iii) Differentiate between ‘owner’s funds‘ and ‘borrowed funds’.
Answer Q.3.(iii)
Basis
Owner’s Funds
Borrowed Funds
Meaning
Capital invested by the owners in the enterprise.
Capital raised as debt/loan from outsiders.
Obligation
No obligation to repay equity in normal course.
Must be repaid after a fixed period.
Return
Return is in the form of dividend, not fixed.
Return is in the form of interest, generally fixed.
Control
Gives ownership and voting rights.
Does not give ownership control.
Q.4. Answer in not more than 150 words:
Question Q.4.(i)
Q.4.(i) Public deposits are a good source of raising medium term finance. How?
Answer Q.4.(i)
Public deposits are considered a good source of medium-term finance because companies can raise funds directly from the public for a fixed period, generally up to a few years. The public deposits are simple and economical because the company does not have to give security like in many loans, and the procedure is comparatively easier. They help companies meet medium-term financial needs without diluting ownership control.
Question Q.4.(ii)
Q.4.(ii) When is it appropriate to use financial institutions as a source of financing?
Answer Q.4.(ii)
It is appropriate to use financial institutions when the entrepreneur needs medium-term or long-term finance for expansion, modernization, purchase of machinery, or setting up large business projects. Financial institutions are useful when large funds are required and the entrepreneur cannot depend only on personal or informal sources.
Question Q.4.(iii)
Q.4.(iii) Name the following:
(a)
The persons who are given preference in payment of dividend and repayment of capital.
(b)
The person who are owners of a company.
(c)
The secured creditors of a company.
(d)
The source of finance in which the right to use assets for a specific period is worked out.
Answer Q.4.(iii)
(a)
The persons who are given preference in payment of dividend and repayment of capital:Preference shareholders.
(b)
The persons who are owners of a company:Equity shareholders.
(c)
The secured creditors of a company:Debenture holders.
(d)
The source of finance in which the right to use assets for a specific period is worked out:Lease financing.
Q.5. Answer in not more than 250 words:
Question Q.5.(i)
Q.5.(i) What is ‘venture capital’? Explain the mode of raising funds?
Answer Q.5.(i)
Venture capital is finance provided to new and risky business ventures which have high growth potential but may not easily get funds from traditional sources. It is especially useful for new entrepreneurs, technology-based ventures, and innovative projects. Venture capital investors provide funds to support the enterprise in its early stages and expect higher returns in future because the risk involved is high.
The mode of raising funds through venture capital generally works in this way:
1.
The entrepreneur prepares a strong business idea or project.
2.
The proposal is presented to venture capital institutions or investors.
3.
These investors study the future potential, risk, and growth possibilities of the business.
4.
If satisfied, they provide capital support.
5.
In return, they may get a share in ownership or future returns from the business.
Thus, venture capital is an important modern source of finance for innovative businesses where ordinary financing may not be easily available.
Question Q.5.(ii)
Q.5.(ii) Discuss the various sources of financing capital through ownership.
Answer Q.5.(ii)
Ownership capital means funds raised from the owners of the business. The main sources are:
1.
Equity Shares– These represent ownershipcapital. Equity shareholders are the real owners and true risk bearers of the company.
2.
Preference Shares– These carry preference in payment of dividend and repayment of capital.
3.
Retained Earnings– A part of profit kept back in the business for future use instead of distributing it fully.
4.
Personal Savings– In small business, the entrepreneur may use own savings.
These sources are called ownership sources because they belong to the owners and do not create debt liability in the normal course.
Question Q.5.(iii)
Q.5.(iii) Explain the term ‘debt financing’. How are Banks’ an important source of debt financing?
Answer Q.5.(iii)
Debt financing means raising funds by borrowing money from outside sources. These funds have to be repaid after a certain period and usually carry a fixed rate of interest. Debentures, loans, public deposits, and bank finance are common forms of debt financing.
Banks are an important source of debt financing because they provide funds for both short-term and medium-term business needs. They help entrepreneurs by giving:
•
cash credit
•
bank overdraft
•
loans
•
discounting of bills
Bank finance is important because it helps businesses meet working capital needs, manage operations, and handle urgent financial requirements. It is one of the most convenient and widely used sources of borrowed capital for enterprises.