Practice Questions

Compare recourse and non-recourse factoring in one sentence based on who bears the risk of bad debts.

Recall the full form of GDR and ADR.

Justify the classification of Retained Earnings as a permanent source of funds for an organization.

Evaluate the use of Factoring as a source of finance for a company whose sales consist of numerous invoices of very small amounts.

Name the two main categories of sources of funds based on ownership.

Define 'trade credit'.

Critique the utility of Trade Credit as a source of finance for purchasing fixed assets like land and machinery.

Define 'business finance'.

List the three classifications of sources of funds based on the time period.

Propose a reason why a business owner might choose a loan from a commercial bank over issuing debentures, despite the bank's stricter conditions.

Examine why retained earnings are considered a source with no explicit cost.

Name two international sources of finance available to Indian companies.

Explain the difference between fixed capital and working capital requirements.

Identify the financial instrument known as an unsecured promissory note used for short-term funding by highly-rated corporations.

Explain the concept of 'lease financing' and identify the two parties involved in a lease agreement.

Explain what is meant by 'borrowed funds' and list three examples of such funds.

Contrast American Depository Receipts (ADRs) and Indian Depository Receipts (IDRs) based on the issuer, the investor, and the market where they are traded.

Examine the role of financial institutions as 'development banks' beyond just providing finance.

Analyze 'Retained Earnings' and 'Debentures' by classifying them on the basis of (i) Period, (ii) Ownership, and (iii) Source of Generation. Justify your classification for each.

Design a two-point checklist for a CFO to evaluate whether to use 'Owner's Funds' or 'Borrowed Funds' for a new long-term project.

Examine why Commercial Paper is not a viable source of short-term finance for a new or moderately rated company.

Describe 'retained earnings' as a source of internal finance.

Compare and contrast owner's funds and borrowed funds on the basis of risk and control.

Contrast lease financing with a bank loan for acquiring an asset that becomes obsolete quickly, such as high-end computing equipment.

Compare and contrast Debentures and Preference Shares as sources of long-term finance from the perspective of a company, considering cost, risk, and tax implications.

Analyze the risk of overtrading associated with the easy availability of trade credit.

Demonstrate how issuing equity shares enhances the creditworthiness of a company and provides a cushion for creditors.

A business has a very high sales turnover and sells goods only on a cash basis. Solve whether its working capital requirement would be high or low and why.

Evaluate the suitability of using Public Deposits as the primary source of finance for a newly incorporated technology startup.

Critique the decision of a company's management to exclusively rely on retained earnings for all future expansion projects, ignoring other sources of finance.

Justify why a company with highly stable and predictable earnings might prefer issuing debentures over equity shares for financing a new project.

Propose a suitable source of finance for a manufacturing firm that needs to acquire new machinery with a high rate of technological obsolescence. Justify your choice.

Justify why preference shares are often described as a hybrid security, having features of both equity shares and debentures.

Describe debentures as a source of long-term finance and list any three types of debentures.

Describe the key features of equity shares and preference shares.

Summarize the merits and limitations of raising funds through public deposits.

Propose how a company can use both 'equity shares' and 'debentures' to create an optimal capital structure that balances risk and return for its shareholders.

Evaluate the trade-off between 'Control' and 'Cost' when a company chooses between issuing new equity shares and taking a loan from a financial institution.

Create a policy guideline for a company to choose between issuing Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs) for international expansion.

A newly established, moderately profitable manufacturing company wants to finance a major expansion project costing a significant amount. Analyze the suitability of raising funds through 'public deposits' versus 'issue of equity shares' for this purpose.

Formulate a financing strategy for Mr. Anil Singh's restaurant chain expansion, as described in the chapter's opening case, justifying the blend of different sources of funds.

Explain any five factors that affect the choice of a source of finance for a business.

Critique the effectiveness of Commercial Paper as a source of funds during a period of economic depression or tight liquidity in the market.

Apply the concepts of 'Control' and 'Risk Profile' to solve the dilemma faced by Mr. Anil Singh in the case study. He needs funds for expansion and is considering a partnership or a bank loan.

An Indian company with a strong global reputation wants to raise funds from the international market. Analyze the key differences and suitability of using Global Depository Receipts (GDRs) versus Foreign Currency Convertible Bonds (FCCBs).