Sources of Business Finance Test - 23

Preference shares, more commonly referred to as preferred stock, are shares of a company's stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, the shareholders with preferred stock are entitled to be paid from company assets first. Capital raised through the issue of redeemable preference shares is to be paid back as premium to such shareholders after the expiry of a stipulated period, whether the company is wound up or not. When company is winding up preference shareholders receive arrears of the dividend.

Debentures proves a burden on finances of the company, when company is not earning profits. Debenture put a permanent burden on the earnings of a company. Therefore, there is a greater risk when the earnings of the company fluctuate.
Therefore, C is the correct option.

The process of estimating the fund requirements for a business and specifying the sources of funds is called the financial management for a business. The main sources of funds available to a business are shareholder funds and borrowed funds. The public investment in a company can be done by accumulating capital through equity issue to the public or borrowed funds by issuing debentures and public deposits.

The company or a business revolves around earning profits, for the same, it has to perform financial planning to keep the business running. Some part of the profits that are earned are usually kept for use in the future. This foresight of retaining a portion of the net earnings is known as retained earnings.

Business finance refers to money and credit employed in business. It involves procurement and utilization of funds so that business firms may be able to carry out their operations effectively and efficiently.

Retained earnings are the funds which have been kept by the company for their future expenses out of the net earnings gained by the company over the course of business. These retained earnings can be a source of funds for internal financing, as a help in the low business turnover or self financing for the smooth functioning of the business or company.

Quantitative measures of monetary policy includes those instruments which focus on the overall supply of the money. It includes: 

A.  Bank rate policy: 

Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral. It is increased at the time of inflation to reduce the money supply in the economy and vice versa. 

B. Variable reserve requirement:  

Variable reserve requirement is also known as Cash Reserves Ratio (CRR) refers to the proportion  of total deposits of the commercial banks which they must  keep as cash reserves with the central bank. The ratio is fixed by the central bank and is varied from time to time to control the supply of money in the economy depending upon the prevailing situation of inflation or deflation.

C. Open Market Operations: 

Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities in the open market to control the supply of money in the economy. By selling the securities, the central bank soaks liquidity from the economy and by buying the securities, the central bank releases liquidity. 

The sources of funds can be categorized on the basis of: