Sources of Business Finance Test - 48

Debentures represent a form of long-term borrowing by a company. They are debt instruments issued to investors, promising to repay the principal amount along with interest over a specified period. Equity shares and preference shares represent ownership capital, while retained earnings are accumulated profits.

Inter Corporate Deposits (ICD) are deposits made by one company in the fixed deposit account of another corporate entity. These deposits are typically short-term in nature and are used by companies to manage their short-term cash surpluses or liquidity requirements.

Debentures represent a form of long-term borrowing for a company. When a company issues debentures, it is essentially borrowing money from investors or lenders. Debenture holders are creditors to the company and are entitled to receive a fixed rate of interest over a specified period, typically until the maturity date of the debentures. Unlike shares, debentures do not confer ownership rights in the company. Instead, they represent a form of loan capital, where the company is obligated to repay the principal amount borrowed along with the agreed-upon interest.

Equity shares represent ownership capital in a company. Holders of equity shares are the owners of the company and have voting rights in company decisions, reflecting their ownership stake. Preference shares and debentures represent borrowed funds and do not signify ownership.

Funds required for purchasing current assets, such as inventory, accounts receivable, and cash, are typically categorized as working capital requirements. Working capital represents the capital needed to fund a company's day-to-day operations, including the acquisition of raw materials, payment of wages, and maintenance of inventory levels. It ensures that a company can meet its short-term financial obligations and continue its operations smoothly.

Sources of finance can be classified based on their generation basis (such as equity or debt), period basis (short-term, medium-term, long-term), and ownership basis (equity financing involving ownership dilution or debt financing without ownership dilution). These categorizations help businesses understand the nature, duration, and ownership implications of different sources of finance, aiding in financial planning and decision-making. Therefore, option (D) is correct as it encompasses all these categorizations.

The primary purpose of issuing debentures is to raise long-term borrowed funds for the company. Debentures represent a form of debt financing that allows companies to raise capital without diluting ownership or voting rights.

The RBI regulates commercial papers. CP is a source of short term finance. The maturity period of CP ranges from 90 days to 364 days.

Trade credit is a short term finance provided by one firm to another for routine business transactions.

ADR: American Depository Receipts

ADR are issued by a non US company to Americans to obtain foreign capital. ADRs are bought and sold in American markets like regular stocks.it can be issued only to American citizens and can be listed and traded on a stock exchange of USA.