Financing - Borrowed Funds - Debentures and Loans

There is no content available!

To Access the full content, Please Purchase

  • Q1

    Generally, a business cannot arrange all the required financial resources solely from issue of shares and other internal sources. Comment.

    Marks:5
    Answer:

    Generally, a business cannot arrange all the required financial resources solely from issue of shares and other internal sources. It needs to raise funds from outside known as borrowed funds. Funds raised by way of borrowings or credit from the public, commercial banks or financial institutions.

    Funds raised by way of borrowings or credit from the public, commercial banks or financial institutions is also called ‘Debt Capital.’ Features of borrowed funds are:

    • Temporary source of finance
    • Available for a specified period, beyond which they need to be repaid
    • Fixed rate of interest is payable
    • May be raised for long term, medium term or short term
    • Lenders do not have any voting rights
    • Raised by creating a charge on assets of the company

    View Answer
  • Q2

    Describe loans from Financial Institutions. Give 2 merits.

    Marks:3
    Answer:

    Loans from Financial Institutions refer to finance provided to businesses by a number of Financial Institutions all over the country, established by the Central and State Governments.

    They provide both- Owned Capital and Loan Capital for Long / medium term requirements. Also conduct market surveys and provide technical assistance and managerial services to businesses.
    Merits:
    i. Provide loans and startup capital, also provide underwriting facilities.
    ii. Offer various financial arrangements, like foreign currency loans & deferred payment facilities available for import of machinery and equipment.

    View Answer
  • Q3

    Give the advantages of Debenture for a company.

    Marks:3
    Answer:

    Advantages of Debentures for a company:
    i. Economical source of finance, since lesser charges on underwriting commission, brokerage, etc.
    ii. Trading on equity possible when surplus profits, higher dividend can be paid to equity shareholders.
    iii. No dilution of Management’s control since no Voting Rights available.
    iv. Interest on debentures is tax deductible expense, hence leads to tax saving.
    v. Can repay the funds raised as & when desired by company.

    View Answer
  • Q4

    Briefly explain the categories of debentures on the basis of security & convertibility.

    Marks:2
    Answer:

    Types of debentures are:

    Security:

    - Mortgaged or Secured Debentures

    Debentures which create a fixed or floating charge on the assets of the company, by way of mortgage. In case of default, holders can recover their investment from the mortgaged property

    - Simple or Unsecured Debentures

    Debentures which do not carry any charge on the assets of the company.

    Convertibility:

    - Convertible Debentures

    Debentures where the holders are given the option to convert their debentures into equity shares after a specified period, subject to certain conditions. Incentive to debenture holders to acquire Voting Rights & participate in profit sharing of the company.

    - Non- convertible Debentures

    Debentures that do not carry any option of conversion into Equity shares.

    View Answer
  • Q5

    What kind of finance is the borrowed fund?

    Marks:1
    Answer:

    Borrowed funds are the source of long term finance. A business requires long term funds for funding its fixed assets.

    View Answer