CLASS XI: CHAPTER 7 QUESTION BANK
Sources of Business Finance | 10 Practice Sets (CBSE 2026-27)
📌 General Instructions for All Sets:
- Maximum Marks: 25 | Time Allowed: 45 Minutes
- Questions 1-5 are objective type carrying 1 mark each (MCQs & Assertion-Reasoning).
- Questions 6-7 are short answer type carrying 3 marks each (30-40 words).
- Questions 8-9 are short answer type carrying 4 marks each (50-80 words).
- Question 10 is a long answer type carrying 6 marks (100-150 words).
- Strictly adhere to the CBSE Competency/Case-Based format.
📄 PRACTICE PAPER - SET 1 (Level: Easy - Fundamental Concepts)
SECTION A (1 Mark Each)
1. The funds required to purchase fixed assets like land, building, and machinery are known as:
[Case-Based] A company decides to use its undistributed profits from the previous years to finance its new factory.
2. This internal source of finance is called:[Case-Based] A manufacturer buys raw materials from a supplier and is allowed to pay the bill after 30 days.
3. This short-term financing facility is called:4. Assertion (A): Equity shareholders are the primary risk bearers of the company.
Reason (R): Equity shareholders do not get a fixed rate of dividend and are paid only after all other claims have been settled.
Reason (R): Equity shareholders do not get a fixed rate of dividend and are paid only after all other claims have been settled.
5. Assertion (A): Borrowed funds provide permanent capital to the business.
Reason (R): Borrowed funds like debentures and bank loans have a fixed repayment date and must be returned after a specific period.
Reason (R): Borrowed funds like debentures and bank loans have a fixed repayment date and must be returned after a specific period.
SECTION B (3 Marks Each)
6. Define 'Business Finance'. Why does a business need finance? (Give any two reasons).
[Case-Based] 'Alpha Garments' is planning to issue shares that carry a fixed rate of dividend and have priority in repayment of capital during the winding up of the company.
7. Identify the type of shares 'Alpha Garments' is planning to issue. State any two features of these shares.
SECTION C (4 Marks Each)
8. Explain the concept of 'Retained Earnings'. State any three of its merits.
[Case-Based] 'Zeta Corp' needs ₹50 Lakhs for 6 months. It decides to invite the general public to deposit their savings directly with the company, offering an interest rate higher than banks.
9. Identify the source of finance used. Explain any three of its merits.
SECTION D (6 Marks Each)
[Case-Based] Mr. Amit is starting a large-scale manufacturing business. He requires ₹10 Crores. He decides to raise ₹6 Crores by issuing equity shares and ₹4 Crores by taking a long-term loan from a commercial bank. His friend advises him to understand the exact nature of the funds he is raising.
10. Help Mr. Amit by distinguishing between **Owners' Funds** (Equity) and **Borrowed Funds** (Bank Loan) on the basis of: (a) Meaning, (b) Risk involved, (c) Reward/Return, (d) Control/Voting Rights, (e) Security/Collateral, and (f) Refund of Capital.
📄 PRACTICE PAPER - SET 2 (Level: Moderate - Application & Analysis)
SECTION A (1 Mark Each)
1. Which of the following is considered the most expensive source of finance from the company's perspective due to dividend expectations and floatation costs?
[Case-Based] A company issues a written acknowledgment of debt under its common seal, promising to pay a fixed rate of interest.
2. This instrument is known as a:[Case-Based] A company with surplus funds lends ₹2 Crores to another company for a period of 90 days.
3. This transaction is called:4. Assertion (A): Retained earnings is an external source of finance.
Reason (R): Retained earnings are generated from the past profits of the business and do not require borrowing from outside parties.
Reason (R): Retained earnings are generated from the past profits of the business and do not require borrowing from outside parties.
5. Assertion (A): Equity shareholders have full voting rights.
Reason (R): Since they bear the maximum risk of the business, they are granted the democratic right to elect the management and control the company.
Reason (R): Since they bear the maximum risk of the business, they are granted the democratic right to elect the management and control the company.
SECTION B (3 Marks Each)
6. Differentiate between 'Equity Shares' and 'Preference Shares' on the basis of: (a) Payment of Dividend, (b) Voting Rights.
[Case-Based] The financial manager of 'Bright Star Ltd.' prefers to raise funds through Trade Credit because it does not require pledging any factory assets as security.
7. What is Trade Credit? State two other merits of using trade credit.
SECTION C (4 Marks Each)
8. Explain the term 'Inter Corporate Deposits' (ICD). State any three of its characteristics.
[Case-Based] 'Delta Corp' is a highly profitable company. The Directors want to raise long-term funds without diluting their voting control over the company. They also want to take advantage of the tax benefits on interest payments.
9. Suggest the most suitable source of borrowed funds for 'Delta Corp'. Explain any three merits of this source.
SECTION D (6 Marks Each)
[Case-Based] State and Central governments have established various specialized institutions like the Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs). A local manufacturing company, 'Pioneer Industries', requires ₹20 Crores for modernization and also needs technical advice on installing the new machinery. Commercial banks refused the loan because the repayment period is very long (15 years).
10. Identify the **specific source of finance** 'Pioneer Industries' should approach. Explain the **meaning** of this source and state any **four advantages** 'Pioneer Industries' will gain by borrowing from them instead of commercial banks.
📄 PRACTICE PAPER - SET 3 (Level: Moderate-High - Nuanced Competency)
SECTION A (1 Mark Each)
1. Which source of finance is known as "Ploughing back of profits"?
[Case-Based] The RBI regulates this short-term, unsecured borrowing between two corporate entities.
2. What is the maximum period for which this instrument is usually issued?3. The interest paid on debentures is:
4. Assertion (A): Public deposits are highly regulated by the Reserve Bank of India.
Reason (R): To protect the innocent general public from fraudulent companies, the RBI sets strict rules on the quantum and tenure of public deposits.
Reason (R): To protect the innocent general public from fraudulent companies, the RBI sets strict rules on the quantum and tenure of public deposits.
5. Assertion (A): Commercial banks only provide long-term finance.
Reason (R): Banks mainly provide short to medium-term finance like cash credit, overdrafts, and discounting of bills, though term loans are also given.
Reason (R): Banks mainly provide short to medium-term finance like cash credit, overdrafts, and discounting of bills, though term loans are also given.
SECTION B (3 Marks Each)
6. Explain 'Public Deposits'. Why are they considered a cheaper source of finance than bank loans?
[Case-Based] 'Alpha Traders' supplies raw cotton to 'Zeta Textiles'. Alpha Traders allows Zeta Textiles to pay for the cotton after 45 days without any formal bank paperwork.
7. Identify the source of finance. State any two limitations of this source.
SECTION C (4 Marks Each)
8. What are 'Debentures'? Explain any three limitations of issuing debentures from the company's perspective.
[Case-Based] A company has accumulated massive retained earnings over the last decade. The CEO wants to use this money to open a new branch instead of taking a loan.
9. Is the CEO's decision sound? Explain any four merits of using Retained Earnings as a source of finance.
SECTION D (6 Marks Each)
[Case-Based] 'FutureTech Ltd.' is evaluating its capital structure. The company needs massive funds for an AI project. The CFO lists the features of Equity Shares. He notes that equity shares provide permanent capital that never has to be refunded, and there is no legal compulsion to pay dividends if the company faces a loss, making it financially safe. However, the existing shareholders strongly oppose issuing more equity shares because they fear new shareholders will dilute their voting power. Secondly, the CFO notes that issuing equity is highly expensive due to printing prospectuses and paying underwriters.
10. By quoting lines from the paragraph, identify and explain the **two merits** and **two demerits** of using Equity Shares as a source of finance.
📄 PRACTICE PAPER - SET 4 (Level: Hard - Analytical Competency)
SECTION A (1 Mark Each)
1. Which of the following sources of finance creates a permanent charge/fixed burden on the earnings of the company?
[Case-Based] A company issues a special type of share. The holders of these shares have a right to receive arrears of dividend before any dividend is paid to equity shareholders.
2. These shares are known as:3. Funds required for day-to-day operations, like purchasing raw materials and paying wages, are known as:
4. Assertion (A): Preference shares are safer than equity shares for an investor.
Reason (R): Preference shareholders get a fixed rate of dividend and have preferential rights regarding the repayment of capital during winding up.
Reason (R): Preference shareholders get a fixed rate of dividend and have preferential rights regarding the repayment of capital during winding up.
5. Assertion (A): Trade credit is granted universally to every firm.
Reason (R): Trade credit depends strictly on the past financial record, goodwill, and the financial standing of the purchasing firm.
Reason (R): Trade credit depends strictly on the past financial record, goodwill, and the financial standing of the purchasing firm.
SECTION B (3 Marks Each)
6. Explain the term 'Commercial Banks' as a source of business finance. State two forms in which they provide loans.
[Case-Based] A newly established company, 'StartUp Innovations', requires raw materials but has no past financial track record or goodwill in the market.
7. Will the company easily get 'Trade Credit'? Explain the factors on which the grant of trade credit depends.
SECTION C (4 Marks Each)
8. Differentiate between 'Preference Shares' and 'Debentures' on the basis of: (a) Status/Nature, (b) Return, (c) Risk, and (d) Voting Rights.
[Case-Based] 'Elite Builders' collected ₹5 Crores directly from the public for a period of 2 years to meet its medium-term financial needs. The company did not issue any shares or debentures.
9. Identify the source of finance. State any three of its limitations.
SECTION D (6 Marks Each)
[Case-Based] 'BlueOcean Ltd.' has a massive expansion plan. They have huge accumulated reserves, but the CEO argues that using internal reserves is not "free" because the company loses the opportunity to invest those funds elsewhere to earn interest. Instead, the CEO suggests issuing Preference Shares. He points out that preference shares are excellent because they do not dilute the voting control of the existing equity shareholders. Also, they provide a fixed rate of return, attracting cautious investors. However, the Finance Manager warns that unlike debenture interest, the dividend paid on preference shares is not deductible from taxes, making it a relatively costly source of finance.
10. By quoting lines from the paragraph, identify and explain: (a) The **limitation of Retained Earnings** (Opportunity Cost) pointed out by the CEO.
(b) **Two merits of Preference Shares** mentioned by the CEO.
(c) **One limitation of Preference Shares** warned by the Finance Manager.
📄 PRACTICE PAPER - SET 5 (Level: Advanced - Evaluation Competency)
SECTION A (1 Mark Each)
[Case-Based] A company issues debentures that can be converted into equity shares after a specific period of time.
1. These are called:2. Which of the following sources is NOT suitable for long-term financing?
[Case-Based] 'Company A' has surplus cash. It lends money to 'Company B' for 3 months at an interest rate higher than banks.
3. This transaction is called:4. Assertion (A): Retained earnings may cause dissatisfaction among equity shareholders.
Reason (R): If a company retains a very large portion of its profits, it declares lower dividends, which may upset shareholders expecting a regular cash income.
Reason (R): If a company retains a very large portion of its profits, it declares lower dividends, which may upset shareholders expecting a regular cash income.
5. Assertion (A): Financial Institutions are also known as 'Development Banks'.
Reason (R): They provide both financial and technical assistance to industries specifically to promote the economic development of the country.
Reason (R): They provide both financial and technical assistance to industries specifically to promote the economic development of the country.
SECTION B (3 Marks Each)
6. State any three limitations of borrowing from 'Commercial Banks'.
[Case-Based] A reputed company wants to raise short-term funds but wants to avoid the lengthy paperwork, heavy security, and strict scrutiny involved in bank loans.
7. Suggest two suitable short-term sources of finance for this company. Explain one of them.
SECTION C (4 Marks Each)
8. Explain any four limitations of 'Equity Shares' from the perspective of the company and the investors.
[Case-Based] A new firm wants to issue 'Public Deposits'. The management believes it is the easiest way to raise funds without any regulatory interference.
9. Is the management correct? Explain the regulatory framework of Public Deposits. State three merits of this source.
SECTION D (6 Marks Each)
[Case-Based] 'Solaris Energies' needs ₹100 Crores for a new massive project. The directors are analyzing 'Debentures' as an option. The CFO states, "Debentures are excellent because the interest we pay is tax-deductible, which drastically reduces our tax liability. Furthermore, debenture holders are just creditors; they do not get voting rights, so our control over the company remains absolute." However, a senior director objects, saying, "Our company's sales are highly fluctuating. We don't have a stable income. Debentures carry a fixed charge, meaning we must pay interest even if we suffer a massive loss. Also, if we issue debentures, our borrowing capacity for the future will be exhausted."
10. By quoting lines from the paragraph, identify and explain the **two merits** and **two demerits** of issuing Debentures discussed by the management of 'Solaris Energies'.
📄 PRACTICE PAPER - SET 6 (Level: Expert - Complex Case Studies)
SECTION A (1 Mark Each)
[Case-Based] A business sells its accounts receivables (unpaid invoices) to a third-party financial agency at a discount to get immediate cash.
1. This specific financial service (often taught as a source) is known as:2. Which source of finance explicitly involves the creation of a 'Charge on Assets' (mortgaging assets)?
3. Assertion (A): Retained earnings add to the financial strength of the business.
Reason (R): They do not carry any explicit interest burden, and they increase the company's capacity to absorb sudden financial shocks.
Reason (R): They do not carry any explicit interest burden, and they increase the company's capacity to absorb sudden financial shocks.
4. Assertion (A): ICDs (Inter Corporate Deposits) are risk-free.
Reason (R): ICDs are highly secured by pledging the fixed assets of the borrowing company.
Reason (R): ICDs are highly secured by pledging the fixed assets of the borrowing company.
5. Which of the following is a characteristic of a 'Development Bank' (Financial Institution)?
SECTION B (3 Marks Each)
6. Differentiate between 'Trade Credit' and 'Public Deposits' as sources of short-term finance.
[Case-Based] A foreign bank wishes to invest in an Indian company. However, the Indian company does not want to issue shares directly in the foreign market.
7. Are ADRs and GDRs part of the standard Class XI syllabus? (If not, focus on standard sources). Explain the role of 'Financial Institutions' in providing foreign currency loans.
SECTION C (4 Marks Each)
8. Describe any four merits of obtaining loans from 'Financial Institutions'.
[Case-Based] A well-known company issued a large number of equity shares. Due to this, the existing shareholders found their voting power diluted and the dividend per share drastically reduced.
9. Identify and explain these two limitations of equity shares. State two other limitations.
SECTION D (6 Marks Each)
[Case-Based] 'Elite Textiles' requires funds for different purposes. First, they need ₹50 Lakhs to buy raw cotton for the upcoming festive season. They approach their suppliers who allow them a 60-day window to pay without interest. Second, they need ₹10 Crores to build a new warehouse over 3 years. They invite their loyal customers and the general public to deposit money directly into the company account at a 9% interest rate. Third, they need ₹50 Crores for a massive, 15-year factory upgrade. They issue formal written documents under the company seal promising to pay 10% interest annually and return the principal after 15 years, securing this loan against their factory land.
10. Identify and explain the **three different sources of finance** utilized by 'Elite Textiles' for their specific needs as described in the case.
📄 PRACTICE PAPER - SET 7 (Level: Expert - Integrated Concepts)
SECTION A (1 Mark Each)
[Case-Based] A company wants to raise capital. It offers shares where the dividend accumulates if the company suffers a loss in a particular year, and this accumulated dividend is paid in the next profitable year.
1. These shares are:2. Which source of finance is best suited for a company that does NOT want to create a fixed financial burden, does NOT want to dilute control, and wants to use its own generated wealth?
3. Assertion (A): ICDs are completely free from government regulations.
Reason (R): The Companies Act explicitly restricts the amount a company can lend as an Inter Corporate Deposit to prevent corporate fraud.
Reason (R): The Companies Act explicitly restricts the amount a company can lend as an Inter Corporate Deposit to prevent corporate fraud.
4. Assertion (A): Factoring provides instant liquidity to a business.
Reason (R): A factor (financial institution) buys the accounts receivables (bills) of a company, giving them an immediate cash advance instead of waiting for the customers to pay.
Reason (R): A factor (financial institution) buys the accounts receivables (bills) of a company, giving them an immediate cash advance instead of waiting for the customers to pay.
5. Commercial banks require _____ before granting a term loan.
SECTION B (3 Marks Each)
6. Differentiate between 'Shares' and 'Debentures' on the basis of: (a) Status, (b) Return, and (c) Control.
[Case-Based] A company is highly profitable but refuses to distribute dividends, choosing to retain 100% of its earnings. The shareholders are frustrated.
7. Is the shareholders' frustration justified? State two limitations of Retained Earnings.
SECTION C (4 Marks Each)
8. Explain the term 'Preference Shares'. Discuss any three of its merits to the issuing company.
[Case-Based] A startup company has brilliant technical ideas but lacks commercial management skills. They approach a 'Development Bank' (Financial Institution) for a loan.
9. Can the Development Bank help them beyond just providing money? Explain the comprehensive role of Financial Institutions.
SECTION D (6 Marks Each)
[Case-Based] The Board of Directors of 'Star Manufacturing' is analyzing how to raise ₹20 Crores. Option A is to issue 'Equity Shares'. Option B is to borrow from a 'Commercial Bank'. Mr. Sen, a director, says, "Option A is great because we don't have to mortgage our factory land, and there is no fixed burden to pay dividends if we suffer losses. However, the existing owners will lose their monopoly over decision-making." Mr. Patel argues, "Option B is better because banks keep our financial information completely secret, unlike public share issues. However, the bank will force us to mortgage our factory, and the paperwork will be extremely rigid and stressful."
10. By quoting lines from the paragraph, identify and explain the **two merits and one demerit of Equity Shares**, and **one merit and two demerits of Commercial Bank loans** discussed by the directors.
📄 PRACTICE PAPER - SET 8 (Level: Advanced Board Mock 1)
SECTION A (1 Mark Each)
1. Which of the following is NOT an advantage of Trade Credit?
[Case-Based] The rate of interest paid on Public Deposits is generally:
2.
3. Assertion (A): Financial Institutions impose restrictive conditions on borrowing companies.
Reason (R): They often place their own nominees on the Board of Directors of the borrowing company to ensure the funds are not misused.
Reason (R): They often place their own nominees on the Board of Directors of the borrowing company to ensure the funds are not misused.
4. Assertion (A): Factoring provides protection against bad debts.
Reason (R): Under 'Non-Recourse Factoring', if the customer fails to pay the bill, the factor (financial agency) bears the loss, not the company.
Reason (R): Under 'Non-Recourse Factoring', if the customer fails to pay the bill, the factor (financial agency) bears the loss, not the company.
5. The maturity period of an Inter Corporate Deposit (ICD) typically ranges from:
SECTION B (3 Marks Each)
6. Explain the term 'Factoring' and state two of its benefits to a company.
[Case-Based] 'Alpha Corp' needs funds but wishes to avoid the complex and lengthy regulatory procedures involved in issuing shares or debentures to the general public.
7. Suggest a suitable source of finance (borrowed funds) that avoids public issue regulations. State two limitations of this source.
SECTION C (4 Marks Each)
8. Discuss any four factors a business must keep in mind before choosing a particular source of finance.
9. "Preference shares combine the features of both equity shares and debentures." Justify this statement.
SECTION D (6 Marks Each)
[Case-Based] The Finance Minister is reviewing the role of 'Financial Institutions' (Development Banks like IFCI, SIDBI). He notes that while commercial banks focus on short-term profit-making loans, Development Banks were established with a broader vision. They provide massive long-term capital for basic infrastructure which banks refuse to touch. During economic slowdowns, they provide stability. They also offer expert technical and managerial advice to young entrepreneurs. However, borrowing from them is a nightmare because they demand too many documents, conduct rigid investigations that take months, and often force the company to place a government nominee on their Board of Directors, stripping away management freedom.
10. By quoting lines from the paragraph, identify and explain **three merits** and **two demerits** of raising funds from Financial Institutions.
📄 PRACTICE PAPER - SET 9 (Level: Advanced Board Mock 2)
SECTION A (1 Mark Each)
[Case-Based] A company is facing a cash crunch and needs funds just for 3 months to pay its suppliers. It borrows from another reputed corporate firm at 12% interest.
1. This source is:2. The term "Cost of Capital" refers to:
3. Assertion (A): Retained earnings is considered the most dependable source of funds.
Reason (R): The company does not have to depend on external investors or banks, nor does it have to undergo complex legal procedures to use its own profits.
Reason (R): The company does not have to depend on external investors or banks, nor does it have to undergo complex legal procedures to use its own profits.
4. Assertion (A): Trade credit is an expensive source of finance.
Reason (R): Suppliers often charge a higher price for the goods if they are sold on credit rather than for immediate cash.
Reason (R): Suppliers often charge a higher price for the goods if they are sold on credit rather than for immediate cash.
5. Which of the following sources has the highest 'Financial Risk' (risk of bankruptcy) for the issuing company?
SECTION B (3 Marks Each)
6. Differentiate between 'Equity Shares' and 'Retained Earnings' on any three bases.
[Case-Based] 'Aura Enterprises' has a very unstable income and low physical assets to pledge as security.
7. Should the company issue Debentures? Give two valid reasons to justify your answer.
SECTION C (4 Marks Each)
8. Explain any four limitations of raising funds through 'Public Deposits'.
9. What are 'Inter Corporate Deposits' (ICD)? Explain its three variants (Call deposits, Three-month deposits, Six-month deposits).
SECTION D (6 Marks Each)
[Case-Based] 'Sunrise Industries' is evaluating 'Trade Credit' and 'Commercial Banks' for short-term working capital. The Purchase Manager prefers Trade Credit, stating, "It promotes our sales, it is extremely convenient as it requires no massive paperwork, and most importantly, our suppliers do not force us to mortgage our factory machines." The Finance Manager counters, "Trade credit is dangerous. Because we get easy credit, we tend to over-purchase raw materials and stockpile them unnecessarily. Also, suppliers secretly charge us a higher price for the raw materials when we buy on credit. I prefer a Bank Loan."
10. By quoting lines from the paragraph, identify and explain the **three merits** and **two demerits** of 'Trade Credit' discussed by the managers.
📄 PRACTICE PAPER - SET 10 (Level: Ultimate Board Challenger)
SECTION A (1 Mark Each)
1. Which of the following sources of finance provides the highest degree of voting control to the investor?
[Case-Based] A company uses past profits to buy a new software system. Which distinct advantage does this source offer over issuing new shares?
2.
3. Assertion (A): Preference shareholders have preferential rights over equity shareholders.
Reason (R): They receive their fixed dividend before any dividend is paid to equity shareholders, and their capital is refunded first during winding up.
Reason (R): They receive their fixed dividend before any dividend is paid to equity shareholders, and their capital is refunded first during winding up.
4. Assertion (A): ICDs are highly suitable for companies with a poor credit rating.
Reason (R): Because ICDs are unsecured short-term loans, lending companies only provide them to highly reputed companies with excellent financial standing.
Reason (R): Because ICDs are unsecured short-term loans, lending companies only provide them to highly reputed companies with excellent financial standing.
5. Factoring helps an organization to:
SECTION B (3 Marks Each)
6. State three reasons why a company might prefer issuing 'Preference Shares' over 'Debentures'.
[Case-Based] An established company wants to raise ₹10 Lakhs for 2 years. They publish an advertisement in the newspaper inviting the public to deposit money directly into the company account at 10% interest.
7. Identify the source of finance. Why is it advantageous for both the company and the public?
SECTION C (4 Marks Each)
8. Explain how 'Cost', 'Risk', and 'Control considerations' affect the choice of the source of finance.
9. Differentiate between 'Owners' Funds' and 'Borrowed Funds' on the basis of: (a) Permanent vs Temporary, (b) Return, (c) Risk to business, and (d) Security.
SECTION D (6 Marks Each)
[Case-Based] Mr. X has formed a new company to manufacture solar panels. He requires funds for three distinct purposes. First, he needs ₹20 Crores permanently to buy land and build the factory structure. He does not want the burden of fixed interest, as initial profits will be zero. Second, he needs ₹5 Crores for 10 years to buy specialized machinery. He wants to save on taxes by deducting the interest paid and does not want to lose any voting control over the company. Third, he needs ₹1 Crore daily to buy raw materials and pay labor. He realizes that getting a long-term loan for daily expenses is foolish, so he approaches an institution that can provide him a flexible running account to withdraw funds as needed.
10. Identify and justify the **most suitable source of finance** Mr. X should use for each of his **three distinct requirements** (Permanent capital, 10-year machinery capital, Daily working capital).
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