A
Distinguish between GDR and ADR.
Global Depositary Receipt
American Depository Receipts
Under GDR, shares of the company are first converted into depository receipts by an international bank. These depository receipts are denominated in US dollars. Then these depository receipts are offered for sale globally through foreign stock exchanges.
The depository receipts which are issued by a USA Bank for trading only in American Stock markets are known as American Depository Receipts (ADR).
The holders of GDRs are entitled for dividend just like shareholders. But they do not enjoy the voting rights.
The ADRs are issued only to the American citizens.
What is meant by the Stock Market?
The secondary market (stock exchange) is an association or organisation or a body of individuals established for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities.
It may be noted that it is called a secondary market because only the securities already issued can be traded on the floor of the stock exchange.
This market is open only to its members, most of whom are brokers acting as agents of the buyers and sellers of securities.
What do you mean by Investment Decision?
Ans: Decisions Relating to Investment, Financing and Dividend
1. Investment Decision :This decision involves careful selection of assets in which funds have to be invested. Decisions relating to investment in fixed assets [capital budgeting] and decision relating to investment in current assets [working capital] are considered here. Investment decisions are influenced by cash flow, risk involved, technological changes etc.
2. Financing Decision : This decision relates to the proportion in which funds are raised from various sources. Factors like cost of fund, risk involved, control, cash flow etc. are considered before taking a financial decision. In financing decisions the firm has to decide the ratio of owned funds and borrowed funds. Owned funds consist of equity share capital, preference share capital and retained earnings. Borrowed funds include debentures, loans and public deposits etc.
3. Divided Decision : This decision is concerned with appropriation of earned profits. This profit of the firm can be retained in the business or can be distributed to the shareholders as dividend. A company has to decide how much profits should be distributed as dividend and how much should be retained for future business growth. Factors affecting dividend decisions are cash flow position, stability of earnings, growth opportunities etc.
‘Finance is considered as the life-line of the business, especially in the modern day’. Give reasons for the same.
Ans: Reasons for why Finance is considered as the life-line of the business, especially in the modern day are as follows:
(a) Need for Large Scale Operation :
Finance is required by business to function on a large scale.
(b) Use of Modern Technology :
Finance is required for purchasing modern technology, machinery, equipment and tools to meet the competition and function effectively.
(c) Promotion of sales :
Finance is required for conduction activities for promoting sales. This involves advertisement, personal selling, use of sales promotional schemes, providing after sales service and free home delivery, etc.
State the meaning of ‘Foreign Direct Investment’.
Ans: The foreign direct investment usually refers to the subscription by the foreigners to shares and debentures of the Indian Companies.
Alternatively, some companies are formed with the specified purpose of operating in India or the multinationals can set up their subsidiary or branch in India.
As for the foreign collaborations, these can be financial collaborations involving foreign companies’ participation in the equity capital of an existing or new undertaking.
State any four objectives of financial planning.
Ans: The main objectives of financial planning are:
(a) To ascertain the amount of fixed capital as well as the working capital required in a given period.
(b) To determine the amount to be raised through various sources using a judicious debt-equity mix.
(c) To ensure that the required amount is raised on time at the lowest possible cost.
(d) To ensure adequate liquidity so that there are no defaults in payments and all contingencies (any unforeseen expenditure) are met without difficulty.
(e) To ensure optimal use of funds so that the business is neither starved of funds nor has unnecessary surplus funds at any point of time.
Define a Small Scale Enterprise as per ‘MSMED Act, 2006’.
Ans: Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 has classified enterprises as follows :
1. Manufacturing Enterprises
a) Micro Enterprise : A unit with an investment up to Rs. 25 lakh.
b) Small Enterprise : A unit with an investment above Rs. 25 lakh and upto Rs. 5 crore.
c) Medium Enterprise : A unit with an investment above Rs. 5 crore and upto Rs. 10 crore.
2. Service Enterprises
a) Micro Enterprise : A unit with an investment up to Rs. 10 lakh.
b) Small Enterprise : A unit with an investment above Rs. 10 lakh and up to Rs. 2 crore.
c) Medium enterprise : A unit with an investment above Rs. 2 crore and up to Rs. 5 crore.
Name any three special financial institutions and state their objectives.
1. Industrial Finance Corporation of India (IFCI) : It is the oldest SFI set up in 1948 with the primary objective of providing long-term and medium-term finance to large industrial enterprises. It provides financial assistance for setting up of new industrial enterprises and for expansion or diversification of activities.
2. Industrial Credit and Investment Corporation of India (ICICI): It was set up in 1955 for providing long-term loans to companies for a period up to 15 years and subscribes to their shares and debentures.
3.Industrial Development Bank of India (IDBI): It was set up in 1964 as a subsidiary of the Reserve Bank of India for providing financial assistance to all types of industrial enterprises without any restriction on the type of finance and the number of funds.
4. Industrial Investment Bank of India (IIBI): The former Industrial Reconstruction Bank of India (IRBI), an institution which was set up for rehabilitation of small units have been reconstituted in 1997 as Industrial Investment Bank of India. It is a full-fledged all-purpose development bank with adequate operational flexibility and autonomy.
Explain briefly the importance of financial planning.
Ans: Importance of Financial Planning are
1. It helps to estimate accurate requirements of funds.
2. It facilitates in developing a sound capital structure which gives maximum returns to shareholders.
3. It helps in proper utilisation of funds.
4. It tries to avoid the shortage of funds and surplus(extra) of funds.
5. It provides policies and procedures for coordinating different departments of an enterprise.
6. It acts as a basis to control the financial activities of an organisation.
7. It helps to face unforeseen financial situations in the business.