Corporate Finance

An overdraft (or bank overdraft) is a short-term credit facility provided by a bank that allows a current account holder to withdraw more money than is available in their account balance, up to a pre-approved limit. In effect, it is a loan from the bank that is activated when the account balance goes below zero.
Key features of an overdraft facility include:

Nature: It is a form of short-term, revolving credit. The borrower can withdraw, repay, and withdraw again up to the sanctioned limit.

Interest Calculation: Interest is charged only on the amount that is actually overdrawn and for the number of days the account remains overdrawn. This makes it a flexible and cost-effective source of short-term finance compared to a regular loan where interest is charged on the entire principal amount.

Purpose: It is primarily used to manage temporary cash flow shortages and meet working capital requirements.

Security: It can be secured (backed by an asset like property or inventory) or unsecured, depending on the bank's policy and the customer's creditworthiness.

Liability: On a company's balance sheet, a bank overdraft is shown as a current liability.

Preference shares, also known as preferred stock, can be classified into different types based on their features. The main kinds are:

Cumulative and Non-Cumulative Preference Shares:
Cumulative: If the company does not make enough profit to pay the preference dividend in a particular year, the unpaid dividend (arrears) accumulates and must be paid in future years before any dividend is paid to equity shareholders.
Non-Cumulative: The right to receive a dividend for a year lapses if the company does not declare it in that year. Arrears do not accumulate.

Redeemable and Irredeemable Preference Shares:
Redeemable: These shares are issued for a fixed term, and the company must repay the capital amount to the shareholders at the end of that term. In many countries, like India, companies are only allowed to issue redeemable preference shares.
Irredeemable (Perpetual): These shares are not repaid during the lifetime of the company. The capital is returned only upon the winding up of the company.

Participating and Non-Participating Preference Shares:
Participating: These shareholders are entitled to their fixed dividend and also have the right to share in the surplus profits of the company (after paying the equity dividend) along with the equity shareholders.
Non-Participating: These shareholders are only entitled to their fixed rate of dividend and do not have a right to any surplus profits.

Convertible and Non-Convertible Preference Shares:
Convertible: The holders of these shares have the right to convert their preference shares into equity shares at a predetermined rate after a specified period.
Non-Convertible: These shares do not carry the right of conversion into equity shares.

Step 1: Understanding the Question:
The question asks for the type of businesses for which venture capital is typically provided.
Step 2: Key Concept:
Venture Capital is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which have demonstrated high growth.
Step 3: Detailed Explanation:
- Venture capitalists invest in these early-stage companies in exchange for an equity stake. They understand that these ventures are inherently high-risk.
- These startups often lack a track record, have unproven technologies or business models, and may not have access to traditional sources of funding like bank loans.
- Therefore, venture capital is specifically designed for businesses that are considered very risky but also offer the potential for exceptionally high returns.
- While many of these risky units might be in the technology sector (technical units), the defining characteristic is the high risk and high growth potential, not the sector itself. Venture capital can be provided to any type of unit (organizational, technical, etc.) as long as it fits the risk-return profile. The most encompassing and accurate description is 'very risky units'.
Step 4: Final Answer
Venture capital is primarily available for very risky ventures, such as startups and early-stage companies, that have high growth potential.

Step 1: Understanding the Question:
The question asks for the definition of 'Naked Debentures'.
Step 2: Key Concept:
Debentures are debt instruments issued by a company to raise funds. They can be classified based on the security provided to the debenture holders.
- Secured Debentures: These are backed by a charge on the assets of the company. If the company fails to repay the debenture holders, they can sell these specific assets to recover their money.
- Unsecured Debentures: These are not secured by any charge on the company's assets.
Step 3: Detailed Explanation:
The term 'Naked Debentures' is another name for Unsecured Debentures. They are issued solely on the creditworthiness and financial standing of the company. The holders of these debentures are treated as unsecured creditors. In the event of liquidation of the company, they are paid only after the claims of secured creditors have been met.
Step 4: Final Answer
Naked debentures are unsecured debentures, meaning they are not backed by any specific asset of the company.

Step 1: Understanding the Question:
The question asks to classify public deposits based on the term or duration of finance they provide.
Step 2: Key Concept:
Public deposits are unsecured deposits raised by companies directly from the public. The maturity period of these deposits is regulated by law (e.g., the Companies Act). Generally, companies can accept deposits for a period ranging from 6 months to 36 months (3 years).
Step 3: Detailed Explanation:
Let's analyze the classification of finance terms:

Short-term finance: Typically for a period of up to one year. Used for funding working capital needs.

Medium-term finance: Typically for a period of one to five years.

Long-term finance: Typically for a period of more than five years. Used for funding capital assets.

Since public deposits have a maximum tenure of 3 years, they are primarily used to meet short-term and medium-term financial requirements, especially for working capital. Among the given choices, while they can extend into the medium term, they are most commonly associated with and categorized under short-term finance due to their role in funding the operating cycle. Given the options, "Short term finance" is the most appropriate classification for their primary purpose.
Step 4: Final Answer:
Public deposits serve the short-term and medium-term needs of a business. As per the answer key and common classification, they are considered a source of short-term finance. Therefore, option (A) is correct.

Step 1: Understanding the Question:
The question asks for the factors that determine a company's decision to issue bonus shares. A bonus issue is the distribution of free shares to existing shareholders, which is done by capitalizing the company's accumulated reserves and profits.
Step 2: Analysis of Options:
Let's analyze how each factor influences the bonus issue decision.

(A) Amount of profit: A company must have sufficient accumulated profits or reserves to issue bonus shares. Without substantial profits, a bonus issue is not possible as it involves converting these reserves into share capital. This is a primary determinant.

(B) Liquidity of funds: While a bonus issue itself does not involve a cash outflow, the overall financial health and liquidity position of the company are crucial. A company with poor liquidity might be hesitant to lock its reserves into share capital, as it may need those reserves for operational needs. Strong liquidity indicates a healthy financial position, making a bonus issue more feasible.

(C) Age of the company: A well-established, mature company is more likely to have built up significant reserves over the years. Such companies often have stable earnings and are in a better position to issue bonus shares compared to a new, growing company that needs to reinvest all its profits.

Step 3: Final Answer:
Since the amount of profit, liquidity, and the age/maturity of the company are all important factors considered by the management before making a bonus decision, the correct answer is (D) All of these.