CA Inter P6 · Chapter 2
Types of Financing MCQs with Answers
7 multiple-choice questions on Types of Financing for CA Inter P6 Financial Management and Strategic Management. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A financial institution issues deep discount bonds with a maturity value of ₹ 1,00,000, repayable after 10 years, carrying no periodic interest. If investors require a yield of 9% per annum compounded annually, the issue price (to the nearest rupee) should be about:
- A) ₹ 52,632
- B) ₹ 38,942
- C) ₹ 42,241
- D) ₹ 46,043
Show answer & explanation
Answer: C) ₹ 42,241
A deep discount bond pays only the maturity value, so its price is the present value of that amount: ₹ 1,00,000 / (1.09)^10 = ₹ 1,00,000 / 2.3674 = ₹ 42,241. Using simple interest (₹ 1,00,000 / 1.90) gives ₹ 52,632, which ignores compounding. Discounting for 9 years instead of 10 gives ₹ 46,043.
Question 2
The stage of venture capital financing provided to an entrepreneur to prove a business concept and develop a prototype, before the firm has a commercial product, is called:
- A) Buy-out financing
- B) Second-round financing
- C) Seed capital
- D) Bridge (mezzanine) finance
Show answer & explanation
Answer: C) Seed capital
Seed capital is the earliest stage of venture finance. It funds research and development of a concept or prototype, when risk is highest. Second-round and later financing support firms already selling a product. Bridge or mezzanine finance comes just before a public issue, and buy-out finance helps management acquire an existing business.
Question 3
Which of the following is a feature of a financial lease rather than an operating lease?
- A) The lease is non-cancellable and the lessee bears the risks and rewards of ownership, including maintenance, over most of the asset's economic life
- B) The lessee can cancel the lease at short notice without penalty
- C) The lease period is short compared with the asset's economic life and the lessor bears obsolescence risk
- D) The lessor normally provides maintenance and insurance as part of the rental
Show answer & explanation
Answer: A) The lease is non-cancellable and the lessee bears the risks and rewards of ownership, including maintenance, over most of the asset's economic life
A financial lease is a long-term, non-cancellable arrangement under which the lessee effectively gets the risks and rewards of ownership and usually bears maintenance and insurance. The lease term covers most of the asset's life, so the lessor recovers its investment plus a return. The other options describe an operating lease.
Question 4
Commercial paper (CP) is best described as:
- A) A certificate issued by a bank against a fixed-term deposit
- B) An unsecured short-term promissory note issued at a discount by highly rated companies
- C) A secured long-term debenture carrying a fixed coupon
- D) A short-term bank overdraft secured by a charge on inventory
Show answer & explanation
Answer: B) An unsecured short-term promissory note issued at a discount by highly rated companies
Commercial paper is a money market instrument: an unsecured promissory note with a short maturity, issued at a discount to face value by companies with strong credit ratings. Investors earn the difference between the discounted issue price and the face value. A certificate issued by a bank against a deposit is a certificate of deposit, not CP.
Question 5
An Indian company wishes to raise equity from investors in the United States by issuing depository receipts that are listed and traded on a US stock exchange. The instrument it should use is:
- A) Foreign Currency Convertible Bonds (FCCBs)
- B) External Commercial Borrowings (ECBs)
- C) Global Depository Receipts (GDRs) listed only in Luxembourg
- D) American Depository Receipts (ADRs)
Show answer & explanation
Answer: D) American Depository Receipts (ADRs)
ADRs are dollar-denominated receipts issued by a US depository bank against the underlying shares of a non-US company and traded in the US market. GDRs are usually listed on European exchanges and offered in several markets. ECBs and FCCBs are debt or quasi-debt instruments, not depository receipts for equity.
Question 6
Mahendra Textiles Ltd sells its factory building to a leasing company for cash and simultaneously leases the same building back for 15 years. The main purpose of this arrangement is to:
- A) Release funds tied up in the asset while keeping the right to use it
- B) Reduce the company's lease payments to nil
- C) Avoid having to maintain the building during the lease term
- D) Transfer the operating risks of the business to the leasing company
Show answer & explanation
Answer: A) Release funds tied up in the asset while keeping the right to use it
Under a sale and leaseback, the owner sells an asset and leases it back immediately. The company gets a lump sum of cash to use elsewhere and continues to use the asset in return for lease rentals. Operating risks stay with the company, and maintenance obligations depend on the lease terms.
Question 7
A company has obtained sanction of a term loan from a financial institution, but disbursement will take three months. In the meantime it takes a short-term loan from a bank to start work on the project, to be repaid from the term loan proceeds. This short-term loan is known as:
- A) Seed capital
- B) Packing credit
- C) Deferred credit
- D) Bridge finance
Show answer & explanation
Answer: D) Bridge finance
Bridge finance is a short-term loan taken to meet expenses while formalities for a sanctioned long-term loan are completed. It is repaid when the term loan is disbursed. Packing credit is pre-shipment finance for exporters, and deferred credit refers to buying assets on instalment terms.