financial management case study with solution pdf class 12

CBSE Class 12 Case Studies In Business Studies – Financial Management

FINANCIAL MANAGEMENT Financial Management: Definition Financial Management is concerned with optimal procurement as well as usage of finance.

Objective The prime objective of financial management is to maximise shareholder’s wealth by maximising the market price of a company’s shares.

Financial Decisions Involved in Financial Management

• Investment Decision
• Financing Decision
• Dividend Decision

Role of Financial Management

• To determine the capital requirements of business, both long-term and short-term.
• To determine the capital structure of the company and determine the sources from where required capital will be raised keeping in view the risk and return matrix.
• To decide about the allocation of funds into profitable avenues, keeping in view their safety as well.
• To decide about the appropriation of profits.
• To ensure efficient management of cash in order to ensure both liquidity and profitability.
• To exercise overall financial controls in order to promote safety, profitability and conservation of funds.

INVESTMENT DECISION

• It seeks to determine as to how the firm’s funds are invested in different assets
• It helps to evaluate new investment proposals and select the best option on the basis of associated risk and return.
• Investment decision can be long-term or short-term.
• A long-term investment decision is also called a Capital Budgeting decision.

Types of Investment Decision

• It refers to the amount of capital required to meet day- to-day running of business.
• It relates to decisions about cash, inventory and receivables.
• It affects both liquidity and profitability of business.
• It refers to the amount of capital required for investment in fixed assets or long term projects which will yield return and influence the earning capacity of business over a period of time.
• It affects the amount of assets, competitiveness and profitability of business.
• The expected cash flows from the proposed project should be carefully analysed.
• The expected rate of return should be carefully studied in terms of risk associated from the proposed project.
• Different types of ratio analysis should be done to evaluate the feasibility of the proposed project as compared to similar projects in the same industry.

FINANCING DECISION Financing Decision: Definition Financing decision relates to determining the amount of finance to be raised from different sources of finance.This decision determines the overall cost of capital and the financial risk of the enterprise. Types of Sources of Raising Finance

• Equity shares
• Preference shares
• Retained earnings
• Loan from bank or financial institutions
• Public deposit

Considerations Involved in the Issue of Debt

• Interest on borrowed funds has to be paid regardless of whether or not a business has made a profit. Likewise, borrowed funds have to be repaid ata fixed time.
• There is some amount of financial risk in debt financing.
• The cost of debt is less than equity as the degree of risk assumed by the investors is less and the amount of interest paid by the company is tax deductible.

Factors Affecting Financing Decision

• The source of finance which involves the least cost should be chosen.
• The risk involved in raising debt capital is higher than equity.
• The sources involving high flotation cost require special consideration.
• If the cash flow position of a business is good, it should opt for debt else equity.
• If the fixed operating cost ofa business is low, it should opt for debt else equity.
• The issue of equity capital dilutes the control of existing shareholders over business whereas financing through debt does not lead to any such effect
• If there is boom in capital market it is easy for the company to raise equity capital, else it may opt for debt.

Considerations Involved in the Issue of Equity

• Shareholders do not expect any commitment regarding the payment of returns or repayment of capital.
• The floatation cost on raising equity capital is high.
• The shareholders expect higher returns in return for assuming higher risks.

DIVIDEND DECISION Dividend Decision relates to disposal of profit by deciding the proportion of profit which is to be distributed among shareholders and the proportion of profit which is to be retained in the business for meeting the investment requirements.

Factors Affecting Dividend Decision

• If the earnings of the company are high, dividends are paid at a higher rate.
• If the earnings of a company are stable, it is likely to pay higher dividends.
• A company is more likely to maintain a stable dividend rate over a period of time,unless there is a significant change in its earnings.
• A company planning to pursue a growth opportunity is likely to pay lower dividends. The dividends are paid in cash, therefore if the cash flow of the company is good, it is likely to pay higher dividends.
• If the shareholders prefer regular income in form of dividends, the company is likely to maintain a dividend payout rate.
• If the tax rate is high, the company is likely to pay less dividend.
• If a company wants positive reactions at stock market, It Is likely to pay higher dividends.
• A large company can access funds easily from capital market as per its requirements, therefore, it is likely to retain lesser profits and is likely to pay higher dividends.
• The legal constraint should be considered at the time of dividend payment by a company.
• The contractual constraints may also affect the dividend payment by a company.

FINANCIAL PLANNING Financial Planning: Definition The process of estimating the funds requirement of a business and specifying the sources of funds is called financial planning. It basically involves preparation of a financial blueprint of an organisation’s future operations.

Twin Objectives of Financial Planning

• To ensure availability of funds as per the requirements of business.
• To see that the enterprise does not raise resources needlessly.

Importance of Financial Planning

• It ensures smooth running of a business enterprise by ensuring availability of funds at the right time.
• It helps in anticipating future requirements of funds and evading business shocks and surprises.
• It facilitates co-ordination among various departments of an enterprise, like marketing and production functions, through well-defined policies and procedures.
• It increases the efficiency of operations by curbing wastage of funds, duplication of efforts, and gaps in planning. .
• It helps to establish a link between the present and the future.
• It provides a continuous link between investment and financing decisions.
• It facilitates easy performance as evaluation standards are set in clear, specific and measurable terms.

CAPITAL STRUCTURE Capital Structure: Definition It refers to the mix between owners and borrowed funds.

Financial Risk: Definition It refers to a situation when a company is unable to meet its fixed financial charges like payment of interest on debt capital.

Trading on Equity: Definition It refers to the increase in the earnings per share by employing the sources of finance carrying fixed financial charges like debentures (interest is paid at a fixed rate) or preference shares (dividend is paid at fixed rate).

Financial Leverage: Definition The proportion of debt in the overall capital is called financial leverage. It is computed as D/E or D/D+E, where D is the Debt and E is the Equity.

FIXED CAPITAL Fixed Capital: Definition It refers to investment in long-term assets.

Importance of Management of Fixed Capital

• It affects the growth and profitability of busmess m future.
• It involves huge investment outlay in terms of investment in land, building, machinery etc.
• Its influences the overall level of business risk of the organisation.
• If these decisions are reversed they may lead to major losses.

WORKING CAPITAL Working Capital: Definition The funds needed to meet the day-today operations of the business is called working capital.

Factors Affecting the Choice of Capital Structure

13. Regulatory framework: The business will choose the option where it can easily fulfill the norms of the concerned regulator like a bank or SEBI. 14. Capital structure of other companies: The business must know what the industry norms are, whether they are following them or deviating from them and adequate justification must be there.

Factors Affecting the Working Capital Requirements of a Business Enterprise

LATEST CBSE QUESTIONS

Question 1. What is meant by ‘financial management’ ? (CBSE, Delhi 2017) Answer: Financial Management is concerned with optimal procurement as well as usage of finance.

Question 2. Somnath Ltd. is engaged in the business of export of garments. In the past, the performance of the company had been upto the expectations. In line with the latest technology, the company decided to upgrade its machinery. For this, the Finance Manager, Dalmia estimated the amount of funds required and the timings. This will help the company in linking the investment and the financing decisions on a continuous basis. Dalmia therefore, began with the preparation of a sales forecast for the next four years. Fie also collected the relevant data about the profit estimates in the coming years. By doing this, he wanted to be sure about the availability of funds from the internal sources of the business. For the remaining funds he is trying to find out alternative sources from outside. (CBSE, Delhi 2017) Identify the financial concept discussed in the above para. Also state the objectives to be achieved by the use of financial concept, so identified. Answer: Financial planning is the financial concept discussed in the above paragraph. The process of estimating the fund requirements of a business and specifying the sources of funds is called financial planning. It relates to the preparation of a financial blueprint of an organisation’s future operations. The objectives to be achieved by the use of financial concept are stated below:

• To ensure availability of funds whenever required which involves estimation of the funds required, the time at which these funds are to be made available and the sources of these funds.
• To see that the firm does not raise resources unnecessarily as excess funding is almost as bad as inadequate funding. Financial planning ensures that enough funds are available at right time.

Question 3. Explain briefly any four factors which affect the choice of capital structure of a company. (CBSE, Delhi 2017) Answer: The four factors which affect the choice of capital structure of a company are described below:

• Risk: Financial risk refers to a situation when a company is unable to meet its fixed financial charges. Financial risk of the company increases with the higher use of debt. This is because issue of debt involves fixed commitment in terms of payment of interest and repayment of capital.
• Flexibility: Too much dependence on debt reduces the firm’s ability to raise debt during unexpected situations. Therefore, it should maintain flexibility by not using debt to its full potential.
• Interest Coverage ratio (ICR): The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation. This may be calculated as follows: ICR = EBIT/Interest. If the ratio is higher, lower is the risk of company failing to meet its interest payment obligations hence debt may be issued or vice versa. But besides interest payment related repayment obligations should also be considered.
• Cash flow position: The issue of debt involves a fixed commitment in the form of payment of interest and repayment of capital. Therefore if the cash flow position of the company is weak it cannot meet the fixed obligations involved in issue of debt it is likely to issue equity or vice versa.

Question 4. Explain briefly any four factors that affect the working capital requirement of a company. (CBSE, Delhi 2017) Answer: The four factors that affect the working capital requirements of a company are explained below:

• Credit availed: In case the suppliers from whom the firm procures the raw material needed for production or finished goods follow a liberal credit policy, the business can be operated on minimum working capital or vice versa.
• Credit allowed: The credit terms may vary from firm to firm. However, if the level of competition is high or credit worthiness of its clients is good the firm is likely to follow a liberal credit policy and grant credit to its clients it results in higher amount of debtors, increasing the requirement of working capital or vice versa.
• Scale of operations: The amount of working capital required by a business varies directly in proportion to its scale of business. For organisations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.
• Growth prospects: The business firms who wish to take advantage of a forthcoming business opportunity or plan to expand its operations will require higher amount of working capital so that is able to meet higher production and sales target whenever required or vice versa .

Question 5. Explain briefly any four factors that affect the fixed capital requirements of a company. (CBSE, Delhi 2017) Answer: The four factors that affect the fixed capital requirements of a company are explained below:

• Nature of business: The kind of activities a business is engaged in has an important bearing on its fixed capital requirements. On one hand a trading concern does not require to purchase plant and machinery etc. and needs lower investment in fixed assets. Whereas on the other hand a manufacturing organisation is likely to invest heavily in fixed assets like land, building, machinery and needs more fixed capital.
• Scale of operations: The amount of fixed capital required by a business varies directly in proportion to its scale of businessA larger organisation operating at a higher scale needs bigger plant, more space etc. and therefore, requires higher investment in fixed assets when compared with the small organisation.
• Diversification: If a business enterprise plans to diversify into new product lines, its requirement of fixed capital will increase as compared to an organisation which does not have any such plans.
• Growth prospects: If a business enterprise plans to expand its current business operations in the anticipation of higher demand, its requirement of fixed capital will be more as compared to an organisation which doesn’t plan to persue any such plans.

Question 6. What is meant by ‘Capital Structure’ ? (CBSE, OD 2017) Answer: Capital structure refers to the mix between owned funds and borrowed funds.

Question 7. Ramnath Ltd. is dealing in import of organic food items in bulk. The company sells the items in smaller quantities in attractive packages. Performance of the company has been up to the expectations in the past. Keeping up with the latest packaging technology, the company decided to upgrade its machinery. For this, the Finance Manager of the company, Mr. Vikrant Dhull, estimated the amount of funds required and the timings. This will help the company in linking the investment and the financing decisions on a continuous basis. Therefore, Mr. Vikrant Dhull began with the preparation of a sales forecast for the next four years. He also collected the relevant data about the profit estimates in the coming years. By doing this, he wanted to be sure about the availability of funds from the internal sources. For the remaining funds he is trying to find out alternative sources. Identify the financial concept discussed in the above paragraph. Also, state any two points of importance of the financial concept, so identified. (CBSE, OD 2017) Answer:

• Financial planning is the financial concept discussed in the above paragraph. The process of estimating the fund requirements of a business and specifying the sources of funds is called financial planning. It relates to the preparation of a financial blueprint of an organisation’s future operations.
• It helps in anticipating future requirements of a funds and evading business shocks and surprises .

Question 8. When is financial leverage favourable? (CBSE, Sample Paper 2017) Answer: Financial leverage affects the profitability of a business and it is said to be favourable when return on investment ( ROI) is higher than cost of Debt.

Question 9. “A business that doesn’t grow dies”, says Mr. Shah, the owner of Shah Marble Ltd. with glorious 36 months of its grand success having a capital base of RS.80 crores. Within a short span of time, the company could generate cash flow which not only covered fixed cash payment obligations but also create sufficient buffer. The company is on the growth path and a new breed of consumers is eager to buy the Italian marble sold by Shah Marble Ltd. To meet the increasing demand, Mr. Shah decided to expand his business by acquiring a mine. This required an investment of RS.120 crores. To seek advice in this matter, he called his financial advisor Mr. Seth who advised him about the judicious mix of equity (40%) and Debt (60%). Mr. Seth also suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest on loan is a tax deductible expense for computation of tax liability. After due deliberations with Mr. Seth, Mr. Shah decided to raise funds from a financial institution.

• Identify and explain the concept of Financial Management as advised by Mr. Seth in the above situation.
• State the four factors affecting the concept as identified in part (1) above which have been discussed between Mr. Shah and Mr. Seth. (CBSE,Sample Paper 2017)
• Capital structure is the concept of Financial Management as advised by Mr. Seth in the above situation. Capital structure refers to the mix between owners funds and borrowed funds.
• Cashflow position: The issue of debt capital involves a fixed burden on the company in the form of payment of interest and repayment of capital. Therefore if the cash flow position of a company is good it may issue debt else equity to raise the required amount of capital.
• Risk Consideration: Financial risk refers to a situation when a company is unable to meet its fixed financial charges. Financial risk of the company increases with the higher use of debt. This is because issue of debt involves fixed commitment in terms of payment of interest and repayment of capital.
• Tax rate: Considering the fact that amount of interest paid is a deductible expense, cost of debt is affected by the tax rate. If for example a firm is borrowing @ 10% and the tax rate is 30%, the after tax cost of debt is only 7%. Therefore, when the tax rate is higher it makes debt relatively cheaper and increases its attraction vis-a-vis equity.
• Control: The issue of debentures doesn’t affect the control of the equity shareholders over the business as the debenture holders do not have the right to participate in the management of the business.

Question 10. Shalini, after acquiring a degree in Hotel Management and Business Administration, took over her family food processing company of manufacturing pickles, jams and squashes. The business had been established by her great grandmother and was doing reasonably well. However, the fixed operating costs of the business were high and the cash flow position was weak. She wanted to undertake modernisation of the existing business to introduce the latest manufacturing processes and diversify into the market of chocolates and candies. She was very enthusiastic and approached a finance consultant, who told her that approximately ? 50 lakh would be required for undertaking the modernisation and expansion programme. He also informed her that the stock market was going through a bullish phase.

• Keeping the above considerations in mind, name the source of finance Shalini should not choose for financing the modernisation and expansion of her food processing business. Give one reason in support of your answer.
• Explain any two other factors, apart from those stated in the above situation, which Shalini should keep in mind while taking this decision. (CBSE, Sample Paper 2016)
• Shalini should not choose debt capital for financing the modernisation and expansion of her food processing business because the fixed operating cost of the company is high. It cannot take the additional burden of fixed commitments in terms of payment of interest and repayment of capital by issuing debt.

Question 11. Radhika and Vani who are young fashion designers, left their job vyith a famous fashion designer chain to set-up a company ‘Fashionate Pvt. Ltd.’ They decided to run a boutique during the day and coaching classes for the entrance examination of National Institute of Fashion Designing in the evening. For the coaching centre, they hired the first floor of a nearby building. Their major expense was the money spent on photocopying of notes for their students. They thought of buying a photocopier knowing fully that their scale of operations was not sufficient to make full use of photocopier. In the basement of the building of Fashionate Pvt. Ltd, Praveen and Ramesh were carrying on a printing and stationery business in the name of ‘Neo Prints Pvt. Ltd.’ Radhika approached Praveen with the proposal to buy a photocopier jointly which could be used by both of them without making separate investment. Praveen agreed to this. Identify the factor affecting the fixed capital requirements of Fashionate Pvt. Ltd. (CBSE, Delhi 2016) Answer: The factor affecting the fixed capital requirement of Fashionable Pvt. Ltd. is the level of collaboration. This kind of arrangement of using the resources jointly helps to reduce the fixed capital requirements of the business firms.

Question 12. Kay Ltd. is a company manufacturing textiles. It has a share capital of ? 60 lakhs. In the previous year, its earning per share was ? 0.50. For diversification, the company requires an additional capital of ? 40 lakhs. The company raised funds by issuing 10% debentures for the same. During the year, the company earned a profit of ? 8 lakhs on the capital employed. It paid tax @ 40%.

• State whether the shareholders gained or lost, in respect of earning per share on diversification. Show your calculations clearly.
• Also state any three factors that favour the issue of debentures by the company as part of its capital structure. (CBSE, OD 2016)

OR Vivo Ltd. is a company manufacturing textiles. It has a share capital of Rs. 60 lakhs. The earning per share in the previous year was Rs. 0.50. For diversification, the company requires an additional capital of Rs. 40 lakhs. The company raised funds by issuing 10% debentures for the same. During the current year, the company earned a profit of Rs. 8 lakhs on the capital employed. It paid tax @ 40%.

• State whether the shareholders gained a lost, in respect of earning per share on diversification. Show your calculations clearly.
• Also, state any three factors that favour the issue of debentures by the company as part of its capital structure. (CBSE, Delhi 2016)

• Tax deductibility: Debt is considered to be a relatively cheaper source of finance as the amount of interest paid on debt is treated as a tax deductible expense.
• Flotation cost: The money spent by the company on raising capital through debentures is less than that spent on equity.

Question 13. Rizul Bhattacharya, after leaving his job, wanted to start a Private Limited Company with his son. His son was keen that the company may start manufacturing mobile-phones with some unique features. Rizul Bhattacharya felt that mobile phones are prone to quick obsolescence and a heavy fixed capital investment would be required regularly in this business. Therefore, he convinced his son to start a furniture business. Identify the factor affecting fixed capital requirements which made Rizul Bhattacharya choose the furniture business over mobile phones. (CBSE, OD 2016) Answer: The factor affecting the fixed capital requirements which made Rizul Bhattacharya choose the furniture business over mobile phones is technological upgradation.

Question 14. Tata International Ltd. earned a net profit of Rs. 50 crores. Ankit, the finance manager of Tata International Ltd. wants to decide how to appropriate these profits. Discuss any five factors which will help him in taking this decision. (CBSE, Sample Paper, 2015) Answer: The five factors which will help Ankit, in taking the dividend decision are described below:

• Earnings: Since the dividends are paid out of current and past earnings, there is a direct relationship between the amount of earnings of the company and the rate at which it declares dividend. If the earnings of the company are high, it may declare a higher dividend or vice-versa.
• Cash flow position: Since the dividends are paid in cash, if the cash flow position of the company is good it may declare higher dividend or vice-versa.
• Access to capital market: If the company enjoys an easy access to capital market because of its credit worthiness. It does not feel the need to depend entirely on retained earnings to meet its financial needs. Hence, it may declare higher dividend or vice-versa.
• Growth prospects: If the company has any forthcoming investment opportunities, it may like to retain profits to finance its expansion projects. This is because retained profits is considered to be the cheapest source of finance as it doesn’t involve any explicit costs. Hence, it may declare lower dividend or vice-versa.
• Preferences of the shareholders: The companies paying stable dividends are always preferred by small investors primarily if they want regular income in the form of ‘stable returns’ from their investments. Large shareholders may be willing to forgo their present dividend in pursuit of higher profits in future. Therefore, the preferences of the shareholders must be taken into consideration.

Question 15. ‘Abhishek Ltd’ is manufacturing cotton clothes. It has been consistently earning good profits for many years. This year too, it has been able to generate enough profits. There is availability of enough cash in the company and good prospects for growth in future. It is a well managed organisation and believes in quality, equal employment opportunities and good remuneration practices. It has many shareholders who prefer to receive a regular income from their investments. It has taken a loan of Rs. 50 lakhs from ICICI Bank and is bound by certain restrictions on the payment of dividend according to the terms of the loan agreement. The above discussion about the company leads to various factors which decide how much of the profits should be retained and how much has to be distributed by the company. Quoting the lines from the above discussion, identify and explain any four such factors. (CBSE, 2015) Answer: The five factors which Ankit has to consider before taking dividend decisions are:

• Growth Opportunities: Financial needs of a firm are directly related to the investment opportunities available to it. If a firm has abundant profitable investment opportunities, it will adopt a policy of distributing lower dividends. It would like to retain a large part of its earnings because it can reinvest them at a higher rate.
• Stability of Dividends: Investors always prefer a stable dividend policy. They expect to get a fixed amount as dividends which should increase gradually over the years.
• Legal Restrictions: A firm’s dividend policy has to be formulated within the legal provisions and restrictions of the Indian Companies Act.
• Restrictions in Loan Agreements: Lenders, mostly financial institutions, put certain restrictions on the payment of dividends to safeguard their interests.
• Liquidity: The cash position is a significant factor in determining the size of dividends. Higher the cash and overall liquidity position of a firm, higher will be its ability to pay dividends.

Question 16. Amit is running an ‘advertising agency’ and earning a lot by providing this service to big industries State whether the working capital requirement of the firm will be ‘less’ or ‘more’. Give reason in support of your anser. (CBSE, Sample Paper 2014-15) Answer: The working capital requirements of Amit will be relatively less as he is running an advertising agency, wherein there is no need to maintain inventory.

Question 17. Yogesh, a businessman, is engaged in the purchase and sale of ice-creams. Identify his working capital requirements by giving reasons to support your answer. Now, he is keen to start his own ice-cream factory. Explain any two factors that will affect his fixed capital requirements. (CBSE, OD 2012) Answer:

• The working capital requirements of Yogesh will be less as he is engaged in trading business.
• Level of collaboration: If Yogesh gets an opportunity to set up his factory in collaboration with another enterprise, his fixed capital requirements will reduce considerably else his fixed capital requirements will be more.
• Financial alternatives available: If Yogesh is able to get the place to start the factory and machinery on lease, his fixed capital requirements will reduce considerably. Whereas if he decides to purchase them, his fixed capital requirements will be more.

Question 18. Amar is doing his transport business in Delhi. His buses are generally used for tourists going to Jaipur and Agra. Identify the working capital requirements of Amar. Give reasons to support your answer. Further, Amar wants to expand and diversify his transport business. Explain any two factors that will affect his fixed capital requirements. (CBSE, OD, 2012) Answer:

• The working capital requirements of Amar will be relatively less as he is engaged in prtividing transport services wherein there is no need to maintain inventory.
• Diversification: If a business enterprise plans to diversify into new product lines, its requirement of fixed capital will increase.
• Growth prospects: If a business enterprise plans to expand its current business operations in the anticipation of higher demand, consequently, more fixed capital will be needed by it.

Question 19. Manish is engaged in the business of manufacturing garments. Generally, he used to sell his garments in Delhi. Identify the working capital requirements of Manish giving reason in support of your answer. Further, Manish wants to expand and diversify his garments business. Explain any two factors that will affect his fixed capital requirements. (CBSE, Delhi 2012) Answer:

• The working capital requirements of Manish will be relatively more as he is engaged in the business of manufacturing garments. This is because the length of production cycle is longer i.e. it takes time to convert raw material into finished goods.
• Scale of Operations: The amount of fixed capital required by a business enterprise is directly proportionate to its scale of operations. Therefore, if Manish plans to do business on a large scale, his fixed capital requirements will be more or vice versa.
• Technological Upgradation: If Manish plans to use machines of latest technology in manufacturing garments, his fixed capital requirements will be more as replacement of obsolete machines will require huge financial outlay.

Question 20. Harish is engaged in the warehousing business and his warehouses are generally used by businessmen to store fruits. Identify the working capital requirements of Harish giving reasons in support of your answer. Further, Harish wants to expand and diversify his warehousing business. Explain any two factors that will affect his fixed capital requirements. (CBSE, Delhi 2012) Answer:

• The working capital requirements of Harish will be relatively less as he is engaged in providing warehousing services wherein there is no need to maintain inventory.
• Scale of Operations: The amount of fixed capital required by a business enterprise is directly proportionate to its scale of operations. Therefore, if Harish plans to do business on a large scale his fixed capital requirements will be more or vice versa.

ADDITIONAL QUESTIONS

Question 1. Arun is a successful businessman in the paper industry. During his recent visit to his friend’s place in Mysore, he was fascinated by the exclusive variety of incense sticks available there. His friend tells him that Mysore region is known as a pioneer in the activity of Agarbathi manufacturing because it has a natural reserve of forest products especially Sandalwood to provide for the base material used in production. Moreover, the suppliers of other types of raw material needed for production follow a liberal credit policy and the time required to manufacture incense sticks is relatively less. Considering the various factors, Arun decides to venture into this line of business by setting up a manufacturing unit in Mysore. In context of the above case:

• Identify and explain the type of financial decision taken by Arun.
• Identify the three factors mentioned in the paragraph which are likely to affect the working capital requirements of his business.
• Investment decision has been taken by Arun. Investment decision seeks to determine as to how the firm’s funds are invested in different assets. It helps to evaluate new investment proposals and select the best option on the basis of associated risk and return. Investment decision can be long term or short-term. A long-term investment decision is also called a Capital Budgeting decision
• Availability of raw material: As there is easy availability of Sandalwood which is used as the base material for production, the working capital requirements of his business will be less as there is no need to stock the raw materials.
• Production cycle: The production cycle is shorter and less time is required to manu¬facture incense sticks. Thus, the working capital requirements of his business will be low.
• Credit availed: Due to the fact that the suppliers of other types of raw material needed for production follow a liberal credit policy, the business can be operated on minimum working capital.

Question 2. ‘Adwitiya’ is a company enjoying market leadership in the food brands segment. It’s portfolio includes three categories in the Foods business namely Snack Foods, Juices and Confectionery. Keeping in line with the growing demand for packaged food it now plans to introduce Ready- To-Eat Foods. Therefore, the company has planned to undertake investments of nearly Rs. 450 crores for its new line of business. As per the current financial report, the interest coverage ratio of the company and return on investment is higher. Moreover, the corporate tax rate is high. In context of the above case:

• As a financial manager of the company, which source of finance will you opt for debt or equity, to raise the required amount of capital? Explain by giving any two suitable reasons in support of. your answer.
• Why are the shareholder’s of the company like to gain from the issue of debt by the company?
• Interest coverage ratio: The interest coverage ratio of the company is high so it can easily meet its fixed commitment of payment of interest and repayment of capital.
• Tax rate: The tax rate is high which makes debt relatively cheaper as the amount of interest paid on debt is treated as a tax deductible expense.
• The shareholders of the company are likely to gain from the issue 6f debt by the company because the return on investment is higher. It helpS a company to take advantage of trading on equity to increase the earnings per share.

Question 3. Computer Tech Ltd.,is one of the leading information technology outsourcing services providers in India. The company provides business consultancy and outsourcing services to its clients. Over the past five years the company has been paying dividends at high rate to its shareholders. However, this year, although the earnings of the company are high, its liquidity position is not so good. Moreover, the company plans to undertake new ventures in order to expand its business. In context of the above case: .

• Give any three reasons because of which you think Computer Tech Ltd. has been paying dividends at high rate to its shareholders over the past five years.
• Comment upon the likely dividend policy of the company this year by stating any two reasons in support of your answer.
• Earnings: The earnings of the company have been high. Since the dividends are paid out of current and past earnings, there is a direct relationship between the amount of earnings of the company and the rate at which it declares dividend .
• Cashflow position: The cash flow position of the company must have been good as in order to pay high dividends, more cash is required.
• Access to capital market: Because of its credit worthiness, the company enjoyed an easy access to capital market. Therefore, it did not feel the need to depend entirely on retained earnings to meet its financial needs. Hence, it declared higher dividends in past.
• The cash flow position of the company is not good and dividends are paid in cash.
• The company may like to retain profits to finance its expansion projects. Retained profits do not involve any explicit cost and are considered to be the cheapest source of finance.

Question 4. Bhuvan inherited a very large area of agricultural land in Haryana after the death of his grandfather. He plans to sell this piece of land and use the money to set up a small scale paper factory to manufacture all kinds of stationary items from recycled paper. Being an amateur in business, he decides to consult his friend Subhash who works in a financial consultancy firm. Subhash helps him to prepare a blue print of his future business operations on the basis of sales forecast in next five years. Based on these estimates, he helps Bhuvan to assess the fixed and working capital requirements of business. In context of the above case:

• Identify the type of financial service that Subhash has offered to Bhuvan.
• Briefly state any four points highlighting the importance of the type of financial service identified in part (1).
• Financial planning is the type of financial service that Subhash has offered to Bhuvan.
• It helps in anticipating future requirements of a funds and evading business shocks and surprises.
• It facilitates co-ordination among various departments of an enterprise like marketing and production functions, through well-defined policies and procedures.
• It increases the efficiency of operations by curbing wastage of funds, duplication of efforts, and gaps in planning.

Question 5. ‘Madhur Milan’ is a popular online matrimonial portal. It seeks to provide personalized match making service. The company has 80 offices in India, and is now planning to open offices in Singapore, Dubai and Canada to cater to its customers beyond the country. The company has decided to opt for the sources of equity capital to raise the required amount of capital. In context of the above case:

• Identify and explain the type of risk which increases with the higher use of debt.
• Explain briefly any four factors because of which you think the company has decided to opt for equity capital.
• Financial risk of the company increases with the higher use of debt. This is because issue of debt involves fixed commitment in terms of payment of interest and repayment of capital. Financial risk refers to a situation when a company is unable to meet its fixed financial charges.
• Capital market conditions: The state of capital market is bullish, so people are likely to invest more in equity.
• Fixed operating cost: The fixed operating cost of company is high so it cannot take the further burden fixed commitment in terms of payment of interest and repayment of capital by issuing debt.
• Cashflow position: The cash flow position of the company is weak so it cannot meet the fixed obligations involved in issue of debt.
• Risk: The proportion of debt in its capital structure is already high so it cannot issue further debt, thereby endangering the solvency of the company.

Question 6. Wooden Peripheral Pvt. Ltd. is counted among the top furniture companies in Delhi. It is known for offering innovative designs and high quality furniture at affordable prices. The company deals in a wide product range of home and office furniture through its eight showrooms in Delhi. The company is now planning to open five new showrooms each in Mumbai and Bangalore. In Bangalore it intends to take the space for the showrooms on lease whereas for opening showrooms in Mumbai, it has collaborated with a popular home furnishing brand, ‘Creations.’

• Identify the factors mentioned in the paragraph which are likely to affect the fixed capital requirements of the business for opening new showrooms both in Bangalore and Mumbai separately,
• “With an increase in the investment in fixed assets, there is a commensurate increase in the working capital requirement.” Explain the statement with reference to the case above.
• The fixed capital requirements of Wooden Peripheral Pvt. Ltd. for opening new showrooms in Bangalore will be relatively less as its taking space on lease, so only rentals have to be paid. Similarly, its fixed capital requirement for opening showrooms in Mumbai will be reduced as its going to share the costs with another company through collaboration.
• It’s true that,” With an increase in the investment in fixed assets, there is a commen¬surate increase in the working capital requirement.” Like in the above case, Wooden Peripheral Pvt. Ltd. is planning to invest in new showrooms. Consequently, its requirement of working capital will increase as it will need more money to stock goods, pay electricity bills and salaries to staff. Also, it intends to take the space for the showrooms in Mumbai on lease so it will have to pay rentals.

Question 7. ‘Apparels’ is India’s second largest manufacturer of branded Lifestyle apparel. The company now plans to diversify into personal care segment by launching perfumes, hair care and skin are products. Moreover, it is planning to open ten exclusive retail outlets in various cities across the country in next two years. In context of the above case:

• Identify the two factors affecting the fixed capital needs of the company by quoting lines from the paragraph.
• Why is the management of fixed capital considered to be an important for a business?
• It affects the growth and profitability of business in future.
• It influences the overall level of business risk of the organisation.
• If these decisions are reversed, they may lead to major losses.

Question 8. After persuing a course in event management, Kajal and her brother Kamal promoted an event management company under the name Khushi Entertainment Private Limited. They strive together as dedicated and dynamic professionals managing different kinds of formal and informal events across all major cities in India and abroad. They design the event idea and co-ordinate the different aspects of the event to make it a grand success. As a policy, they take fifty percent of the payment as advance from the client before the start of an event and receive the balance charges after the successful completion of the event. In context of the above case:

• Comment upon the working capital needs of the company keeping in mind its nature of business.
• Identify the other factor mentioned in the paragraph which is likely to affect the working capital requirement of their business.
• The working capital requirements of Khushi Entertainment Private Limited will be relatively less as they are engaged in providing event management services, wherein there is no need to maintain inventory
• The other factor mentioned in the paragraph which is likely to affect the working capital requirement of their business is ‘Credit availed.’ Since as a policy, they take fifty percent of the payment as advance from the client before the start of an event, their requirement of working capital is reduced.

Question 9. Storage Solution Ltd. is a large warehousing network company operating. through a chain of warehouses at 40 different locations across India. The company now intends to undertake computerisation of its owned ware houses as it seeks to provide better value added and cost effective solutions for scientific storage and preservation services to the market participants dealing in agricultural products including farmers, traders, etc. In context of the above case:

• How is the decision to undertake computerisation of owned warehouses likely to affect the fixed capital requirements of its business?
• Name any two sources that company may use to finance the implementation of this plan.
• The decision to undertake computerisation of owned warehouses will increase the fixed capital requirements of its business both in present and future as after sometime, the technology being used will become obsolete and need upgradation.
• The company may use retained earnings and take loans from financial institutions to implement this plan.

Question 10. Visions Ltd. is a renowned multiplex operator in India. Presently, it owns 234 screens in 45 properties at 20 locations in the country. Considering the fact that the there is a growing trend among the people to spend more of their disposable income on entertainment, two years back the company had decided to add more screens to its existing set up and increase facilities to enhance leisure, food chains etc. It had then floated an initial public offer of equity shares in order to raise the desired capital. The issue was fully subscribed and paid. Over the years, the sales and profits of the company have increased tremendously and it has been declaring higher dividend and the market price of its shares has increased manifolds. In context of the above case:

• Name the different kinds of financial decisions taken by the company by quoting lines from the paragraph.
• Do you think the financial management team of the company has been able to achieve its prime objective? Why or why not? Give a reason in support of your answer.
• Investment decision: “Two years back the company had decided to add more screens to its existing set up and increase facilities to enhance leisure, food chains etc.”
• Financing decision: “It had then floated an initial public offer of equity shares in order to raise the desired capital.”
• Dividend decision: “Over the years, the sales and profits of the company have increased tremendously and it has been declaring higher dividend.”
• Yes, the financial management team of the company has been able to achieve its prime objective i.e. wealth maximisation of the shareholders by maximising the market price of the shares of the company.

Question 11. After completing his education in travel and tourism, Arjun started Travel Angels Pvt. Ltd. along with his twin brother Bheem. Their company seeks to provide travel solutions to its clients like ticket booking for airways, railways and road ways, hotel booking, insurance etc. Although the business is doing well both of them have realised that they are not good in managing finance, and feel confused and frustrated sometimes due to financial crises that may suddenly arise. In order to avoid such situations in the future, they hire Nakul and Sehdev as financial managers, who have done a degree certification course in financial management. In context of the above

• Give the meaning of financial management.
• Outline the role of Nakul and Sehdev as the financial management team of the Travel Angels Pvt. Ltd. by giving any four suitable points.
• Financial Management is concerned with optimal procurement as well as usage of finance.
• To determine the capital requirements of business both long-term and short term.
• To exercise overall financial control in order to promote s’afety, profitability and conservation of funds.

Question 12. Wireworks Ltd. is a company manufacturing different kinds of wires. Despite fierce competition in the industry, it has been able to maintain stability in its earnings and as a policy, uses 30% of its profits to distribute dividends. The small investors are very happy with the company as it has been declaring high and stable dividend over past five years. In context of the above case:

• State any one reason because of which the company has been able to declare high dividend by quoting line from the paragraph.
• Why do you think small investors are happy with the company for declaring stable dividend?
• Stability in earnings: The company has been able to declare high dividend because its earnings are stable. “Despite fierce competition in the industry, it has been able to maintain stability in its earnings.”
• The small investors are happy with the company for declaring stable dividend as they enjoy a regular income on their investment.

Question 13. Manoj is a renowned businessman involved in export business of leather goods. As a responsible citizen, he chooses to use jute bags for packaging instead of plastic bags. Moreover, on the advice of his friends, he decides to use jute for manufacturing aesthetic handicrafts, keeping in view the growing demand for natural goods. In order to implement his plan, after conducting a feasibility study, he decides to set up a separate manufacturing unit for producing varied jute products. In context of the above case:

• Identify the type of investment decision taken by Manoj by deciding to set up a separate manufacturing unit for producing jute products.
• State any two factors that he is likely to consider while taking this decision
• Capital budgeting decision has been taken by Manoj.
• Cash inflows: The expected cash inflows from the proposed projects should be carefully analysed and the project indicating higher cash inflows should be selected.
• Rate of return: The expected rate of return should be carefully studied in terms of risk associated from the proposed project. If two projects are likely to offer the same rate of return, the project involving lesser risk should be selected.

Question 14. Khoobsurat Pvt. Ltd. is the largest hair salon chain in the Delhi, with over a franchise of 200 salons. The company is now planning to set up a manufacturing unit in Faribadad for production of various kinds of beauty products under its own brand name. In context of the above case:

• Comment upon the fixed capital needs of the company.
• How will the requirement of fixed capital of the company change when it implements its plan to set up a manufacturing unit?
• The fixed capital needs of the company are low as its salons have been promoted in the form of franchises.
• The requirement of fixed capital of the company will increase when it implements its plan to set up a manufacturing unit because it will have to make investments in buying land, building, machinery etc.

Question 15. Well-being Ltd. is a company engaged in production of organic foods. Presently, it sells its products through indirect channels of distribution. But, considering the sudden surge in the demand for organic products, the company is now inclined to start its online portal for direct marketing. The financial managers of the company are planning to use debt in order to take advantage of trading on equity. In order to finance its expansion plans, it is planning to ‘ raise a debt capital of Rs. 40 lakhs through a loan @ 10% from an industrial bank. The present capital base of the company comprises of Rs. 9 lakh equity shares of Rs. 10 each. The rate of tax is 30%. In the context of the above case:

• What are the two conditions necessary for taking advantage of trading on equity?
• Assuming the expected rate of return on investment to be same as it was for the current year i.e. 15% , do you think the financial managers will be able to meet their goal. Show your workings clearly.
• The rate of return on investment should be more than the rate of interest.
• The amount of interest paid should be tax deductible.

Yes, the financial managers will be able to meet their goal as the projected EPS, with the issue of debt, is higher than the present EPS.

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Case Study Chapter 9 Financial Management

Please refer to Chapter 9 Financial Management Case Study Questions with answers provided below. We have provided Case Study Questions for Class 12 Business Studies for all chapters as per CBSE, NCERT and KVS examination guidelines. These case based questions are expected to come in your exams this year. Please practise these case study based Class 12 Business Studies Questions and answers to get more marks in examinations.

Case Study Questions Chapter 9 Financial Management

Read the source given below and answer the following questions : Financial management is concerned with efficient acquisition and allocation of funds. In other words, financial management is concerned with flow of funds and involves decisions related to procurement of funds, investment of funds in long term and short term assets and distribution of earnings to owners. In simple words we can say Financial Management refers to “Efficient acquisition of finance, efficient utilisation of finance and efficient distribution and disposal of surplus for smooth working of company.”

Questions :

Question. Efficient disposal of surplus, indicates which financial decisions ? (a) Financial decision (b) Investment decision (c) Dividend decision (d) None of the above

Question. Every organisation considers Financial management department as (a) Life blood of an organisation (b) Not very important department (c) Controlling department (d) None of the above

Question. ‘Efficient acquisition’ of finance is related to which financial decision ? (a) Financial decision (b) Investment decision (c) Dividend decision (d) None of the above

Question. “Efficient utilisation of finance”, indicates which financial decision ? (a) Financial decision (b) Investment decision (c) Dividend decision (d) None of the above

Read the source given below and answer the following questions : After completing the course of Hotel Management, Rahul plans to start his own Hotel, he plans to hire a team of experts to give his guests a unique and unforgettable experience. Keeping in mind their budgets. Before starting the business he visited his home town to take blessings of his father. His father told him that success of business depends on how well finance is invested in assets and operations and how timely and economically finances are arranged from outside or from with in the business. He guided him that he should always spend time in identifying different available sources of finance and comparing them in terms of their costs and associated risks. The returns from investment should always exceed the cost of investment.

Question. State the decision of financial management which assures the returns from investment should always exceed the cost of investment. (a) Investment decision (b) Financing decision (c) Dividend decision (d) None of the above

Question. Which decision helped him in identifying different available sources of finance and comparing them in terms of cost and risk. (a) Investment decision (b) Financing decision (c) Dividend decision (d) None of the above

Question. Identify the concept discussed above which has direct bearing on the financial health of a business. (a) Financial Management (b) Financial Planning (c) Business objective (d) None of the above

Question. State the key objective of concept identified in above para. (a) Profit maximisation (b) Wealth maximisation (c) Sales maximisation (d) None of the above

Read the source given below and answer the following questions : ‘ Sarah Ltd.’ is a company manufacturing cotton yarn. It has been consistently earning good profits for many years. This year too, it has been able to generate enough profits. There is availability of enough cash in the company and good prospects for growth in future. It is a well-managed organisation and believes in quality, equal employment opportunities and good remuneration practices. It has many shareholders who prefer to receive a regular income from their investments. It has taken a loan of `40 lakhs from IDBI and is bound by certain restrictions on the payment of dividend according to the terms of loan agreement.

Question. Company is able to generate enough profit, so it should give how much dividend to share holders ? (a) More (b) Less (c) Moderate (d) None of the above

Question. “They have many shareholders, who prefer to receive a regular income from their investment.” This indicates the company should pay : (a) less dividend (b) more dividend (c) moderate dividend (d) none of the above

Question. IDBI restricted the company regarding payment of dividend. This is related to which factor of dividend decision? (a) Legal Restrictions (b) Stock market reaction (c) Access to capital market (d) Contractual constraint

Question. The above para is indicating which decision ? (a) Investment decision (b) Financing decision (c) Dividend decision (d) None of the above

Read the source given below and answer the following questions : Mr. A. Bose is running a successful business. Mr. Bose is the owner of R. K. Cement Ltd. Mr. Bose decided to expand his business by acquiring a Steel Factory. This required an investment of Rs. 60 crores. To seek advice in this matter, he called his financial advisor Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%). Employ more of cheaper debt may enhance the EPS. Mr. Ghosh also suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest on loan is a tax deductible expense for computation of tax liability. After due deliberations with Mr. Ghosh, Mr. Bose decided to raise funds from a financial institution.

Question. In the above case Mr. Ghosh suggested to raised more fund from debt. Higher debtequity ratio results in: (a) Lower financial risk (b) Higher degree of operating risk (c) Higher degree of financial risk (d) Higher Earning of profit.

Question. Employ more of cheaper debt may enhance the EPS. Such practice is called: (a) Equity Trading (b) Financial Leverage (c) Investment Decision (d) Trading on Equity

Question. “Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%)” The proportion of debt in the overall capital is called___________. (a) Working Capital (b) Financial Leverage (c) Total Assets (d) None of these

Question. Identify the concept of Financial Management as advised by Mr. Ghosh in the above situation. (a) Capital Budgeting (b) Capital Structure (c) Dividend Decision (d) Working Capital Decision

Read the source given below and answer the following questions : Sunrises Ltd. dealing in ready made garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional Rs. 80,00,000 for replacing machines with modern machinery of higher production capacity. It involves committing the finance on a long term basis. These decisions are very crucial for any business since they affect its earning capacity in the long run. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was Rs. 8,00,000 and total capital investment was Rs. 1,00,00,000. Instead of issuing 10% Debenture the Company can issue Equity Shares for raising the fund. The financial manager of the company would normally opt for a source which is the cheapest.

Question. A decision for raising fund of Rs. 80,00,000 either from 10% Debenture or Equity Shares is a: (a) Financing decision (b) Dividend decision (c) Investment decision (d) None of the above

Question. What is the other name of long term decision ? (a) Capital Budgeting (b) Gross working capital (c) Financial management (d) Working Capital

Question. The financing decisions are affected by various factors. Which one of the following factor is discussed in the above case? (a) Cash Flow Position of the Company (b) Cost (c) Amount of Earnings (d) Taxation Policy

Question. A decision for replacing machines with modern machinery of higher production capacity is a: (a) Financing decision (b) Working capital decision (c) Investment decision (d) None of the above

Read the source given below and answer the following questions : ‘Monisha Consumer Goods’ is a leading consumer goods chain with a network of 46 stores primarily across Mumbai, Delhi and Pune. It was started by Monisha Gupta in 1987. It has a large market share in Mumbai, Delhi and Pune. Looking for an opportunity to expand, it has decided to open a new branch in Kerala. It has decide on what new resources it will invest in so that it is able to earn the highest possible return for investors. Once the company believes that it will be able to generate higher revenues and profits, it also has to decide on how this project will get funded. The finance manager, Atul was told to have an optimal capital structure by striking a balance between various sources of getting the project funded so as to increase shareholders’ wealth. Atul, after assessing the cash flow position of the company, evaluated the cost of different sources of finance and compared the risk associated with each source as well as the cost of raising funds.

Question. State the two financial decisions discussed in the above situation.

(i) Investment decision/ Capital budgeting decision/ Long term Investment decision (ii) Financing decision

Read the source given below and answer the following questions : Sudha is an enterprising business woman who has been running a poultry farm for the past ten years. She has saved ` 4,00,000 from her business. She shared with her family her desire to utilise this money to expand her business. Her family members gave her different suggestions like buying new machinery to replace the existing one, acquiring altogether new equipments with latest technology, opening a new branch of the poultry farm in another city and so on. Since these decisions are crucial for her business, involve a huge amount of money and are irreversible except at a huge cost, Sudha wants to analyse all aspects of the decisions, before taking any final decision.

Question. Identify and explain the financial decision to be taken by Sudha.

Investment decision/Capital budgeting decision Investment/Capital budgeting decision involves deciding about how the funds are invested in different assets so that they are able to earn the highest possible return for their investors

Question. Also, explain the briefly the factors that will affect this decision

Factors that affect capital budeting decision are: (a) Cash flows of the project (b) Rate of return of the project (c) Investment criteria

Read the source given below and answer the following questions : Rizul Bhattacharya after leaving his job wanted to start a Private Limited Company with his son. His son was keen that the company may start manufacturing of Mobile-phones with  some unique features. Rizul Bhattacharya felt that the mobile-phones are prone to quick obsolescence and a heavy fixed capital investment would be required regularly in this business. Therefore he convinced his son to start a furniture business. 

Question. Identify the factor affecting fixed capital requirements which made Rizul Bhattacharya to choose furniture business over mobile-phones.

Technology upgradation

Read the source given below and answer the following questions : ‘Sarah Ltd.’ is a company manufacturing cotton yarn. It has been consistently earning good profits for many years. This year too, it has been able to generate enough profits. There is availability of enough cash in the company and good prospects for growth in future. It is a well managed organisation and believes in quality, equal employment opportunities and good remuneration practices. It has many shareholders who prefer to receive a regular income from their investments. It has taken a loan of ` 40 lakhs from IDBI and is bound by certain restrictions on the payment of dividend according to the terms of loan agreement. The above discussion about the company leads to various factors which decide how much of the profits should be retained and how much has to be distributed by the company. 

Question. Quoting the lines from the above discussion identify and explain any four such factors.

Factors affecting dividend decision:  (i) Stability of earnings – ‘It has been consistently earning good profits for many years’. (ii) Cash Flow position – ‘There is availability of enough cash in the company’. (iii) Growth Prospects – ‘Good prospects for growth in the future.’ (iv) Shareholders’ preference – ‘It has many shareholders who prefer to receive regular income from their investments.’ (v) Contractual constraints – ‘It has taken a loan of ` 40 Lakhs from IDBI and … agreement.’

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Class 12th Business Studies - Financial Management Case Study Questions and Answers 2022 - 2023

By QB365 on 08 Sep, 2022

QB365 provides a detailed and simple solution for every Possible Case Study Questions in Class 12 Business Studies Subject - Financial Management, CBSE. It will help Students to get more practice questions, Students can Practice these question papers in addition to score best marks.

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Financial management case study questions with answer key.

12th Standard CBSE

Final Semester - June 2015

Business Studies

Mr. A. Bose is running a successful business. Mr. Bose is the owner of R. K. Cement Ltd. Mr. Bose decided to expand his business by acquiring a Steel Factory. This required an investment of Rs. 60 crores. To seek advice in this matter, he called his financial advisor Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%). Employ more of cheaper debt may enhance the EPS. Mr. Ghosh also suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest on loan is a tax deductible expense for computation of tax liability. After due deliberations with Mr. Ghosh, Mr. Bose decided to raise funds from a financial institution. 1. Identify the concept of Financial Management as advised by Mr. Ghosh in the above situation.

2. In the above case Mr. Ghosh suggested to raised more fund from debt. Higher debt-equity ratio results in:

3. “Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%)” The proportion of debt in the overall capital is called___________.

4. Employ more of cheaper debt may enhance the EPS. Such practice is called:

Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional Rs.80,00,000 for replacing machines with modern machinery of higher production capacity. It involves committing the finance on a long term basis. These decisions are very crucial for any business since they affect its earning capacity in the long run. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was Rs. 8,00,000 and total capital investment was Rs. 1,00,00,000. Instead of issuing 10% Debenture the Company can issue Equity Shares for raising the fund. The financial manager of the company would normally opt for a source which is the cheapest. 1. What is the other name of long term decision?

2. A decision for replacing machines with modern machinery of higher production capacity is a:

3. A decision for raising fund of Rs. 80,00,000 either from 10% Debenture or Equity Shares is a:

4. The financing decisions are affected by various factors. Which one of the following factor is discussed in the above case? Choose the correct option.

*****************************************

Financial management case study questions with answer key answer keys.

1. (b) Capital Structure 2. (c) Higher degree of financial risk 3. (b) Financial Leverage 4. (d) Trading on Equity

1. (a) Capital Budgeting 2. (c) Investment decision 3. (a) Financing decision 4. (b) Cost

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NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management, Download PDF

 ncert solutions for class 12 business studies chapter 9 financial management : students can find attached ncert solutions for cbse class 12 business studies part 2, chapter 9, financial management. a pdf download link has been attached below for the free download of complete ncert solutions..

NCERT Solutions Class 12 Business Studies: This article hands out complete NCERT Solutions for Class 12 Financial Management. Students can be carefree while referring to these NCERT Solutions since they have been prepared as per the latest CBSE Syllabus 2023-2024 and updated CBSE Curriculum. NCERT Solutions for class 12 Business Studies Chapter 9 all exercise pdf download link has been attached below for your reference.

NCERT Solutions for Class 12 Business Studies Chapter 9 is important for students to practice since they are the most important part of your Board Examinations. Almost 80% of the entire CBSE Board Exam Question Paper is based on NCERT exercises. Thus, students must practice these solutions daily in order to score well in Board Examinations. Along with this, NCERT’s in-text exercises must also be referred to. Test your Understanding, Do It Yourself also helps in increasing your textual knowledge and would assist you in scoring high marks in CBSE Board Examinations.

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Highlights of NCERT Solutions for Class 12 Business Studies Chapter 9 – Financial Management

• NCERT Solutions for Class 12 Financial Management are based on CBSE Class 12 Business Studies Chapter 9, Financial Management.
• These NCERT Solutions are important from the CBSE Business Studies Board Exam's point of view
• The solutions have been divided into three segments: Very Short Answer Questions, Short Answer Questions, Long Answer Questions

Key Features of NCERT Solutions for Class 12 Business Studies Chapter 9 – Financial Management

• NCERT Solutions for Class 12 Business Studies Chapter 9, Financial Management are based on the updated and revised CBSE Syllabus 2024
• The solutions of the NCERT exercise presented below have been prepared after a thorough analysis of the CBSE Class 12 Business Studies Chapter 9, Financial Management
• Detailed and complete NCERT Solutions for CBSE Class 12 Business Studies Chapter 9, Financial Management are presented here

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

Find below NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management along with a PDF download link

Very Short Answer Type

1. What is meant by capital structure?

Answer. The mix between two sources of business finance, owner’s funds and borrowed funds is called capital structure. They are referred to as debt and equity.

2. S t ate the two objectives of financial planning.

• To ensure availability of funds whenever required
• To see that the firm does not raise resources unnecessarily

3. Name the concept of financial management which increases the return to equity shareholders due to the presence of fixed financial charges.

Answer.  The concept of financial management which increases the return to equity shareholders due to the presence of fixed financial charges is called trading on equity.  

4. Amrit is running a ‘transport service’ and earning good returns by providing this service to industries. Giving reason, state whether the working capital requirement of the firm will be ‘less’ or ‘more’.

Answer. The working capital of a firm is the capital required to run the daily operations of the business. Since transport service is an exhaustive area that requires a lot of operations, its working capital will be more.

5. Ramnath is into the business of assembling and selling of televisions. Recently he has adopted a new policy of purchasing the components on three months credit and selling the complete product in cash. Will it affect the requirement of working capital? Give reason in support of your answer.

Answer. Yes, purchasing three months of credit will affect his working capital since it will increase to the amount of credit taken to him. But, selling the complete product in cash wouldn’t affect the working capital of the firm.

Short Answer Type

1. What is financial risk? Why does it arise?

Answer . Financial risk refers to the financial situation of a company when it would not be able to meet its fixed financial obligations. Such a situation occurs when the debt of a company increases. When a company takes a huge amount of debt, the higher becomes its obligations to repay it with an interest rate are equally high. Thus, such a situation arises when there is a higher debt in the capital structure.

2. Define current assets? Give four examples of such assets.

• Cash and cash equivalents
• Accounts receivable
• Stocks Inventory
• Pre-paid liabilities

3. What are the main objectives of financial management? Briefly explain.

• To maximize shareholders’ wealth
• All financial decisions aim to ensure that each decision is efficient and adds some value
• To maximize the current price of equity shares of the company or to maximize the wealth of owners of the company, that is, the shareholders.
• To ensure that benefits from the investment exceed the cost so that some value addition takes place.

4. Financial management is based on three broad financial decisions. What are these?

• Investment Decision - It relates to how the firm’s funds are invested in different assets. They can be short-term or long-term. A long-term investment decision is also called a Capital Budgeting decision. These decisions are very crucial for any business since they affect its earning capacity in the long run.
• Financing Decision - This decision is about the quantum of finance to be raised from various long-term sources. It is concerned with the decisions about how much to be raised from which source. This decision determines the overall cost of capital and the financial risk of the enterprise.
• Dividend Decision - It relates to the distribution of dividends. The decision is mainly about how much of the profit earned by the company (after paying tax) is to be distributed to the shareholders and how much of it should be retained in the business.

5. Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional `80,00,000 for replacing machines with modern machinery of higher production capacity. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was `8,00,000 and total capital investment was `1,00,00,000. Suggest whether issue of debenture would be considered a rational decision by the company. Give reason to justify your answer. (Ans. No, Cost of Debt (10%) is more than ROI which is 8%).

ROI = Return/Investment

= 8,00,000/ 1,00,00,000

Let’s assume that the company will operate with the same efficiency, an additional investment of 8,00,000 will have having net ROI of 8%, which makes 6,40,000. The cost of debt is 10% which generates 8%. The company at this moment should not issue a debenture when the cost of debt is higher than the cost of capital.

6. How does working capital affect both the liquidity as well as profitability of a business?

Answer. Working capital is directly proportional to the liquidity of the business and indirectly proportional to the profitability of the business. As the working capital increases, the liquidity of the business increases whereas as the working capital increases, the profitability of the business decreases. This is so because the increase in working capital indicates that the capital required for running the daily operations of the business has increased, which means more investment and less return.

7. Aval Ltd. is engaged in the business of export of canvas goods and bags. In the past, the performance of the company had been upto the expectations. In line with the latest demand in the market, the company decided to venture into leather goods for which it required specialised machinery. For this, the Finance Manager Prabhu prepared a financial blueprint of the organisation’s future operations to estimate the amount of funds required and the timings with the objective to ensure that enough funds are available at right time. He also collected the relevant data about the profit estimates in the coming years. By doing this, he wanted to be sure about the availability of funds from the internal sources of the business. For the remaining funds, he is trying to find out alternative sources from outside.

a) Identify the financial concept discussed in the above paragraph. Also, state the objectives to be achieved by the use of financial concept so identified. ( Financial Planning).

b) ‘There is no restriction on payment of dividend by a company’. Comment. ( Legal & Contractual Constraints)

• To ensure that enough funds are available at the right time
• It focuses on smooth operations by focusing on fund requirements and their availability in the light of financial decisions
• It forecasts all the items that are likely to undergo changes

b) There is no restriction on the payment of dividends by a company. This can be understood through legal constraints and contractual constraints. Legal constraints deal with the restrictions put on the company while paying the dividends to its shareholders. Contractual constraints- When a company pays its dividend using cash, then the company’s cash gets reduced. As a consequence, the company has to take loans from banks and other credit institutions. Thus, they can put restrictions on a bank to pay its dividends.

Long Answer Type

1. What is working capital? Discuss five important determinants of working capital requirement?

Answer. The investment or amount of funding used in the daily operations of a business is called its working capital. Every company needs to invest in current assets. To fulfill this requirement, a company keeps a set of funds ready for carrying out its functional activities, the sum is called the working capital.

• Nature of business - Working capital depends on the nature of the business, and the amount of processing needed in an organization. For example A trading organisation usually needs a smaller amount of working capital compared to a manufacturing organisation because there is usually no processing. Similarly, service industries that usually do not have to maintain inventory require less working capital.
• Scale of Operations - Organisations that operate on a higher scale of operation, the quantum of inventory and debtors required is generally high, and thus they require high working capital.
• Business Cycle - a requirement of working capital depends on the phase the business cycle is into. If the industry or the company is blooming, then the requirement of working capital will be more, and less working capital will be required in cases of depression of a business.
• Seasonal Factors - In peak season, because of a higher level of activity, a larger amount of working capital is required. The level of activity as well as the requirement for working capital will be lower during the lean season.
• Production Cycle - The production cycle is the time span between the receipt of raw materials and their conversion into finished goods. Working capital requirement is higher in firms with longer processing cycles and lower in firms with shorter processing cycles.

2. “Capital structure decision is essentially optimisation of risk-return relationship.” Comment.

Answer. Capital structure is the ratio of debt to equity and it influences capital structure decisions. The cost and dangers are determined by the maintained proportion. This is due to the fact that the risk and return characteristics of stock and debt are very different.

(i) Equity is a less hazardous source on the one hand, but it lacks the tax benefit of dividend deductibility since dividends are paid out of profits after tax.

(ii) Debentures, on the other hand, pay a predetermined rate of interest, and the interest is deducted from income when calculating taxes. The rate of return for equity stockholders is thereby increased.

3. “A capital budgeting decision is capable of changing the financial fortunes of a business.” Do you agree? Give reasons for your answer.

Answer. Yes, I agree that a capital budgeting decision is capable of changing the financial fortunes of a business. This is because capital budgeting is done for future operations, keeping in mind the needs and requirements of the future. It has long-term implications and thought processes behind it. Strong capital budgeting can help a company grow in various ways. But, the financial situation keeps on changing. And it is an irreversible decision. Once the decision has been made and capital invested, there’s no going back. The entire money can go in vain. Thus, capital budgeting decisions are capable of changing the financial fortune of a company.

4. Explain the factors affecting dividend decision?

• Amount of Earnings
• Stability Earnings
• Stability of Dividends
• Growth Opportunities
• Cash Flow Position
• Shareholders’ Preference
• Taxation Policy
• Stock Market Reaction
• Access to Capital Market
• Legal Constraints
• Contractual Constraints

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Financial Management – CBSE Notes for Class 12 Business Studies

January 11, 2024 by Bhagya

Financial Management –  CBSE Notes for Class 12 Business Studies

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NCERT Class 12 Business studies Chapter wise Solutions

Business studies part  – i.

• 1 – Nature and Significance of Management
• 2 – Principles of Management
• 3 – Management and Business Environment
• 4 – Planning
• 5 – Organising
• 6 – Staffing
• 7 – Directing
• 8 – Controlling

Business Studies Part  – I I

• 9 – Business Finance
• 10 – Financial markets
• 11 – Marketing
• 12 – Consumer Protection
• 13 – Entreprenuership Development

Chapter Financial Management

• Financial Management, Financial Decisions and Financial Planning
• Capital Structure: Concept
• Fixed and Working Capital: Concept and Determinants

Multiple Choice:

1. The cheapest source of finance is

• (a) debenture
• (b) equity share capital
• (c) preference share
• (d) retained earning

Ans: (d) The cheapest source of finance is retained earnings. Retained income refers to that portion of net income or profits of an organisation that it retains after paying off dividends. An organisation can reinvest its retained earnings or profits for the purpose expansion, modernisation, etc. It neither involves any fund raising cost nor any risk. Also, unlike other sources of finance it does not involve any obligation in terms of repayment.

2. A decision to acquire a new and modern plant to upgrade an old one is a

• (a) financing decision
• (b) working capital decision
• (c) investment decision
• (d) None of the above

Ans: (c) The decision to acquire a new and modern plant to upgrade an old one is an Investment decision. Investment decision refers to the decision regarding where the funds are to be invested so as to earn the highest possible return. The decision to acquire a new plant is a long term investment decision and affects long run working and earning capacity of the business.

On the other hand, working capital decisions refer to those investment decisions that influence the day to day working of the business. While, financing decision refers to the decisions regarding the sources from where the funds can be raised.

3. Other things remaining the same, an increase in the tax rate on corporate profit will

• (a) make the debt relatively cheaper
• (b) make the debt relatively the dearer
• (c) have no impact on the cost of debt
• (d) we can’t say

Ans: (a) When there is an increase in the tax on corporate profit, the debt becomes relatively cheaper. This is because interest that is to be paid to the debtors is deducted from the total income before calculating the value of tax. Thus, as the value of tax increases, the debt becomes relatively cheaper.

4. Companies with a higher growth potential are likely to

• (a) pay lower dividends
• (b) pay higher dividends
• (c) dividends are not affected
• (d) none of the above

Ans (a) Companies which have higher growth potential are likely to pay lower dividends. This is because the companies having higher growth potential have greater investment plans and require larger funds for investment. Thus, they retain a greater portion of their earnings to finance the required investment and thereby, pay lower dividends.

5. Financial leverage is called favourable if

• (a) Return on investment is lower than the cost of debt
• (b) ROI is higher than the cost of debt
• (c) Debt is easily available
• (d) If the degree of existing financial leverage is low

Ans: (b) Financial Leverage refers to the proportion of debt in the overall capital. It is said to be a favourable situation when the return on investment becomes higher than the cost of debt. In other words, as the Return on investment becomes greater, the earning per share also increases and the financial leverage is said to be favourable.

6. Higher debt-equity ratio results in

• (a) lower financial risk
• (b) higher degree of operating risk
• (c) higher degree of financial risk
• (d) higher EPS

Ans: (c) Higher debt- equity ratio refers to a situation where the proportion of debt in total capital is higher. This implies higher degree of financial risk. This is because in case of debt, it is obligatory for a business to make interest payments and the return of principal to the debtors. Thus, higher debt increases the financial risk for the business.

7. Higher working capital usually results in

• (a) higher current ratio, higher risk and higher profits
• (b) lower current ratio, higher risk and profits
• (c) higher equity, lower risk and lower profits
• (d) lower equity, lower risk and higher profits

Ans: (a) Working capital of a firm refers to the amount of current assets which are in excess over current liabilities. If a company has a higher working capital then there will be a higher current ratio (i.e. current assets over current liabilities), higher risk and higher profits.

8. Current assets are those assets which get converted into cash

• (a) within six months
• (b) within one year
• (c) between one year and three years
• (d) between three and five years

Ans: (b) Current assets are those assets which can be converted into cash or can be used to pay off liabilities within a time span of 12 months, i.e. one year. Some of the examples of current assets are cash, cash equivalents, inventories, debtors, bills receivables, etc.

9. Financial planning arrives at

• (a) minimising the external borrowing by resorting to equity issues
• (b) entering that the firm always have significantly more fund than required so that there is no paucity of funds
• (c) ensuring that the firm faces neither a shortage nor a glut of unusable funds
• (d) doing only what is possible with the funds that the firms has at its disposal

Ans: (c) Financial Planning aims at ensuring that the firm faces neither a shortage nor a glut (excess) of unusable funds. If there is a shortage of funds then the firm will not be able to carry out its planned activities and commitments. On the other hand, if there are excess funds available then it adds to the cost of business and also encourages wastage of funds. Thus, financial planning focuses on ensuring the availability of just enough funds at the right time.

10. Higher dividend per share is associated with

• (a) high earnings, high cash flows, unstable earnings and higher growth opportunities
• (b) high earnings, high cash flows, stable earnings and high growth opportunities
• (c) high earnings, high cash flows, stable earnings and lower growth opportunities
• (d) high earnings, low cash flows, stable earnings and lower growth opportunities

Ans: (d) If a company gives higher dividend per share then it gets associated with high amount of earnings as only if they will earn higher, they will be able to give higher dividends; higher cash flow as the payment of dividend involves cash outflow; stable earnings as stable earnings means that the company is confident of its future earning potentials; and lower growth opportunities because it requires less requirement of retained earnings and their retained earnings while lowering the amount of dividends paid.

11. A fixed asset should be financed through

• (a) a long term liability
• (b) a short term liability
• (c) a mix of long and short term liabilities

Ans : (a) Fixed assets are those assets which are invested in a company for a longer time period, generally more than one year. As these assets have long term implication on the business in terms of growth and profitability, they should be financed through long term liabilities such as long term loans, preference shares, retained earnings, etc.

12. Current assets of a business firm should be financed through

• (a) current liability only
• (b) long-term liability only
• (c) both types (i.e. Long and short liabilities)

Ans: (c) Current assets are those assets which get converted in cash or cash equivalents within a short span of time and provide liquidity to a business. For financing the current assets of a business, both types of liabilities (short and long) can be used.

Short Answer Type:

1. What is meant by capital structure?

Ans: Capital structure refers to the combination of borrowed funds and owners’ fund that a firm uses for financing its fund requirements. Herein, borrowed funds comprise of loans, public deposits, debentures, etc. and owners’ fund comprise of preference share capital, equity share capital, retained earning etc. Generally, capital structure is simply referred as the combination of debt and equity that a firm uses for financing its funds. It is calculated as the ratio of debt and equity or the proportion of debt in the total capital used by the firm. Algebraically,

The proportion of the debt and equity used by the firm affects its financial risk and profitability. While on one hand, debt is a cheaper source of finance than equity and lowers the overall cost of capital but on the other hand, higher use of debt, increases the financial risk for the firm. Thus, the decision regarding the capital structure should be taken with utmost care. Capital structure is said to be optimal when the proportion of debt and equity used is such that the earnings per share increases.

2. Discuss the two objective of Financial Planning.

Ans: Financial Planning involves designing the blueprint of the financial operations of a firm. It ensures that just the right amount of funds are available for the organisational operations at the right time. Thereby, it ensures smooth functioning. Taking into consideration the growth and performance, through financial planning, firms tend to forecast what amount of fund would be required at what time. The following are the two highlighted objectives of financial planning.

(i)   Ensure Availability of Funds: Ensuring that the right amount of funds are available at the right time is one of the main objectives of financial planning. It involves estimating the right amount of funds that are required for various business operations in the long term as well for day to day operations. In addition, it also involves estimating the time at which the funds would be required. Thus, financial planning ensures that right amount of funds are available at the right time. Financial planning also points out the probable sources of funds.

(ii)   Proper Utilisation of Funds: Financial Planning aims at full utilisation of funds. It ensures that both inadequate funds as well as excess funds are avoided. Inadequate funds hinders the smooth operations and the firm is unable to carry its commitments. On the other hand, excess funds add to the cost of business and encourage unnecessary wasteful expenditure. Thus, financial planning ensures that the funds are properly and optimally utilised.

3. What is financial risk? Why does it arise?

Ans: Financial risk refers to a situation when a company is not able to meet its fixed financial charges such as interest payment, preference dividend and repayment obligations. In other words, it refers to the probability that the company would not be able to meet its fixed financial obligations. It arises when the proportion of debt in the capital structure increases. This is because it is obligatory for the company to pay the interest charges on debt along with the principle amount. Thus, higher the debt, higher will be its payment obligations and thereby higher would be the chances of default on payment. Hence, higher use of debt leads to higher financial risk for the company.

4. Define a ‘current asset’. Give four examples of such assets.

Ans: Current asset of a firm refers to those assets which can be converted into cash or cash equivalents in a short period of time, i.e. less than one year. Such assets are used to facilitate the day to day business operations. As they can be easily converted into cash or cash equivalents, these assets provide liquidity to the company. Firms acquire such assets to meet its various payment obligations. However, such assets provide very little return and are thereby, less profitable. Current assets can be financed through short-term as well as long term sources.

Some of the examples of current assets are short term investment, debtors, stocks and cash equivalents.

5. Financial management is based on three broad financial decisions. What are these?

Ans: Financial management refers to the efficient acquisition, allocation and usage of funds of the company. It deals in three main dimensions of financial decisions namely, Investment decisions, Financial decisions and Dividend decisions.

Investment Decisions: Investment decisions refer to the decisions regarding where to invest so as to earn the highest possible returns on investment. Investment decisions can be taken for both long term as well as short term.

Long term investment decisions also known as Capital Budgeting decisions affect a business’ long term earning capacity and profitability. For example, investment in a new machine, purchase of a new building, etc. are long term investment decisions.

Short term investment decisions also known as working capital decisions affect a business’ day to day working operations. For example, decisions regarding cash or bill receivables are short term investment decisions.

Financial Decisions: Such decisions involve identifying various sources of funds and deciding the best combination for raising the funds. The main sources for raising funds are shareholders’ funds (referred as equity) and borrowed funds (referred as debt). Based on the cost involved, risk and profitability a company must judiciously decide the combination of debt and equity to be used. For example, while debt is considered to be the cheapest source of finance, higher debt increases the financial risk. Financial decisions taken by a company affects its overall cost of capital and the financial risk.

Dividend Decisions:

The decision involves the decision regarding the distribution of profit or surplus of the company. A company can distribute its profit to the equity shareholders in the form of dividends or retain it with itself. Under dividend decision, a company decides what proportion of the surplus to distribute as dividends and what proportion to keep as retained earnings. It is aimed at maximising the shareholders’ wealth while keeping in view the requirement of retained earnings that are needed for re-investment.

6. What are the main objectives of financial management? Briefly explain

Ans: The paramount objective of the financial management is maximising the shareholders’ wealth. That is, the basic objective of financial management for a company is to opt for those financial decisions that prove gainful from the point of view of the shareholders. The shareholders are said to gain when the market value of their shares rise. The market value of shares increase when the benefits from a financial decision exceed the cost involved in taking them. In other words, a financial decision raises the market value of share if it results in some value addition. Thus, financial decisions should be taken such that some value addition takes place and ultimately the price of the equity share increases. When a financial decision is able to fulfil the primary objective of wealth maximisation, other objectives such as proper utilisation of funds, maintenance of liquidity etc. are automatically fulfilled.

7. How does working capital affect both the liquidity as well as profitability of a business?

Ans: Working capital of a business refers to the excess of current assets (such as cash in hand, debtors, stock, etc.) over current liabilities. Working capital affects both the liquidity as well as profitability of a business. As the amount of working capital increases, the liquidity of the business increases. However, since current assets offer low return, with the increase in working capital the profitability of the business falls. For example, an increase in the inventory of the business increases its liquidity but since the stock is kept idle, the profitability falls. On the other hand, low working capital, hinders the day to day operations of the business. Thus, the working capital should be such that a balance is maintained between the profitability and liquidity.

Long Answer Type:

1. What is working capital? How is it calculated? Discuss five important determinants of working capital requirement.

Ans: Every business needs to take the decision regarding the investment in current assets i.e. the working capital. Current assets refer to the assets that are converted into cash or cash equivalents in a short period of time (less than or equal to one year). There are two broad concepts of working capital namely, Gross working capital and Net working capital.

Gross working capital (or, simply working capital) refers to the investment done in the current assets. Net working capital, on the other hand, refers to the amount of current assets that is in excess of current liabilities. Herein, current liabilities are those obligatory payments which are due for payment such as bills payable, outstanding expenses, creditors, etc. Net Working Capital is calculated as the difference of current assets over current liabilities. i.e.

NWC = Current Assets – Current Liabilities

The following are five determinants of working capital requirement:

(i)   Type of Business : Working capital requirement of a firm depends on its nature of business. An organisation that deals in services or trading will not require much of working capital. This is because such organisations involve small operating cycle and there is no processing done. Herein, the raw materials are the same as the outputs and the sales transaction takes place immediately. In contrast to this, a manufacturing firm involves large operating cycle and the raw materials need to be converted into finished goods before the final sale transaction takes place. Thereby, such firms require large working capital.

(ii)   Scale of Operations :

Another factor determining the working capital requirement is the scale of operations in which the firm deals. If a firm operates on a big scale, the requirement of the working capital increases. This is because such firms would need to maintain high stock of inventory and debtors. In contrast to this, if the scale of operation is small, the requirement of the working capital will be less.

(iii)   Fluctuations in Business Cycle : Different phases of business cycle alter the working capital requirements by a firm. During boom period, the market flourishes and thereby, there is higher sale, higher production, higher stock and debtors. Thus, during this period the need for working capital increases. As against this, in a period of depression there is low demand, lesser production and sale, etc. Thus, the working capital requirement reduces.

(iv)  Production Cycle : The time period between the conversion of raw materials into finished goods is referred as production cycle. The span of production cycle is different for different firms depending on which the requirement of working capital is determined. If a firm has a longer span of production cycle, i.e. if there is a long time gap between the receipt of raw materials and their conversion into final finished goods, then there will be a high requirement of working capital due to inventories and related expenses. On the other hand, if the production cycle is short then requirement of working capital will be low.

(v)   Growth Prospects : Higher growth and expansion is related to higher production, more sales, more inputs, etc. Thus, companies with higher growth prospects require higher amount of working capital and vice versa.

2. ”Capital structure decision is essentially optimisation of risk-return relationship”. Comment.

Ans: Capital Structure refers to the combination of different financial sources used by a company for raising funds. The sources of raising funds can be classified on the basis of ownership into two categories as borrowed funds and owners’ fund. Borrowed funds are in the form of loans, debentures, borrowings from banks, public deposits, etc. On the other hand, owners’ funds are in the form of reserves, preference share capital, equity share capital, retained earnings, etc. Thus, capital structure refers to the combination of borrowed funds and owners’ fund. For simplicity, all borrowed funds are referred as debt and all owners’ funds are referred as equity. Thus, capital structure refers to the combination of debt and equity to be used by the company. The capital structure used by the company depends on the risks and returns of the various alternative sources.

Both debt and equity involve their respective risk and profitability considerations. While on one hand, debt is a cheaper source of finance but involves greater risk, on the other hand, although equity is comparatively expensive, they are relatively safe.

The cost of debt is less because it involves low risk for lenders as they earn an assured amount of return. Thereby, they require a low rate of return which lowers the costs to the firm. In addition to this, the interest on debt is deductible from the taxable income (i.e. interest that is to be paid to the debt security holders is deducted from the total income before paying the tax). Thus, higher return can be achieved through debt at a lower cost. In contrast, raising funds through equity is expensive as it involves certain floatation cost as well. Also, the dividends are paid to the shareholders out of after tax profits.

Though debt is cheaper, higher debt raises the financial risk. This is due to the fact that debt involves obligatory payments to the lenders. Any default in payment of the interest can lead to the liquidation of the firm. As against this, there is no such compulsion in case of dividend payment to shareholders. Thus, high debt is related to high risk.

Another factor that affects the choice of capital structure is the return offered by various sources. The return offered by each source determines the value of earning per share. A high use of debt increases the earning per share of a company (this situation is called Trading on Equity). This is because as debt increases the difference between Return on Investment and the cost of debt increases and so does the EPS. Thus, there is a high return on debt. However, even though higher debt leads to higher returns but it also increases the risk to the company.

Therefore, the decision regarding the capital structure should be taken very carefully, taking into consideration the return and risk involved.

3. ”A capital budgeting decision is capable of changing the financial fortunes of a business”. Do you agree? Why or why not?

Ans: Yes, capital budgeting decision is a very essential decision which needs to be taken carefully. It has the capability of changing the financial fortunes of a business. Capital budgeting decision refers to the decisions regarding the allocation of fixed capital to different projects. Such decisions involve investment decisions regarding attainment of new assets, expansion, modernisation and replacement. Such long term investments include purchasing plant and machinery, furniture, land, building, etc. and also expenditure as on launch of a new product, modernisation and advertising, etc. They have long term implications on the business and are irrevocable except at a huge cost. They affect a business’ long term growth, profitability and risk.

The following are the factors that highlight the importance of capital budgeting decisions:

(i)  Long Term Implications : Investment on capital assets (long term assets) yield return in the future. Thereby, they affect the future prospects of a company. A company’s long term growth prospects depend on the capital budgeting decisions taken by it.

(ii)   Huge Amount of Funds : Investing in fixed capital involves a large amount of funds. This makes the capital budgeting decisions all the more important as huge amount of funds remain blocked for a longer period of time. These decisions once made are difficult to change. Thus, capital budgeting decisions need to be taken carefully after a detailed study of the total requirement of funds and the sources from which they are to be raised.

(iii)   High Risk :

Fixed assets involve huge amount of money and thereby, involve huge risk as well. Such decisions are risky as they have an impact on the long term existence of the company. For example, decision about the purchase of new machinery involves a risk in terms of whether the return from the machinery would be greater than the cost incurred on it.

(iv)   Irreversible Decisions : These decisions once made are irrevocable. Reversing a capital budgeting decision involves huge cost. This is because once huge investment is made on a project, withdrawing it would mean huge losses.

4. Explain the factors affecting the dividend decision.

Ans: Dividend decision of a company deals with what portion of the profits is to be distributed as dividends between the shareholders and what portion is to be kept as retained earnings. The following are the factors that affect the dividend decision.

(i)   Amount of Earning : A firm pays dividend out of its current and the past earnings. This implies that earnings play a key role in the dividend decision. A company having higher earnings will be in a position to pay a higher amount of dividend to its shareholders. In contrast to this, a company having low or limited earnings would distribute low dividends.

(ii)   Stable Earnings : When a company has a stable and a smooth earning, they are in a position to distribute higher dividend as compared to the companies who have an unstable earning. In other words, a company having consistent and stable earnings can distribute higher amount of dividends.

(iii)   Stable Dividends : Companies generally follow the practice of stabilising their dividends. They try to avoid frequent fluctuations in dividend per share and opt for increasing (or decreasing) the value only when there is a consistent rise (or fall) in the earnings of the company.

(iv)  Growth Prospects : Companies aiming for a higher growth level or expansion of operations retain a higher portion of the earnings with itself for re-investment. Thus, dividend of such a company is smaller as compared to the companies with lower growth opportunities.

(v)   Cash Flow Position : Dividend payments require cash outflow. If a company is low on cash then the dividend will be lower as compared to the company which has more liquidity. Even if a company has higher profits, it will not be able to distribute high dividends if it does not have enough cash.

(vi)   Preference of the Shareholders :

A company must keep in mind the preferences of the shareholders while distributing the dividends. For instance, if the shareholders prefer at least a certain amount of dividend, then the company is likely to declare the same.

(vii)   Taxation Policy : Taxation policy plays an important role in deciding the dividends. If the taxation policy is such that a high rate of tax is levied on dividend distribution, then the companies are likely to distribute lower dividends. On the other, it might prefer to distribute higher dividends if the tax rate is low.

(viii)   Stock Market Reactions : The amount of dividend that a company distributes affects its stock market prices. An increase in dividend by a company is viewed as a good sign by the investors and the stock price of the company goes up. On the other hand, a fall in the dividends adversely affects the stock prices. Thus, while taking the dividend decision, a company must consider the probable stock market reactions.

(ix)   Contractual Constraints : Sometimes, while giving out loans to a company, the lender may impose some restrictions in the form of agreement. These restrictions may be related to the dividend paid in the future. In such cases, the company has to keep such agreements in mind when distributing the dividends.

(x)   Access to Capital Market :

The companies that have a greater access to the capital market tend to pay higher dividends. This is because they can rely less on retained earnings and more on other sources due to the market access. The smaller companies who have lower access to capital markets tend to pay lower dividends.

(xi)   Legal Constraints : Companies have to adhere to the rules and policies laid out by the Companies Act. Thus, any company needs to take care of such restrictions and policies before declaring the dividends.

5. Explain the term ”Trading on Equity”. Why, when and how it can be used by a company?

Ans: Trading on equity refers to a practice of raising the proportion of debt in the capital structure such that the earnings per share increases. A company resorts to Trading on Equity when the rate of return on investment is greater than the rate of interest on the borrowed fund. That is, the company resorts to Trading on Equity in situation of favourable financial leverage. As the difference between the return on investment and the rate of interest on debt increases, the earnings per share increase.

The use of Trading on Equity is explained in detail with the help of the following example.

Suppose there are two situations for a company. In situation I it raises a fund of Rs 5,00,000 through equity capital and in situation II, it raises the same amount through two sources- Rs 2,00,000 through equity capital and the remaining Rs3,00,000 through borrowings.

Also suppose the tax rate is 30% and the interest on borrowings is 10%. The earnings per share (EPS) in the two situations is calculated as follows.

Clearly, in the second situation the EPS is greater than in the first situation. In the second situation the company takes advantage of the Trading on Equity and raises the EPS. Here, the return on investment calculated as is 20% while the interest on the borrowings is 10%. Thus, the Trading on Equity is profitable.

However, it should be noted that Trading on Equity is profitable and should be used only when the return on investment is greater than the interest on borrowed funds. In case the return on investment is less than the rate of interest to be paid, the Trading on Equity should be avoided.

Suppose instead of Rs 1,00,000 the company earns just Rs 25,000. In such a case the EPS are calculated as follows.

Thus, in this situation the Trading on Equity is not favourable and should be discouraged. Hence, it can be said that a firm can use Trading on Equity if it is earning high profits and can increase the EPS by raising more funds through borrowings.

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Class 12 Business Studies Chapter 9: Financial Management - NCERT Solutions

Finance, which is so important for business requires proper management in respect to its timely availability, proper management in respect to its timely availability, proper use, with no idle or surplus funds. This all comes under the purview of financial management. Financial management is concerned with optimal procurement as well as usage of finance. It aims at reducing the cost of funds procured, keeping the risk under control and achieving effective deployment of such funds. Other content of this chapter are Meaning of Business Finance, Financial Management, Objectives of Financial Management, Financial Decisions, Investment Decision, Financing Decision, Dividend Decision, Financial Planning, Capital Structure, Fixed and Working Capital and Factors affecting Fixed and Working Capital.

Download pdf of NCERT Solutions for Class Business Studies Chapter 9 Financial Management

Exercise 1 ( Page No. : 249 )

Exercise 2 ( Page No. : 250 )

Exercise 3 ( Page No. : 251 )

Q1
Ans:	Five important determinant of working capital requirement are: The basic nature of a business influences the amount of working capital. A trading organisation and a service industry firm usually needs a smaller amount of working capital as compared to a manufacturing organisation. Organisations which operates on a large scale, their quantum of inventory and debtors required is generally high. Such organizations, therefore, require large amount of working capital as compared to the organisations which operates on a lower scale. Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as well as production are likely to be larger and, therefore, larger amount of working capital is required. As against this, the requirement for working capital will be lowers during the period of depression, since the sales as well as production will be less. Some of the businesses have seasonal operations. During peak season, larger amount of working capital is required because of higher level of activity. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season. Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Some businesses have a longer production cycle while some have a shorter one. Duration and the length of production cycle affect the amount of funds required for raw materials and expenses.
Q2
Ans:	This is because both equity and debt differ significantly in their risk and returns. However, debt is more rewarding in terms of increase in the wealth of shareholders, but increases the risk too. Thus, reckless use of debt also is unfavourable and sometimes, may even force the company to go into liquidation. Thus, capital structure should be so formed, which optimizes the risk-return relationship.
Q3
Ans:	A business needs to invest funds for setting up new business, for expansion and modernization. Investment decision is taken after careful scrutiny of available alternatives in terms of costs involved and expected return. These decisions are very crucial for any business. Earning capacity of the fixed assets of a firm, profitability and competitiveness, all are affected by the capital budgeting decisions. Moreover, these decisions normally involve huge amount of investment and are irreversible, except at a huge cost. Following are the factors that highlight the importance of capital budgeting decisions. Thus, once these decisions are taken, it is impossible for a firm to undo these decisions and certainly a bad capital budgeting decision normally has the capacity to severely damage the financial fortune of a business.
Q4
Ans:	Dividends are paid out of current and past earnings. Thus, earnings are major determinant of dividend decision. A company having higher and stable earnings can declare higher dividends than a company with lower and unstable earnings. Generally, companies try to stabilize dividends per share. A steady dividend is given each year. A change is only made, if the company’s earning potential has gone up and not just the earnings of the current year. Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. The dividend declared in growth companies is, therefore, smaller than that in the non-growth companies. Dividend involves an outflow of cash. Availability of enough cash is necessary for payment or declaration of dividends. While declaring dividends, management must keep in mind the preferences of the shareholders. Some shareholders in general desire that at least a certain amount is paid as dividend. The companies should consider the preferences of such shareholders. If the tax on dividends is higher, it is better to pay less by way of dividends. But if the tax rates are lower, higher dividends may be declared. This is because as per the current taxation policy, a dividend distribution tax is levied on companies. However, shareholders prefer higher dividends, as dividends are tax free in the hands of shareholders. Generally, an increase in dividends has a positive impact on stock market, whereas, a decrease or no increase may have a negative impact on stock market. Thus, while deciding on dividends, this should be kept in mind. Large and reputed companies generally have easy access to the capital market and, therefore, may depend less on retained earnings to finance their growth. These companies tend to pay higher dividends than the smaller companies. Certain provisions of the Companies Act, place restrictions on payouts as dividend. Such provisions must be adhered to, while declaring the dividend. While granting loans to a company, sometimes, the lender may impose certain restrictions on the payment of dividends in future. The companies are required to ensure that the dividend payout does not violate the loan agreement in this regard.
Q5
Ans:	Company A Company B Share capital (100 each) Loan @ 15% p.a. ₹ 10,00,000 ₹ 4,00,000 - ₹ 6,00,000 Profit Before Interest and Tax (30% ROI) (-) Interest (15% of ₹ 6,00,000) Profit Before Tax (-) Tax @ 50% ₹ 3,00,000 ₹ 3,00,000 Nil ₹ 90,000 ₹ 3,00,000 ₹ 2,10,000 ₹ 1,50,000 ₹ 1,05,000 1,50,000 1,05,000 Earning per Share (EPS) = Profit After Tax ÷ Number of Equity Shares A = 150000 ÷ 10000 = ₹ 15 B= 105000 ÷ 4000 = ₹ 26.25 Thus, from the above example, it is clear that shareholders of company B receive higher EPS than the shareholders of company A due to more debt in the total capital of company B. a. Describe the role and objectives of financial management for this company. Ans. Role of Financial Management: A financial management decision has a bearing or the financial health of business by affecting the following: Size and composition of fixed assets: ‘S’ Ltd requires ₹ 5000 crores, which is a huge sum. Financial management will have to ensure that composition is carefully decided. Since, it is into infrastructure industry, it has a long gestation period between investments and returns. Thus, the goal should be to minimise the risk with investing into most productive assets and latest technology, which in no case should remain idle. Quantum of current assets and their break-up: ₹ 500 crores are required for current assets to finance working capital. The company should ensure correct break-up and optimum utilization. Amount of long-term and short-term financing to be used: Long-term assets require long-term financing, whereas, short-term assets require short-term financing. The choice is between liquidity and profitability. An optimum mix of two is required. Breakup of long-term financing into debt and equity: Since, setting up of new steel plant is a long-term task, therefore, large amount of debt is required. Accordingly, debt and equity ratio might be more. Items of profit and loss account: Higher debt is likely to increase interest expense of the company. This and other likely expenses must to be kept in mind before taking financing decision. Objective of Financial Management The objective of financial management is maximization of shareholders’ wealth. The investment decision, financial decision and dividend decision help an organisation to achieve this objective. In the given situation, S Ltd envisages growth prospects of steel industry due to the growing demand. To expand the production capacity, the company needs to invest. However, investment decision will depend on the availability of funds, the financing decision and the dividend decision. However, the company will take those financing decisions which result in value addition, i.e. the benefits are more than the cost. This leads to an increase in the market value of the shares of the company. b. Explain the importance of having a financial plan for this company. Give an imaginary plan to support your answer. Ans. Importance of financial plan for the company are: It helps to forecast what might happen in future. Thus, it prepares a company to face uncertainty. It ensure provision of adequate funds to meet working capital requirements It brings about a balance between inflow and outflow of funds and ensures liquidity throughout the year. It solves the problems of shortage and surplus of funds and ensures proper and optimum utilization of available resources. It ensures increased profitability through cost benefit analysis and by avoiding wasteful operations. It seeks to eliminate ‘wastage of funds and provides better financial control’. It seeks to avail the benefits of trading on equity. Financial Plan of 'S' Ltd An imaginary financial plan for steel plant ( in form of anticipated balance sheet). Particulars Amount       (a) Share Capital       (b) Reserves and Surplus 600 400       (a) Secured Loans       (b) Unsecured Loans 2000 2000       (a) Trade Payables       (b) Provisions 400 100 5500       (a) Fixed Assets       (b) Non-current Investments 3000 100       (a) Short-term Loans and Advances       (b) Miscellaneous Expenditure       (a) Profit & Loss A/c (Debit Balance) 1000 300 200 5500 It is an imaginary financial plan. The total capital is ₹ 5500 crores. Fixed capital is ₹ 5000 crores and working capital is ₹ 500 crores. Debt equity ratio of 4:1 has been assumed. Since, steel plant is an infrastructure project, having a long gestation period. Therefore, company has to borrow, thus ₹ 4000 crores has been borrowed in form of secured and unsecured loans. It is an old company, thus is having reserves and surplus of ₹ 400 crores. Long gestation period can call for miscellaneous expenditure of ₹ 300 debit balance of profit and loss A/c in normal situations. Current ratio of 2:1 quite good. c. What are the factors which will affect the capital structure of this company? Ans. Capital structure refers to the proportion in which debt and equity funds are used for financing the operations of a business. A capital structure is said to be optimum when the proportion of debt and equity is such that, it results in an increase in the value of shares. The factors that will affect the capital structure of this company are: (i) Equity funds: The composition of equity funds in the capital structure will be governed by the following factors: The requirement of funds of ‘S’ Ltd is for long-term. Hence, equity funds will be more appropriate, but due to long gestation period, returns will materialize much later and a mix of more debt and equity is there, thus equity must not be lesser than this, otherwise overall risk will increase. There are no financial risks attached to this form of funding. If the stock market is bullish, the company can easily raise funds through issue of equity shares. If the company already has raised reasonable amount of debt funds, each subsequent borrowing will come at a higher interest rate and will increase the fixed charges. (ii) Debt funds: The usage and the ratio of debt funds in the capital structure will be governed by factors like: The availability of cash flow with the company to meet its fixed financial charges. The purpose is to reduce the financial risk associated with such payments, which can further be checked by using ‘debt service coverage ratio’. It will provide the benefits of trading on equity and hence, will increase the Earning Per Share of equity shareholders. However, ‘Return on Investment’ ratio will be the guiding principle behind it. The company should opt for trading on equity only when Return on Investment is more than the interest rate on debt. Interest on debt funds is a deductible expense and therefore, will reduce the tax liability and thus increase the gains of equity shareholders. It does not result in dilution of management control. d. Keeping in mind that it is a highly capital-intensive sector, what factors will affect the fixed and working capital. Give reasons in support of your answer. Ans. The working and fixed capital requirement of S Ltd will be high due to following reasons: The business is capital intensive and the scale of operation is large. Heavy investments are required for building up the production base and for technological upgradation. Incaseofsteelindustry,themajorinputsareironoreandcoal.The ratio of cost of raw material to total cost is very high. Hence, higher will be the need for working capital. The longer the operating cycle, the larger is the amount of working capital required, as the funds get locked up in the production process for a long-period of time. Terms of credit for buying and selling goods, discount allowed by suppliers and to the customers also determines the quantum of working capital. Key Features of NCERT Class 12 Business Studies Chapter 'Financial Management' question answers : All chapter question answers with detailed explanations. Simple language for easy comprehension. Aligned with the latest NCERT guidelines. Perfect for exam preparation and revision. Popular Questions of Class 12 Business Studies What are the steps taken by management in the planning process? Why is management considered to be a multi-dimensional concept? Explain the procedure for selection of employees. How would you characterize the business environment? Explain with examples, the difference between general and specific environment. Indian Railways has launched a new broad gauge solar power train which is going to be a path breaking leap towards making trains greener and more environment friendly. The solar power DEMU (Diesel Electric Multiple Unit) has 6 trailer coaches and is expected to save about 21,000 liters of diesel and ensure a cost saving of Rs 12, 00,000 per year. Name the objectives of management achieved by Indian Railways in the above case. The government of India announced Demonetization of ₹ 500 and ₹ 1,000 currency notes with effect from the midnight of November 8, 2016. As a result, the existing ₹ 500 and ₹ 1,000 currency notes ceased to be legal tender from that date. New currency notes of the denomination of ₹ 500 and ₹ 2,000 were issued by Reserve Bank of India after the announcement. This step resulted in a substantial increase in the awareness about and use of Point of Sale machines, e-wallets, digital cash and other modes of cashless transactions. Also, increased transparency in monetary transactions and disclosure led to a rise in government revenue in the form of tax collection. a. Enumerate the dimensions of the business environment highlighted above. b. State the features of Demonetization. Define scientific management. State any three of its principles. Discuss the relevance of Taylor and Fayol’s contribution in the contemporary business environment. Explain the qualities of a good leader? Do the qualities alone ensure leadership success? Management is a series of continuous interrelated functions. Comment. Recently Viewed Questions of Class 12 Business Studies Name the principle that is an extension of the ‘harmony, not discord’. Explain the importance of consumer protection from the point of view of a business. National Digital Library of India (NDL India) is a pilot project initiated by the HRD ministry. It works towards developing a framework of virtual repository of learning resources with a single-window search facility. It provides support to all academic levels including researchers, life-long learners and differently-abled learners free of cost. State the dimensions of business environment highlighted above. State the two important sources of recruitment. Mr Shantanu is a chief manager of a reputed company that manufactures garments. He called the production manager and instructed him to keep a constant and continuous check on all the activities related to his department so that everything goes as per the set plan. He also suggested him to keep a track of the performance of all the employees in the organisation so that targets are achieved effectively and efficiently. a. Describe any two features of Controlling highlighted in the above situation.(Goal Oriented, continuous and pervasive – any 2). b. Explain any four points of importance of Controlling. List any two indicators of growth of an organisation. What is informal communication? What kind of strategic decisions are taken by business organisations? Nature and Significance of Management Principles of Management Business Environment Controlling Financial Management Financial Markets Consumer Protection NCERT Solutions NCERT Solutions for Class 12 NCERT Solutions for Class 11 NCERT Solutions for Class 10 NCERT Solutions for Class 9 NCERT Solutions for Class 8 NCERT Solutions for Class 7 NCERT Solutions for Class 6 Quick Links NCERT Sample Papers NCERT Books CBSE Syllabus Scholarship for Students NCERT Exemplar CBSE Topper Answer Sheets CBSE Board Paper Multiplication Tables 2 to 30 Latest Blog © 2024 SaralStudy Privacy Policy Talk to our experts 1800-120-456-456 CBSE Important Questions on Class 12 Business Studies Chapter 9 - Financial Management Class 12 Important Question Business Studies Chapter 9: Financial Management Important Practice Problems for CBSE Class 12 Business Studies Chapter 9: Financial Management Free PDF download of Important Questions with Answers for CBSE Class 12 Business Studies Chapter 9 - Financial Management prepared by expert Business Studies teachers from latest edition of CBSE(NCERT) books. Register for Online tuition on Vedantu.com to score more marks in CBSE board examination. Related Chapters Effective Preparation for Class 12 Business Studies Chapter 9: Important Questions and Answers Very short questions and answers (1 or 2 marks questions). 1. 'Reliable Transport Services Ltd.' specializes in transporting fruits and vegetables. It has a good reputation in the market as it delivers the fruits and vegetables at the right time and at the right place." State with reason whether the working capital requirements of 'Reliable Transport Services" will be high or low.     Ans: Reliable Transport Services Ltd.'s working capital requirements will be minimal. Because fruits and vegetables are perishable by nature, there will be no need to have a big amount of stock on hand. 2. How do 'Floatation costs" affect the choice of capital structure of a company? State. Ans: The cost of obtaining cash is known as the flotation cost. The floatation cost for issuing debt is normally lesser than that of issuing equity, hence in such cases a higher ratio of debt in the capital structure can be preferred by the companies. 3. What is meant by 'financial management'?                                         Ans: Financial management encompasses all business activities including the acquisition and preservation of capital funds in order to achieve a company's financial demands and overall objectives. 4. Besides the investment decision the finance function is concerned with two other broad decisions. Name these decisions.                                                    Ans: The decision other than investment decision are: Financing Decision: This refers to the decision regarding the amount of finance to be raised, choosing from the various long term and short term sources of finance, as well as the decisions regarding choosing the most optimum source of finance. Dividend Decision: A dividend is a portion of a company's profit that is delivered to stockholders. The stockholders receive current income as a result of this. The financial choice concerns the distribution of profits to investors who provided cash to the company. The amount of earnings to be distributed among the  shareholders is the subject of the dividend decision. It must be decided that,  If all profits are to be dispersed,  Whether all earnings will be retained in the business, or  Whether a portion of profits will be retained in the business and the remainder distributed among shareholders. 5. A textile company is diversifying and starting a steel manufacturing plant. State with reason the effect of diversification on the fixed capital requirements of the company. Ans: Due to diversification, the investment will increase thus leading to increased fixed capital requirements. 6. Rizul Bhattacharya after leaving his job wanted to start a Private Limited Company with his son. His son was keen that the company may start manufacturing Mobile-phones with some unique features. Rizul Bhattacharya felt that the mobile phones are prone to quick obsolescence and a heavy fixed capital investment would be required regularly in this business. Therefore, he convinced his son to start a furniture business.  Identify the factor affecting fixed capital requirements, which made Rizul Bhattacharya choose furniture business over mobile phones. Ans: "Technology Upgrade” because mobile phones are more prone to get obsolete due to technology upgradation. 7. The size of assets, the profitability and competitiveness are affected by one of the financial decisions. Name and state the decision.  Ans: Capital budgeting/investment decisions have an impact on asset size, profitability, and competitiveness. 8. Why does financial risk arise? Ans: Regardless of whether the company makes a profit, interest on borrowed funds must be paid. Furthermore, borrowed funds must be repaid after a defined period of time, and they are subject to a charge on assets. This gives rise to financial risk. 9. How does the production cycle affect working capital? Ans: The longer the production cycle, the longer the capital will be stuck in raw materials and semi-manufactured products. As a result, more working capital will be required when the production cycle is long, whereas less working capital will be required when the cycle is short. 10. Enumerate two objectives of financial management? Ans: The two objectives of financial management are: Profit Maximization: The primary objective is concerned with the increasing earning per share (EPS) of the company. It is also the traditional objectives of the financial management that focuses on the fact that all the financial efforts should be made to increase the overall profit of the company, Wealth Maximization : This objective focuses on increasing the overall shareholder wealth of the company, by directing the financing efforts on increasing the share price of the company. Higher the share price, higher the wealth. The goal of financial management in this is to optimize the current value of the company's equity shares. Other Objectives: There can be other objectives such as optimum utilisation of financial resources, choosing the most appropriate source, ensuring easy availability of funds at reasonable costs etc. 11. Radhika and Vani who are young fashion designers left their job with a famous fashion designer chain to set-up a company "Fashionate Pvt. Ltd.' They decided to run a boutique during the day and coaching classes for entrance examinations of National Institute of Fashion Designing in the evening. For the coaching centre they hired the first floor of a nearby building. Their major expense was money spent on photocopying of notes for their students. They thought of buying a photocopier knowing fully that their scale of operations was not sufficient to make full use of the photocopier. In the basement of the building of 'Fashionate Pvt. Ltd.' Praveen and Ramesh were carrying on a printing and stationery business in the name of 'Neo Prints Pvt. Ltd.' Radhika approached Praveen with the proposal to buy a photocopier jointly which could be used by both of them without making separate investment, Praveen agreed to this. Identify the factors affecting fixed capital requirements of 'Fashionate Put. Ltd." Ans: The level of collaboration has an impact on "Fashionate Pvt. Ltd. fixed capital requirements. Occasionally, business organizations would collaborate and develop certain facilities together. In such cases, an individual organization's requirement for fixed capital reduces. 12. What is meant by 'Capital Structure'?                                                 Ans: The term "capital structure" refers to a company's prudent use of debt and equity. One of the most essential considerations in financial management is the financing pattern, or the proportion of funds raised from various sources. 13. Name & state the aspect of financial management that provides a link between investment and financing decisions.                                                         Ans: Financial Planning provides a link between investment and financing decisions. Financial Planning involves designing the blueprint of the financial operations of a firm. 14. Name and state the aspect of financial management that enables to foresee the fund requirements both in terms of "the quantum' and 'in terms of the timings". Ans: "Financial Planning" is the component of financial management that provides foresight of fund requirements both in terms of "quantity" and "timings." Financial planning is creating a blueprint for a company's entire financial operations so that the appropriate quantity of funds are available for various operations at the appropriate time. Short Questions and Answers (3 or 4 Marks Questions) 15. State any four factors which affect the requirements of working capital requirements of a company. Ans: Working capital requirements are influenced by the following factors: Nature of Business: A company's basic nature has an impact on the quantity of working capital it requires. A trading firm, for example, requires less working capital than a manufacturing organization. Scale of Operations: A large-scale operation will require more inventory since its working capital requirements are higher than a small-scale operation. Business Cycle: When the economy is booming, more manufacturing is undertaken, and thus more working capital is required, as opposed to when the economy is in a slump. Seasonal Factors: Demand for a product will be greater during peak season, necessitating more working capital than during lean season. 16. 'Best Bulbs Pvt. Ltd. was manufacturing good quality LED bulbs and catering to the local market. The current production of the company is 800 bulbs a day. Sumit, the marketing manager of the company surveyed the market and decided to supply the bulbs to five-star-hotels also. He anticipated the higher demand in future and decided to buy a sophisticated machine to further improve the quality and quantity of the bulbs produced. Identify the factors affecting fixed capital requirements of the company. Ans: The factor determining a company's fixed capital requirements is 'Growth Prospects’. Higher output, more sales, more inputs, and so on are all related to a company's expansion and growth. This necessitates the use of more advanced machinery. As a result, organizations with strong growth potential require more fixed capital, and vice versa. High growth prospects lead to Large fixed capital requirements, whereas low growth prospects lead to low fixed capital requirements. 17. Every manager has to take three major decisions while performing the finance function. Explain them. Ans: A management must make three main decisions: Investment Decision: Investment decision refers to the prudent allocation of a firm's resources among various alternative offers, with the minimum cost, maximum return. Dividend Decision: Dividend decision is whether to distribute earnings to shareholders as dividends or to retain earnings to finance long-term projects of the firm. Long Questions and Answers (5 or 6 Marks Questions) 18. Sakshi Ltd. is a company manufacturing electronic goods. It has a share capital of Rs. 120 lakhs. The earning per share in the previous years was Rs 0.5. For diversification the company requires additional capital of Rs 80 lakhs. The company raised funds by issuing 10 % debentures for the same. During the current year the company earned profit of Rs 16 lakhs on capital employed, It paid tax of 40%. (a) State whether the shareholders gained or lost in respect of earning per share on diversification. Show your calculations clearly. Ans: (a) Profit before Interest $\& \operatorname{Tax}=R_{s} 16,00,000$ (Given)  Interest on $10 \%$ debenture $=\operatorname{Rs} 8,00,000$  Profit before Tax $=$ Profit before Interest and Tax Interest $=16,00,000-8,00,000=\operatorname{Rs} 8,00,000 .$ $\operatorname{Tax}(a) 40 \%=\operatorname{Rs} 3,20,000\left\{8,00,000 \times \frac{40}{100}\right\}$ Profit after Tax =  Profit before tax - Tax=8,00,000-3,20,000=4,80,000 $\mathrm{EPS}=\frac{\text { profit after tax }}{\text { Number of equity shares }}=\dfrac{4,80,000}{12,00,000}=0.4$ Note: Equity shares are considered to have a face value of Rs 10 each. Hence, the number of equity shares is 12,00,000. (b) Also state any three factors that favour the issue of debentures by the company as part of its capital structure.  Ans: The following are three characteristics that favour the corporation issuing debentures as part of its capital structure. Tax Deductibility: The company's interest payments on its debentures are tax deductible. In the above scenario, the company is paying tax 40 %. Thus, it is beneficial for the company to issue debentures. Say in Management : Issuing more shares will dilute management's control. Thus, companies who aren’t willing to dilute the control may opt for more debt and less equity. Relatively Low Cost: For a company, the cost of raising capital through debentures is relatively lower than that through equity. Debenture investors require a lower rate of return due to the assurance (of rate of return) and guaranteed repayment (of debenture amount at maturity). Aside from that, interest paid to debenture holders is a tax-deductible expense. This means that after deducting interest from the company's earnings, the net amount is utilised to calculate tax liabilities. As a result, corporations prefer debentures since a higher usage of debt decreases the overall cost of capital while leaving the cost of equity the same. 19. Explain briefly any four factors that affect the working capital requirement of a company. Ans: The different factors that influence a company's working capital requirements are outlined below. The effective interest rate that a firm pays on its debts, such as bonds and loans, is known as the cost of debt. Business Type: Companies that provide services or trade (and have a short operational cycle) require less working capital than companies that manufacture goods. The raw materials are generally the same as the final outputs and the sales transaction takes place immediately in service and trading organization, thus leading to low working capital requirements.. A manufacturing firm, on the other hand, has a long operational cycle, and raw resources must be turned into completed goods before they can be sold, thus leading to large working capital needs. Small working capital needs are for service or trading businesses, while manufacturing companies have a high need for working capital. Credit Extends to the Firm's Ability: When a corporation has a generous credit policy, the number of borrowers grows. This, in turn, raises the company's working capital requirements. A strict credit strategy, on the other hand, decreases the need for working capital. Large working capital is required with a company having a liberal credit policy. Whereas, a strict credit policy leads to low working capital needs. Extent of Availability of Raw Material: If the raw materials required by the company can be availed easily, then the firm need not maintain a large stock of inventories of raw material. In such circumstances, the company's working capital requirements are reduced. If on the other hand, raw materials aren't readily available or their supply isn't consistent, the company will need to keep a significant stock of raw materials on hand to assure uninterrupted operations, necessitating a substantial amount of working capital. Hence if raw materials are readily available, then working capital requirements are minimal. But if obtaining raw materials is difficult then it will result in a high working capital demand. Scale of Operations: Companies operating on a large scale require large working capital. This is due to the fact that such businesses must keep a large stock of merchandise and debtors. When the scope of operations is limited, however, the amount of working capital required is lower. Hence, large-scale operations necessitate a large amount of working capital. Operating on a small scale necessitates a low level of working capital. 20. The board of Directors has asked you to design the capital structure of the company. Explain the factors that you would consider while doing so. Ans: The following seven elements are used to establish a company's capital structure:- Cash Flow Position: The cash position at the end of the month on a cash flow statement represents the amount of cash the company has in hand at that point in time. This cash position reflects the company's financial strength and liquidity, indicating the company's capacity to satisfy its existing obligations. Hence, a company with high liquidity and a good cash flow position can issue debt capital, as the company will have less chances of facing financial risk than the company with a low cash position. Tax Rate: Higher the tax rate, more preference for debt capital in the capital structure, as interest on debt capital  being a tax deductible expense makes the debt cheaper. Cost of Debt: Lower the cost of debt, higher will be the preference for debt capital in the equity share as against equity capital. Control: If the existing shareholders want to maintain the control in the firm, the company may prefer more debt over equity in the capital structure, as issuing debt will not affect the control stake of existing shareholders. Stock Market Situations: If the stock market is flourishing, and there is a condition of boom then the companies may prefer more equity over debt in the capital structure. However, in the case of a bear market, to avoid any more risks, the companies will prefer more debt over equity in the capital structure. Return on Investment (ROI): It is a performance metric used to assess an investment's efficiency or profitability, as well as to compare the efficiency of many investments. A higher ROI over the rate of interest will make the companies prefer debt capital because of lower cost and higher returns. While in the case of ROI being less than rate of interest, equity would be preferred, as in this case debt would be more costly affair for the company Size of Business: Small businesses generally go for retained earnings, and equity capital, as if they go for debt or borrowed capital, the company has to face a fixed interest burden. However in the case of large companies, issuing debt is not a big issue, and they can raise long term finance from borrowed sources cheaper than that of small firms. 21. The directors of a company have decided to expand their business activities by increasing the stock of raw materials and finished goods at an estimated cost of Rs. 50 lakhs. Describe the various ways open to the company to raise necessary finance for the purpose. Ans: The company can raise necessary finance for the purpose of expansion through the following function. Issue of Shares: The technique through which businesses distribute additional shares to shareholders is known as the issue of shares. Individuals or corporations can be shareholders. While circulating the shares, the company adheres to the rules set forth by the Companies Act of 2013. The three major fundamental steps in the process of issuing shares are the distribution of prospectuses, the receipt of applications, and the allocation of shares. Issue of Debentures: The term "issuing debentures" refers to the company's issuance of a certificate under its seal that serves as an acknowledgement of the company's debt. The process of a firm issuing debentures is similar to that of issuing shares. A prospectus is published, applications are accepted, and allotment letters are sent out. Loans from Banks and Financial Institutions: Banks are the main actors in all areas of the financial markets, including credit, cash, securities, foreign exchange, and derivatives, due to their vast monetary holdings. The growth of the business sector determines a country's economic development. By making funds available to businesses, a well-developed financial system aids their growth. Retained Earnings: Accounting's idea of retained earnings is crucial. The word refers to a company's previous profits, less whatever dividends it has paid in the past. The term "retained" refers to the fact that the earnings were not distributed to shareholders as dividends, but rather were kept by the corporation. 22. Explain briefly any four factors affecting the fixed capital requirements of an organization. Ans: Factors affecting an organization's fixed capital requirements include: Nature of Business: the type of business is a factor in determining the fixed capital requirements. The type of fixed asset used in manufacturing business (namely plant machinery etc., whereas in trading its merely sale and purchase. For e.g. manufacturing businesses necessitate a large capital investment in fixed assets such as plant and machinery etc., whereas trade concerns necessitate a smaller capital investment in fixed assets. Scale of Operations: A larger organization operating on a large scale requires more fixed capital investment as compared to an organization operating on a small scale. Large firm has more people, more products to produce, more land space, thus fixed expenses increase in terms of salaries, rent, etc. Choice of Technique: An organization using capital-intensive techniques requires more investment in fixed assets as compared to an organization using labour intensive techniques. on the other hand the capital intensive as it uses machinery etc .,which is costly. Technology Upgrade: When compared to other businesses, a company with obsolete techniques and assets needs to revamp their assets and techniques time and again. Growth Prospects: In order to expand their production capacity, companies with stronger growth prospects require larger fixed capital investments. Diversification: If a corporation diversifies, it will need to invest more fixed capital in plant and machinery, among other things. Alternatives to Outright Buying: A well-developed financial sector might offer leasing options as an alternative to outright purchase and more of the alternatives available, lesser the fixed capital required. Collaboration Level: If companies are collaborating, forming a joint venture, and so forth, then they need less fixed capital as they share plants and machinery with their collaborators. 23. Silkiya Ltd." is a company manufacturing silk cloth. It has been consistently earning good profits for many years. This year too, it has been able to generate enough profits. There is availability of enough cash in the company and good prospects for growth in future. It is a well-managed organization and believes in quality, equal employment opportunities and good remuneration practices. It has many shareholders who prefer to receive a regular income from their investments. It has taken a loan of more than 60 lakhs from SBI Bank and is bound by certain restrictions on the payment of dividend according to the terms of the loan agreement. The above discussion about the company leads to various factors which decide how much profit should be retained and how much has to be distributed by the company.  Quoting the lines from the above discussion, identify and explain any four such factors. Ans: The choice on dividends has been considered in the question.  The following factors affect the dividend decision, along with their quotations: Stable Earnings:   A company's earnings are used to determine the amount of dividends it will pay out. A company with stable and smooth earnings can pay higher dividends to shareholders than a company which has unstable and uneven earnings. Quotation: “It has been consistently earning good profits for many years”.  Future Growth Prospects: Companies with better future growth prospects tend to save more of their earnings for future reinvestment. As a result, they pay lower dividends. Quotation : “There is availability of enough cash in the company and good prospects for growth in future”. Shareholder Preferences: When deciding on dividends, shareholders' preferences must be taken into account. If shareholders, for example, want a specified minimum amount of dividends paid, the corporation can proclaim that. Quotation: “It has many shareholders who prefer to receive a regular income from their investments. ” Legal Restrictions: The extent of dividend payment also depends on the legal restrictions a company faces from the external environment. The company has to provide a dividend in accordance with the restrictions and rules and regulations it is bound in. Quotation: “I t has taken a loan of more than 60 lakhs from SBI Bank and is bound by certain restrictions on the payment of dividend according to the terms of the loan agreement.” Chapter-Wise Important Questions Chapter 1 - Nature and Significance of Management Chapter 2 - Principles of Management Chapter 3 - Business Environment Chapter 4 - Planning Chapter 5 - Organising Chapter 6 - Staffing Chapter 7 - Directing Chapter 8 - Controlling Chapter 10 - Financial Markets Chapter 11 - Marketing Chapter 12 - Consumer Protection Chapter-Wise Revision Notes on Class 12 Business Studies   Chapter 1 - Nature and Significance of Management Notes Chapter 2 - Principles of Management Notes Chapter 3 - Business Environment Notes Chapter 4 - Planning Notes Chapter 5 - Organising Notes Chapter 6 - Staffing Notes Chapter 7 - Directing Notes Chapter 8 - Controlling Notes Chapter 9 - Financial Management Notes Chapter 10 - Financial Markets Notes Chapter 11 - Marketing Notes Chapter 12 - Consumer Protection Notes Chapter 13 - Entrepreneurship Development Notes FAQs on CBSE Important Questions on Class 12 Business Studies Chapter 9 - Financial Management 1. While performing the financial function every manager makes three decisions. Explain those decisions in accordance with Chapter 9 Financial Management of Class 12 Business Studies. While performing the financial role, management must make the three decisions listed below - Financing Choice - This decision involves selecting the lowest source of funding from a pool of short and long-term options. Investment Decision - This is the process of selecting the lowest proposal from among all the alternatives that provide the best potential return to investors. Dividend Choice - This decision involves deciding whether earnings should be paid as a dividend to stockholders or retained to fund the company's long-term objectives. 2. State the four factors which affect the working capital requirements of a company. Four factors which affect the working capital requirements of a company are: The principal nature of business has an impact on the quantity of the type of business that is necessary. In comparison to a larger organization, a trading firm requires a modest quantity of operating capital. The size of the operation - A large firm requires more inventory as a source of working capital than a small one. When the economy is growing, a company's output grows, and more working capital is necessary, but when the economy is in crisis, less working capital is required. Seasonal Factors - Demand will be strong during the peak season, thus working capital will be higher than during the offseason. 3. State any three points of importance of financial planning. Financial planning aids you in identifying your short- and long-term financial goals, as well as designing a well-balanced strategy to meet them. The following factors demonstrate its significance: It is critical to ensure that sufficient funds are available. By maintaining a proper balance between cash output and inflow, financial planning contributes to preserving stability. Financial planning ensures that fund providers can invest easily in companies that adhere to financial planning criteria. To know more about  Chapter 9 Financial Management of Class 12 Business Studies refer to the notes provided by Vedantu . They are available on the website of Vedantu and their App and that too free of cost. 4. How does working capital affect both the liquidity as well as the profitability of a business? A company's working capital is critical to the efficient running of its day-to-day activities. Working capital has an impact on a company's liquidity as well as its profitability. An increase in working capital will boost the company's liquidity. For example, as the amount of cash in hand or at the bank grows, so does the ability to make day-to-day payments. A reduction in working capital decreases a company's liquidity and profitability since it is unable to pay off day-to-day expenditures and must thus use capital to do so, further reducing the company's profitability. As a result, working capital should be managed in such a way that profitability and liquidity are maintained. 5. Explain briefly any four factors affecting the fixed capital requirements of an organization. Four factors affecting the fixed capital requirements of an organization are: The nature of the business in which Co. is involved is the first element that influences the amount of fixed capital required. A manufacturing firm requires more fixed capital than a trading firm, which does not require plant, machinery, or other fixed assets. The scale of Operations: Large-scale businesses require more fixed capital since they require more machinery and other assets, whereas small-scale businesses require less fixed capital. The capital-intensive procedures rely on plant and machinery, and firms require more fixed capital to purchase plants and machinery. Technology Development: Industries with rapid technological advancements require more fixed capital because old machines become obsolete as new technology is developed, necessitating the purchase of new plants and machinery, whereas companies with slower technological advancements require less fixed capital because they can manage with older machines. CBSE Class 12 Business Studies Important Questions Cbse study materials. NCERT Solutions for Class 12 Business Studies chapter 9 – Financial Management Multiple choice questions. 1.    The cheapest source of finance is (a) debenture                                         (b) equity share capital (c) preference share                             (d) retained earning Answer  (d) Retained earning is the cheapest source of finance. 2.    A decision to acquire a new and modern plant to upgrade an old one is a (a) financing decision                          (b) working capital decision (c) investment decision                      (d) dividend decision Answer (c) Investment decision is related to careful selection of assets in which funds will be invested by firms. Thus, the above case comes under the investment decision. 3.    Other things remaining the same, an increase in the tax rate on corporate profits will make debt relatively cheaper make debt relatively less cheap home no impact on the cost of debt we can’t say Answer (1) If the tax rate on corporate, profit will increase it makes debt relatively cheaper. 4.    Companies with higher growth paternal are likely to pay lower dividends pay higher dividends dividends are not affected by growth considerations None of the above Answer (1) Companies who are having the higher growth pattern are likely to pay lower dividends. 5.    Financial leverage is called favourable if return on investment is lower than cost of debt return on investment is higher than cost of debt debt is nearly available if the degree of existing financial leverage is low Answer (2) If ROI is higher than cost of debt financial leverage in this case called favourable. 6.    Higher debt equity ratio (Debt/Equity) results in lower financial risk higher degree of operating risk higher degree of financial risk Answer (3) Higher debt equity ratio results in higher degree of financial risk. 7.    Higher working capital usually results in higher current ratio, higher risk and higher profits lower current ratio, higher risk and profits higher equitably, lower risk and lower profits lower equitably, lower risk and higher profits Answer (1) If the working capital is higher it results in higher current ratio, higher risk and higher profits. 8.    Current assets are those assets which get converted into cash (a) within six month                             (b) within one year (c) between one and three year          (d) between three and five year Answer (b) Current assets are those assets which are converted in cash in one year. 9.    Financial planning arrives at minimising the external borrowing by resorting to equity issues entering that the firm always have significantly more fund than required so that there is no paucity of funds ensuring that the firm paces neither a shortage nor a glut of unusable funds doing only what is possible with the funds that the firm has at its disposal Answer (3) Financial planning means deciding how much to spend and on what to spend it ensuring that the firm paces neither a shortage nor a glut of unusable funds. 10.     Higher dividends per share is associated with high earnings, high cash flows, unusable earnings and higher growth opportunities high earnings, high cash flows, stable earnings and high growth opportunities high earnings, high cash flows, stable earnings and lower growth opportunities high earnings, low cash flows, stable earnings and lower growth opportunities Answer (3) Higher dividend per share includes higher earnings, high cash flows, stable earning and lower growth opportunities. 11.     A fixed asset should be financed through a long term liability a short term liability a mix of long and short term liabilities Answer  (1) Fixed assets financed through long term liability. 12.     Current assets of a business firm should be financed through current liability only long term liability only partly from both types i.e., long and short term liabilities Answer (3) Current assets are financed through long and short term liabilities. Short Answer Type Questions Question 1. What is meant by capital structure? Answer Capital structure refers to the mix between owners and borrowed funds. It represents the proportion of equity and debt. Question 2. Discuss the two objectives of Financial Planning. Answer  Financial Planning strives to achieve the following two objectives To Ensure Availability of Funds whenever These are Required This includes a proper estimation of the funds required for different purposes such as for the purchase of long term assets or to meet day-to-day expenses of business etc. To See That the Firm Does Not Raise Resources Unnecessarily Excess funding is almost as bad as inadequate funding. Efficient financial planning ensures that funds are not raised unnecessarily in order to avoid unnecessary addition of cost. Question 3. What is ‘financial risk’? Why does it arise? Answer It refers to the risk of company not being able to cover its fixed financial costs. The higher level of risks are attached to higher degrees of financial leverage with the increase in fixed financial costs, the company its also required to raise its operating profit (EBIT) to meet financial charges. If the company can not cover these financial charges, it can be forced into liquidation. Question 4. Define a ‘current assets’ and give four examples. Answer Current assets are those assets of the business which can be converted into cash within a period of one year. Cash in hand or at bank, bills receivables, debtors, finished goods inventory are some of the examples of current assets. Question 5. Financial management is based on three broad financial decisions. What are these? Answer Financial management is concerned with the solution of three major issues relating to the financial operations of a firm corresponding to the three questions of investment, financing and dividend decision. In a financial context, it means the selection of best financing alternative or best investment alternative. The finance function therefore, is concerned with three broad decision which are as follows Investment Decision The investment decision relates to how the firm’s funds are invested in different assets. Financing Decision This decision is about the quantum of finance to be raised from various long term sources and short term sources. It involves identification of various available sources of finance. Dividend Decision This decision relates to distribution of dividend. Dividend is that portion of profit which is distributed to shareholders the decision involved here is how much of the profit earned by company is to be distributed to the shareholders and how much of it should be retained in the business for meeting investment requirements. Question 6. What is the main objective of financial management? Explain briefly. Answer Primary aim of financial management is to maximise shareholder’s wealth, which is referred to as the wealth maximisation concept. The wealth of owners is reflected in the market value of shares, wealth maximisation means the maximisation of market price of shares. According to the wealth maximisation objective, financial management must select those decisions which result in value addition, that is to say the benefits from a decision exceed the cost involved. Such value addition increase the market value of the company’s share and hence result in maximisation of the shareholder’s wealth. Question 7. Discuss about working capital affecting both the liquidity as well as profitability of a business. Answer The working capital should neither be more nor less than required. Both these situations are harmful. If the amount of working capital is more than required, it will no doubt increase liquidity but decrease profitability. For instance, if large amount of cash is kept as working capital, then this excessive cash will remain idle and cause the profitability to fall. On the contrary, if the amount of cash and other current assets are very little, then lot of difficulties will have to be faced in meeting daily expenses and making payment to the creditors. Thus, optimum amount of both current assets and current liabilities should be determined so that profitability of the business remains intact and there is no fall in liquidity. Long Answer Type Questions Question 1. What is meant by working capital? How is it calculated? Discuss five important determinants of working capital requirements. Answer Working capital is that part of total capital which is required to meet day-to-day expenses, to buy raw materials, to pay wages and other expenses of routine nature in the production process or we can say it refers to excess of current assets over current liabilities. Working Capital = Current Assets – Current Liabilities Factors affecting working capital requirement are Nature of Business  The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a lower amount of working capital compared to a manufacturing organisation. This is because in trading, there is no processing required. In a manufacturing business, however, raw materials need to be converted into finished goods, which increases the expenditure on raw material, labour and other expenses. Scale of Operation The firms which are operating on a higher scale of operations, the quantum of inventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale. Production Cycle Production cycle is the time span between the receipts of raw materials and their conversion into finished goods. Some businesses have a longer production cycle while some have a shorter one. Working capital requirement is higher in ferms with longer processing cycle and lower in firms with shorter processing cycle. Credit Allowed Different firms allow different credit terms to their customers. A liberal credit policy results in higher amount of debtors, increasing the requirements of working capital. Credit Availed Just as a firm allows credit to its customers it also may get credit from its suppliers. The more credit a firm avails on its purchases, the working capital requirement is reduced. Question 2. Capital structure decision is essentially optimisation of risk-return relationship. Comment. Debt and equity differ significantly in their cost and riskiness for the firm. Cost of debt is lower than cost of equity for a firm because lender’s risk is lower than equity shareholder’s risk, since lenders earn on assured return and repayment of capital and therefore they should require a lower rate of return. Debt is cheaper but is more risky for a business because payment of interest and the return of principal is obligatory for the business. Any default in meeting these commitments may force the business to go into liquidation. There is no such compulsion in case of equity, which is therefore, considered riskless for the business. Higher use of debt increases the fixed financial charges of a business. As a result increased, use of debt increases the financial risk of a business. Capital structure of a business thus, affects both the profitability and the financial risk. A capital structure will be said to be optimal when the proportion of debt and equity is such that it results in an increase in the value of the equity share. Question 3. A capital budgeting decision is capable of changing the financial fortune of a business. Do you agree? Why or why not? Answer Investment decision can be long term or short term. A long term investment decision is also called a capital budgeting decision. It involves commiting the finance on a long term basis. e.g., making investment in a new machine to replace an existing one or acquiring a new fixed assets or opening a new branch etc. These decisions are very crucial for any business. They affect its earning capacity over the long-run, assets of a firm, profitability and competitiveness, are all affected by the capital budgeting decisions. Moreover, these decisions normally involve huge amounts of investment and are irreversible except at a huge cost. Therefore, once made, it is almost impossible for a business to wriggle out of such decisions. Therefore, they need to be taken with utmost care. These decisions must be taken by those who understand them comprehensively. A bad capital budgeting decision normally has the capacity to severely damage the financial fortune of a business. Question 4. Explain factors affecting the dividend decision. Answer Dividend decision relates to distribution of profit to the shareholders and its retention in the business for meeting the future investment requirements. How much of the profits earned by a company will be distributed as profit and how much will be retained in the business is affected by many factors. Some of the important factors are discussed as follows Earnings Dividends are paid out of current and past year earnings. Therefore, earnings is a major determinant of the decision about dividend. Stability of Earnings Other things remaining the same, a company having stable earning is in a position to declare higher dividends. As against this, a company having unstable earnings is likely to pay smaller dividend. Growth Opportunities Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. The dividend in growth companies, is therefore, smaller than that in non-growth companies. Cash Flow Position Dividends involve an outflow of cash. A company may be profitable but short on cash. Availability of enough cash in the company is necessary for declaration of dividend by it. Shareholder Preference If the shareholder in general, desire that at least a certain amount should be paid as dividend, the companies are likely to declare the same. Taxation Policy If tax on dividend is higher it would be better to pay less by way of dividends. As compared to this, higher dividends may be declared if tax rates are relatively lower. Stock Market Reaction For investors, an increase in dividend is a good news and stock prices react positively to it. Similarly, a decrease in dividend may have a negative impact on the share prices in the stock market. Access to Capital Market Large and reputed companies generally have easy access to the capital market and therefore, depend less on retained earnings to finance their growth. These companies tend to pay higher dividends than the smaller companies which have relatively low access to the market. Legal constraints Certain provisions of the Company’s Act place restriction on payouts as dividend. Such provisions have to be adhered, while declaring dividends. Contractual Constraints While granting loans to a company, sometimes the lender may impose certain restrictions on the payment of dividends in future. The companies are required to ensure that the dividends does not violate the terms and conditions of the loan agreement in this regard. Question 5. Explain the term ‘trading on equity’. Why, when and how it can used by a business organisation? Answer Trading on equity refers to the increase in profit earned by the equity shareholders due to presence of fixed financial charges. When the rate of earning or Return on Investment (ROI) of a company is higher than the rate of interest on borrowed funds only then a company should opt for trading on equity. Let us consider the following example   Share Capital ` 10 lakhs ` 04.00 lakhs Loan @ 15% p.a. — ` 06.00 lakhs   ` 10 lakhs ` 10.00 lakhs Profit before interest + Tax ` 3 lakhs ` 03.00 lakhs Interest Nil ` 00.09 lakhs Profit before tax ` 3 lakhs ` 02.01 lakhs Tax @ 50% ` 1.5 lakhs ` 1.05 lakhs Profit after tax ` 1.5 lakhs ` 1.05 lakhs Share capital ` 10 lakhs ` 4.00 lakhs Rate of return on share 15% 26.25% It should be clear from the above example, that shareholders of the company ‘X’ have a higher rate of return than company ‘Y’ due to loan component in the total capital of the company. Case Problem ‘S’ Limited is manqufacturing steel at its plant in India. It is enjoying a buoyant demand for its products as economic growth is about 7%-8% and the demand for steel is growing. It is planning to set up a new steel plant to cash on the increased demand it is facing. It is estimated that it will require about ` 5,000 crores to set up and about ` 500 crores of working capital to start the new plant. Question 1. What is the role and objectives of financial management for this company? Answer Role of Financial Management Financial management is concerned with the proper management of funds. It involves Managerial decisions relating to procurement of long term and short term funds. Keeping the risk associated with respect to procured funds under control. Utilisation of funds in the most productive and effective manner. Fixed debt equity ratio in capital. Objective of Financial Management The objective of financial management is maximisation of shareholder’s wealth. The investment decision, financial decision and dividend decision help an organisation to achieve this objective. In the given situation, S limited envisages growth prospects of steel industry due to the growing demand. To expand the production capacity, the company needs to invest. However, investment decision will depend on the availability of funds, the financing decision and the dividend decision. However, the company will take those financial decisions which result in value addition, i.e., the benefits are more than the cost. This leads to an increase in the market value of the shares of the company. Question 2. Explain the importance of having a financial plan for this company. Give an imaginary plan to support your answer. Answer  Importance of financial plan for the company Financial Planning ensures provision of adequate funds to meet working capital requirements. It brings about a balance between in flow and out flow of funds and ensures liquidity throughout the year. It solves the problems of shortage and surplus of funds and ensures proper and optimum utilisation of available resources. It ensures increased profitability through cost benefit analysis and by avoiding wasteful operations. It seeks to eliminate waste of funds and provides better financial control. It seeks to avail the benefits of trading on equity. Financial Plan of S Ltd Total finance required : Fixed capital = ` 1,000 crores Working capital = ` 100 crores Source of finance : 2 : 1 Ratio i.e., 50% finance collected by issue of shares and 50% by borrowed funds. Question 3. What are the factors which will affect the capital structure of this company? Answer Capital structure refers to the proportion in which debt and equity funds are used for financing the operations of a business. A capital structure is said to be optimum when the proportion of debt and equity is such that it results in an increase in the value of shares. The factors that will affect the capital structure of this company are The requirement of funds of ‘S’ Limited is for long term. Hence, equity funds will be more appropriate. There are no financial risks attached to this form of funding. If the stock market is bullish, the company can easily raise funds through issue of equity shares. If the company already has raised reasonable amount of debt funds, each subsequent borrowing will come at a higher interest rate and will increase the fixed charges. The availability of cash flow with the company to meet its fixed financial charges. The purpose is to reduce the financial risk associated with such payments which can further be checked by using ‘debt’ service coverage ratio. It will provide the benefit of trading on equity and hence will increase the earning per share of equity shareholders. However, ‘return on investment’ ratio will be the guiding principle behind it. The company should opt for trading on equity only when return on investment is more than the fixed charges. Interest on debt funds is a deductible expense and therefore, will reduce the tax liability. It does not result in dilution of management control. Question 4. Keeping in mind that it is a highly capital intensive sector what factors will affect the fixed and working capital. Give reasons with regard to both in support of your answer. Answer The working and fixed capital requirement of ‘S’ Limited will be high due to the following reasons The business is capital intensive and the scale of operation is large. Heavy investments are required for building up the production base and for technological upgradation. In case of steel industry, the major input is iron ore and coal. The ratio of cost of raw material to total cost is very high. Hence, higher will be the need for working capital. The longer the operating cycle, the larger is the amount of working capital required as the funds get locked up in the production process for a long period of time. Terms of credit for buying and selling goods, discount allowed by suppliers and to the customers also determines the quantum of working capital. Andhra Pradesh Chhattisgarh West Bengal Madhya Pradesh Maharashtra Jammu & Kashmir NCERT Books 2022-23 NCERT Solutions NCERT Notes NCERT Exemplar Books NCERT Exemplar Solution States UT Book School Kits & Lab Manual NCERT Books 2021-22 NCERT Books 2020-21 NCERT Book 2019-2020 NCERT Book 2015-2016 RD Sharma Solution TS Grewal Solution TR Jain Solution Selina Solution Frank Solution Lakhmir Singh and Manjit Kaur Solution I.E.Irodov solutions ICSE - Goyal Brothers Park ICSE - Dorothy M. Noronhe Micheal Vaz Solution S.S. 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SHARING IS CARING If our Website helped you a little, then kindly spread our voice using Social Networks. Spread our word to your readers, friends, teachers, students & all those close ones who deserve to know what you know now. You can solve a variety of Financial Management class 12 important questions with solutions on the SelfStudys website free of cost. This collection of questions is gathered from the official previous year’s papers by our subject-matter experts. By engaging with these important questions, you can enhance your logical reasoning, analytical thinking, and problem-solving skills efficiently.  The class 12 Financial Management important questions are mostly asked in the Business Studies subject exam. On our digital platform, you are permitted to solve these questions online or download its PDF file for future practice sessions. Significance of Financial Management Class 12 Important Questions Various reasons such as assistance in better exam preparation, confidence boost, etc. are the reasons behind the significance of Financial Management Class 12 Business Studies Important Questions With Solutions PDF. For a detailed overview of why it is important, go through the points mentioned below: Helps Boost Confidence: One of the aspects of having the PDF file of Class 12 Financial Management important questions is that it helps boost confidence. By understanding the various types and difficulty levels of questions, you can answer them more easily without any nervousness.  Gives Students Assistance in Board Exam Preparation: The board exam preparation process is crucial and even a single mistake can result in a great loss. That is why solving the important questions of Class 12 Financial Management can give students assistance in board exam preparation to decide which questions to cover first and how to solve them. Provides Opportunity to Practise Several Questions: Also, the Financial Management Class 12 Important Questions With Solutions PDF file provides students with the opportunity to practice several questions and enables them to get step-by-step answers to all of them.  How to Download Important Questions for Class 12 Business Studies Financial Management PDF? The step-wise process to download the important questions for Class 12 Business Studies Financial Management PDF is mentioned below: Visit this URL [https://www.selfstudys.com/] on your preferred internet browser.  Once you reach the website, you have to find the navigation button and click on it.  Clicking on the navigation button/icon will show you various options to choose from. Here, you can select the ‘CBSE’ option. Then, you need to find the “Important Question” option and click its icon. The pre-opened page will reload quickly, just scroll the page down and find Business Studies.  Then, you can choose the Financial Management chapter to access the important questions for Class 12. Note: Currently, Selfstudys is supporting the online view of PDF files. To access the PDF file, one should use the app. How Class 12 Financial Management Important Questions are Defined? Certain factors are there which help subject matter experts to decide the Class 12 Financial Management important questions. A list of these factors is mentioned below: Weightage: The marks of a question play an important role in deciding whether the particular question of the Financial Management will be considered as important or not. Also, the markings for the same question are compared with several years of CBSE Class 12 Question Papers. Repetition: The frequency of questions from Financial Management Class 12 is considered before giving them the tag of an important Business Studies question for the CBSE Class 12 Board examination. Question Type: The types of questions such as MCQs, Short answer types, and long answer types questions are considered before listing them in the Important Questions for Class 12 Business Studies Financial Management PDF file. Difficulty Level: The difficulty level of the Financial Management questions is also considered when selecting the questions to list them as important ones. At Selfstudys, we pay attention to the above-mentioned key points to list them in our PDF file. However, there could be more reasons than those listed above. Methods to Prepare for Financial Management Important Question Class 12 Every single student who opted for Arts/Commerce should know these methods to prepare for Financial Management Important Question Class 12. Complete the Chapter Financial Management: The very first step is to complete the Chapter Financial Management. This will enable students to develop a conceptual understanding and be prepared to answer the majority of questions with ease. Go Through Chapter-End Questions: After completing the lesson, students should go through the Chapter-End questions that will help them practice a variety of easy to difficult questions. Solving such questions will ensure students have gained a good command over the lesson. It will also give them confidence and the opportunity to build a habit of solving such questions. Clear Doubts and Confusion: No doubt and confusion should remain with students because any misunderstanding of the Financial Management will cause them issues to answer. Therefore, all the students should ask their teacher to clear their doubts about the chapter. Students can also take help of the YouTube and other online study resources to clear their doubts before solving the important questions in the Class 12 Financial Management PDF. Solve Financial Management Class 12 Important Questions: After reading the lesson thoroughly, solving its Chapter-end questions, and clearing all doubts and confusion, a student is ready to use Financial Management Class 12 Important Questions With Solutions PDF to prepare for the Board examination. 3 Most Important Times to Use Financial Management Class 12 Important Questions With Solutions PDF Although, students can use the Financial Management Class 12 Important Questions With Solutions PDF anytime they want, these three times are very essential for effective practice.  After Finishing Financial Management Lesson: One of the ideal times to solve the Class 12 Business Studies Financial Management important question is after finishing the lesson. It is considered an ideal time because it facilitates students to solve questions in an easy and quick way. At the time of Board Exam Preparation: Solving Financial Management Class 12 Important Questions at the time of Board exam preparation is also a very useful moment. However, it is essential to keep in mind that, the board examination times are very delicate with having less spare time to focus on one thing. So, while solving all the important questions of Class 12 Financial Management is ideal, you need to focus on other subjects as well. During Revision Time: Setting a revision time on a weekly and monthly basis is a great way to master this topic. At the same time solving some random questions from the Financial Management Class 12 Important Questions With Solutions PDF is very helpful. Best Practices for Effective Use of Financial Management Class 12 Important Questions With Solutions There are three best practices for the effective use of the Financial Management Class 12 important questions with solutions PDF that we have discussed in this section. Be Regular with Practising Financial Management Class 12 Important Questions: Students should maintain regularity in their learning not only for general study but to practice the Financial Management Class 12 important questions. Being regular in practice helps students keep their learning fresh for longer and enable them to improve. It also helps students to deepen their understanding of the concepts discussed in this chapter. Self-Assessment: In order to analyze and evaluate the grip on the Class 12 Financial Management, students should refer to the PDF file of important questions that Selfstudys is providing here on this page. The PDF file enables students to test their level of preparation in Financial Management Class 12 as well as helps to find out their weaknesses in the subject. Use Solutions: In the Financial Management Class 12 important questions with solutions PDF, you can rely on the given answers as they are prepared by subject matter experts following the board exam pattern and the word limit standard. 3 Solid Reasons to Use PDF Files of Financial Management Important Question Class 12 Many students rely on their course structure, study materials, a few sets of sample questions, and previous year's question papers to prepare for the CBSE Class 12 Business Studies Financial Management. However, the 3 solid reasons mentioned below can help students clear their doubts and enable them to understand why they should use the PDF file of Financial Management important questions with Solutions PDF. 1 Reason: Students can find their weak areas in the Financial Management topic using the PDF file of important questions. It is an all-in-one study resource that helps students recognize their weaker points in a particular topic. Getting access to such questions enables students to not only prepare well for the exam but increase their knowledge. 2 Reason: Another valid and solid reason to use the PDF file is that students can take advantage of the solutions given in the PDF file of Class 12 Financial Management Important Questions. The solutions are highly accurate and follow the exam pattern of the CBSE Board. 3 Reason: Build habits, and master methods to answer and boost confidence in solving the Financial Management using the PDF file of Class 12 Business Studies important questions. It is another solid reason because the PDF file contains numerous sets of Class 12 Financial Management Important Questions along with answers that help students in doing the self-study. NCERT Solutions for Class 12 Maths NCERT Solutions for Class 10 Maths CBSE Syllabus 2023-24 Social Media Channels Login Customize Your Notification Preferences Second click on the toggle icon Provide prime members with unlimited access to all study materials in PDF format. Allow prime members to attempt MCQ tests multiple times to enhance their learning and understanding. Provide prime users with access to exclusive PDF study materials that are not available to regular users. 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To regain access, please make sure that cookies and JavaScript are enabled before reloading the page. 200 IMAGES NCERT Solution For Class 12 Business Studies Chapter 9 Financial NCERT Solution For Class 12 Business Studies Chapter 9 Financial CASE STUDY FINANCIAL MANAGEMENT / case-study-financial-management.pdf Financial Management Case Study in 1 Shot financial management case study with solution pdf class 12 NCERT Solutions For Class 12 Business Studies Chapter 9 Financial VIDEO Financial Management Regular Question Paper Solution l Semester 3 l Jan 24 Exams l B Com l DPA10203 PERSONAL FINANCIAL MANAGEMENT NCERT for Class 12 Business Studies Chapter 9 Financial Management Case Study Business Management Pre released statement May 2024 CAIIB Case Study Bank Financial Management COMMENTS CBSE Class 12 Business Studies Case Studies Financial Management. Financial Management is the process of acquiring funds optimally (at minimum cost possible keeping the risk factor also low) and utilising them in the best possible manner to maximise shareholders' wealth. Objectives of Financial Management. The objective of financial management is maximisation of shareholders' wealth. CBSE Class 12 Case Studies In Business Studies CBSE Class 12 Case Studies In Business Studies - Financial Management. Financial Management is concerned with optimal procurement as well as usage of finance. The prime objective of financial management is to maximise shareholder's wealth by maximising the market price of a company's shares. Case Studies Full syllabus notes, lecture and questions for Case Studies - Financial Management - Business Studies (BST) Class 12 - Commerce - Commerce - Plus excerises question with solution to help you revise complete syllabus for Business Studies (BST) Class 12 - Best notes, free PDF download Financial Management Class 12 Business Studies ... Class 12 Business Studies Financial Management Notes and Questions. Q. 1. Arun is a successful businessman in the paper industry. During his recent visit to his friend's place in Mysore, he was fascinated by the exclusive variety of incense sticks available there. Case Study Chapter 9 Financial Management Please practise these case study based Class 12 Business Studies Questions and answers to get more marks in examinations. Case Study Questions Chapter 9 Financial Management. Read the source given below and answer the following questions : Financial management is concerned with efficient acquisition and allocation of funds. NCERT Solution For Class 12 Business Studies Chapter 9 Financial NCERT Solution for Class 12 Business Studies Chapter 9 - Financial Management provides students with a comprehensive introduction to the concepts. It also provides a clear picture of how the company finances are managed in order to receive more revenue. Concepts covered in this chapter. Meaning of financial management. Class 12th Business Studies 1. Identify the concept of Financial Management as advised by Mr. Ghosh in the above situation. (a) Capital Budgeting. (b) Capital Structure. (c) Dividend Decision. (d) Working Capital Decision. 2. In the above case Mr. Ghosh suggested to raised more fund from debt. Higher debt-equity ratio results in: Financial Management Class 12 Notes CBSE Business Studies ... Financial management in Chapter 9 of Class 12th Business Studies refers to the management of financial funds and enterprise capital that is used to meet the overall needs and objectives of the business enterprise. The management of capital funds includes the expenditure, conservation, and investment of the enterprise's capital. NCERT Solutions for Class 12 Business Studies Chapter 9 Financial NCERT Solutions Class 12 Business Studies Chapter 9 Financial Management are available free for the students. Download exercise solutions PDF in an easy way. NCERT Solutions for Class 12 Business Chapter 9 NCERT Class 12 Business Studies Chapter 9: A Complete Resource for Mastering Financial Management. NCERT Solutions Class 12 Chapter 9 is to the point prepared solutions to the NCERT textbooks problems. These solutions are designed to prepare the students to score the best in their tests or exams. Our NCERT solutions explain the entire chapter ... NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Ans: Role of Financial Management Financial management is concerned with the proper management of funds. It involves. (i) Managerial decisions relating to procurement of long term and short term funds. (ii) Keeping the risk associated with respect to procured funds under control. PDF NCERT Solution for Class 12 Business Studies Chapter 9 NCERT Solution for Class 12 Business Studies Chapter 9 - Financial Management = 8,00,000/1,00,00,000 = 8 % On assuming that the company will be operating on the same efficiency, the additional investment of 80,00,000 will have a ROI of 8% which will amount to 6,40,000. The cost of debt will be 8,00,000 which is more than the ROI of 6,40,000. Financial Management class 12 Notes Business Studies CBSE Class-12 Revision Notes and Key Points. Financial Management class 12 Notes Business Studies. CBSE quick revision note for class-12 Business Studies, Chemistry, Math's, Biology and other subject are very helpful to revise the whole syllabus during exam days. The revision notes covers all important formulas and concepts given in the chapter. Financial Management Extra questions for Financial Management - Business Studies (BST) Class 12. Worksheet questions are the type of Extra questions related to Financial Management. These worksheet questions are designed by the experts for the preparation point of view. It is important for the students of Commerce to go through and practice these questions. PDF Financial ManageMenT planning. Financial planning takes into consideration the growth, performance, investments and requirement of funds for a giv. n period. Financial planning includes both short-term as well as long-term. planning. Long-term planning relates to long term growth and i. vestment. It focuses on capital expenditure p. Financial Management 11. Importance of Financial Planning. (i) It facilitates collection of optimum funds. (ii) It helps in fixing the most appropriate capital structure. (iii) Helps in investing finance in right projects. (iv) Helps in operational activities. (v) Base for financial control. (vi) Helps in proper utilisation of finance. NCERT Solutions for class 12 Business studies Financial Management NCERT Solutions for class 12 Business studies Financial Management. 5. Financial leverage is called favourable if. (a) Return on investment is lower than the cost of debt. (b) ROI is higher than the cost of debt. (c) Debt is easily available. (d) If the degree of existing financial leverage is low. NCERT Solutions for Class 12 Business Studies a. Describe the role and objectives of financial management for this company. Ans. Role of Financial Management: A financial management decision has a bearing or the financial health of business by affecting the following: Size and composition of fixed assets: 'S' Ltd requires ₹ 5000 crores, which is a huge sum. Important CBSE Questions on Class 12 Chapter 9 Effective Preparation for Class 12 Business Studies Chapter 9: Important Questions and Answers. Very Short Questions and Answers (1 or 2 Marks Questions) 1. 'Reliable Transport Services Ltd.' specializes in transporting fruits and vegetables. It has a good reputation in the market as it delivers the fruits and vegetables at the right time and ... PDF CASE STUDY FINANCIAL MANAGEMENT ISBN 10: 0230-32944-6 ISBN 13: 978-0230-32944-7. Published by Amitabh Nagpal for Macmillan Publishers India Ltd, 3A, 5th Floor, DLF Corporate Park, Gurgaon 122 002 (Haryana), India. Typeset by Arpit Printographers [email protected]. , Dilshad Garden, Delhi 110 095This book is meant for e. NCERT Solutions for Class 12 Business Studies chapter 9 Multiple Choice Questions. 1. The cheapest source of finance is. (a) debenture (b) equity share capital. (c) preference share (d) retained earning. Answer (d) Retained earning is the cheapest source of finance. 2. A decision to acquire a new and modern plant to upgrade an old one is a. (a) financing decision (b) working capital decision. Financial Management Class 12 Important Questions with Solutions PDF 2 Reason: Another valid and solid reason to use the PDF file is that students can take advantage of the solutions given in the PDF file of Class 12 Financial Management Important Questions. The solutions are highly accurate and follow the exam pattern of the CBSE Board. 3 Reason: Build habits, and master methods to answer and boost confidence ... 397-first class F24 (pdf) 9/9/2024 1 Today's Class Overview of course objectives Expectations and requirements Maximize your learning experience Start Ch. 13: Non-Financial and Current Liabilities For next class: - Set up the WileyPlus course - Review Ch. 13 and Ch. 14 1 It continues the comprehensive study of financial reporting topics in BU387, including liabilities (e.g., leases, pensions), equity, EPS, deferred ... assignment essay homework paper phd report resume review speech