CBSE Class 12 Business Studies Financial Management HOTs Set A

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Ques 1: A company wants to establish a new unit in which a machinery worth Rs.10 lakhs is involved. Identify the type of decision involved in financial management.

Ans: Investment decision


Ques 2: A decision is taken to raise money for long term capital needs of the business from certain sources. What is this decision called ?

Ans: Financing decision 


Ques 3: A decision is taken to distribute certain parts of the profit to shareholders after paying tax. What is this decision called?

Ans:  Dividend decision


Ques 4: Name the source of finance carrying two fixed obligations viz., interest and redemption.

Ans:  Debentures 


Ques 5: Incase of inflation, does an enterprise need more or less of the working capital?

Ans:   More working capital


Ques 6: Identify the decision taken in financial management which affects the liquidity as well as the profitability of business.

Ans:  Capital budgeting decision 


Ques 7: State why the working capital needs for a service industry are different from that of a manufacturing industry.

Ans:  Nature of business determines the working capital needs . Service industries which usually do not have to maintain inventory require less working capital whereas manufacturing industries have to maintain inventory in the form of R/M to finished goods there require more working capital. 


Ques 8: To avoid the problem of shortage and surplus of funds what is required in financial management? Name the concept and explain its any three points of importance.

Ans:  Financial Planning. Sound financial planning is essential for success of any business enterprise. It is important because-

(i)        It facilitates collection ;of optimum funds.

(ii)       It helps in fixing the most appropriate capital structure .

(iii)      It helps in investing finance in right projects.


Ques 9: State the factors which affect the capital structure of a company.

Ans:     (i)      Cash flow ability

           (ii)      Control

          (iii)     Floatation cost

          (iv)      Flexibility

          (v)      Market condition


Ques 10: Why is Financial Planning done?

Ans: It is done to achieve following two objectives –

(i)    To ensure availability of funds whenever these are required.

(ii)   To see that firm does not raise resources unnecessarily.


Ques 11: Length of Production cycle affects the working capital requirements of an organization. Explain how?

Ans: Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Duration and length of production cycle affects the amount of funds required of R/M and expenses. Consequently the working capital requirement is higher in firms with longer processing cycle  and lower in firms with shorter processing cycle.


Ques 12: ‘Primary objective of financial management is to maximize the wealth of shareholders’. Explain.

Ans: Maximization of shareholders wealth depends upon the market price of shares . Market price of equity share increase if the benefits from a decision exceeds the cost involvcd.


Ques 13: The directors of a manufacturing company are thinking of issuing Rs. 20 lacs additional debentures for expansion of their production capacity. This will lead to an increase in debt-equity ratio from 2:1 to 3:1. What are the risks involved in it?

Ans: The increase in debt-equity ratio from 2:1to 3:1 is subject to following risks-

(a) Interest on debt has to be paid even when the company is not making sufficient profits.

(b) The debebtureholders have charge over the assets of the company so there is threat of solvency.


Ques 14: A businessman who wants to start a manufacturing cocern, approaches you tosuggest him whether the following manufacturing cocern would require large or small working capital: (a) Bread, (b) Coolers, (C) motor Car.

Ans: (a) Bread – Requirement of working capital will be less because it has quick cash turnover.

        (b) Coolers – Require of working capital will be more because it is a seasonal product.

        (c) Motor car – Working capital requirement will be more.


Ques 15: You are the finance manager of a newly established company. The directors of the company have asked you to plan the capital structure of the company. State any four factors that you would consider while planning the capital structure.

Ans: Following factors would be considered for the purpose –

(i) Cash Flow Position

(ii) Interest Coverage Ratio

(iii)  Return on Investment

(iv)  Cost of debt

(v)   Tax rate


Ques 16: How Stock market conditions affect the capital struceture specially when company is planning to raise additonal capital?

Ans: There are two main conditions of stock market i.e., Boom condition and Recession condition.

During recession market is slow and investors also hesitate to take risk so at this time it is advisable to issue borrowed funds as they are less risky and ensure fixed repayment and regular interest. But during boom period, business flourishes and investors also take risk and prefer to invest in equity shares to earn more in the form of dividend.


Ques 17: How is Interest Coverage Ratio computed? What does it indicate?

Ans: Interest Coverage Ratio= Earnings before interest and tax/Interest

Higher ICR means companies can have more of borrowed fund securities whereas lower ICR means less borrowed fund securities.


Ques 18: How is Return on Investment computed?

Ans: Return on Investment= Earnings before Interest and tax/ Total investment


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