CBSE Class 12 Business Studies HOTs Financial Management

Case Study Based HOTs Class 12 Business Studies

Read the following text and answer the following questions on the basis of the same:

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. 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

Answer : B

Question. In the above case Mr. Ghosh suggested to raised more fund from debt.
Higher debt-equity ratio results in:
A) Lower financial risk
B) Higher degree of operating risk
C) Higher degree of financial risk
D) Higher Earning of profit.

Answer : C

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

Answer : B

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

Answer : D

Read the following text and answer the following questions on the basis of the same:

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.

Question. What is the other name of long term decision?
A) Capital Budgeting
B) Gross working capital
C) Financial management
D) Working Capital

Answer : A 

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

Answer : C

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

Answer : A

Question. The financing decisions are affected by various factors. Which one of the following factor is discussed in the above case?
Choose the correct option.
A) Cash Flow Position of the Company
B) Cost
C) Amount of Earnings
D) Taxation Policy

Answer : B

Very Short Answer type Chapter Financial Management Class 12 Business Studies

Question. 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.
Answer: Investment decision

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

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

Question. Name the source of finance carrying two fixed obligations viz., interest and redemption.
Answer: Debentures

Question. Incase of inflation, does an enterprise need more or less of the working capital?
Answer: More working capital 

Question. Identify the decision taken in financial management which affects the liquidity as well as the profitability of business.
Answer: Capital budgeting decision 

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

Question. 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.
Answer: 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. 

Question. State the factors which affect the capital structure of a company.
Answer: (i) Cash flow ability
(ii) Control
(iii) Floatation cost
(iv) Flexibility
(v) Market condition 

Question. Why is Financial Planning done?
Answer: 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. 

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

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

Question. 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?
Answer: 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. 

Question. 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.
Answer: (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. 

Question. 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.
Answer: 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 

Question. How Stock market conditions affect the capital struceture specially when company is planning to raise additonal capital?
Answer: 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.

Question. How is Interest Coverage Ratio computed? What does it indicate?
Answer: 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. 

Question. How is Return on Investment computed?
Answer: Return on Investment= Earnings before Interest and tax/ Total investment.

Question. When is financial leverage considered favorable?
Answer: Financial leverage is considered favorable when return on investment is higher than the cost of debt.

Question. why does financial risk arise?
Answer: Interest on borrowed fund have to be paid regardless of whether or not you firm has made a profit. Moreover borrowed fund have to be repaid after a fixed time and it carries a charge on assets. This gives rise to financial risk.

Question. How does production cycle effect working capital?
Answer: working capital requirement is higher with longer production cycle.

Question. Enumerate two objectives of financial management?
Answer: (a)To ensure availability of required funds. (b) to see that the firm does not raise resources unnecessarily.

Question. What is the primary objectives of financial management?
Answer: Wealth Maximization.

Question. The board of Directors has asked you to design the capital structure of the company. Explain any sin factors that you would consider while doing so.
Answer: For design the capital structure of the company six factors are as following:- 1) Cash Flow Position. 2) Interest coverage ration(ICR) 3) Debt Service coverage ratio(DSCR) 4) Return on investment (ROI) 5) Cost of debt 6) Tax rate.

Question. Every manager has to take three major decisions while performing the finance function. Explain them.
Answer: A manager take three following major decisions:- 1) financing Decision. 2) Investment Decision. 3) Dividend Decision.

Question. What do you call the capital needed for day to day operations? Explain any 5 factors affecting such capital needs.
Answer: Capital needed for day to day operations is called working capital.{explain any 5 factors affecting such capital needs]. 1) Nature of business 2) Scale of operations 3) Seasonal Factors 4) Production cycle 5) Credit allowed

Question. 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.
Answer: the company can raise necessary finance for the purpose of expansion through the following function. (a) Issue of shares (b) Issue of debentures (c) Loans from banks and financial institutions. (d) Retained earnings.

Question. A capital budgeting decisions is capable of changing the financial fortune of a business. Do you agree? Why or why not?
Answer: hint Yes, I agree to this statement because of the following importance of capitals budgeting decisions. (a) long term growth and effects. (b) Large amt of funds involved (c) Risk involved (d) Irreversible decisions.

Question. Are the share holders of a company likely to gain with a debt component in the capital employed ? Explain with the help of an example?
Answer: The shareholders of a company are very likely to gain with debt component in the capital employed by way of trading On equity as it increases the earning per share(EPS) of the share holders[( Explain trade on equity with one example)].

Question. state whether the working capital requirements of business manufacturing the following items are big or small. Justify your statement. (a) Coolers (c) Sugar (b)bread (d) Locomotives (e) Furniture manufacturing against orders.
Answer: Requirements of working capital for the mentioned business will be: (a) Bread Requirements of working capital will be less because it has quick cash turnover. (b) Sugar;- working capital required for manufacturers will be more as ration of raw material cost to total cost is more. (c) Coolers:- working capital required for manufacturers of cooler will be more because it is a seasonal product. (d) Furniture:- Requirements of working capital for a manufacturer of furniture manufactured against specific order is less as it doesn’t requires large stock. (e) Motor car;- Requirements of working capital for a manufacturer of locomotives will be more because gestation period is more.

Question. What do you mean by flotation cost?
Answer: Cost uncured for raising funds.

Question. Name any 2 sources of long term fund?
Answer: (a) Debt. (b) Equity

Question. What is Business Finance?
Answer: Money required for carrying out business activities is called business finance.

Important Exam Questions for NCERT Class 12 Business Financial Management

Short Answer type Chapter Financial Management Class 12 Business Studies