CBSE Class 12 Business Studies Financial Management Worksheet Set A

Business Finance- It refers to funds required for carrying out business activities.

Financial Management- It includes decisions relating to procurement of funds, investment of funds in long term and short term assets and distribution of earning to the owner.

Objective of Financial Management:-Maximize wealth of equity shareholders which means maximizing the market price of equity shares.

Financial Decisions-

A) Investment decision-It is concerned with investment of firms fund in different assets (Fixed assets and current assets)

Long Term or Capital Budgeting Decision- Related to decisions taken to invest in the fixed assets.

Factors Affecting –

1. Cash flow positions 2. Return on investment 3. Investment criteria.

B) Financing decision- It deals with determination of sources of finance, amount to be raised from each source.

Factors Affecting-

1. Cost 2. Risk 3. Tax Rate 4. Cash flow position

C) Dividend decisions- It refers decisions related to amount of profit to be distributed among shareholders and amount of profit to be retained in the business for financing.

factors affecting-

1. Amount of earning 2. Stability of earning

3. cash flow position 4. Taxation policy

Financial planning- is the process of estimating the funds requirement, specifying the sources of fund and utilizing them in an optimum manner.

The objective of financial Planning-

1. To ensure availability of funds whenever required

2. To ensure unnecessarily finance is not raised.

Capital Structure – Refers to proportion of debt and equity used for financing the operations of business. 

Factors Affecting–

1. Cash flow positions 

2. Return on investment

3. Tax rate 

4. Cost of Debts

5. Control 

6. Risk

7. Stock market condition.

Fixed Capital – it refers to money invested in the fixed assets, which is to be used over a long period of time.

Factors Affecting –

1. Nature of business 

2. Scale of operations

3. Choice of technique 

4. Growth prospectus

Working Capital – it refers to money invested in the current assets, which is to be used over a short period of time.

factors affecting – 1-Nature of business 2- Scale of operations 3-Production cycle 4-Seasonal factors.

Very Short Questions Answers

Question. Management has to decide whether a new and modern plant should be replaced with the old one. Which type the financial decision is it.
Answer: Investment Decision.

Question. A company wants to establish a new unit in which a machinery of worth Rs.10 lakhs is involved. Identify the type of decision involved in financial management?
Answer: Capital Budgeting decision or 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. What is meant by ‘Financial Risk’?
Answer: Financial risk refers to inability tomeet fixed financial charges like interest payment, preference dividend and repayment obligations.

Question. What kind of decisions involves distributions of profit to shareholders?
Answer: Dividend Decisions.

Question. Which type of dividend policy should be followed by a company having growth opportunities?
Answer: Conservative dividend policy, i.e. such company should pay less dividend.

Question. Identify, why the requirement of Fixed Capital for a trading concern are different from that of a manufacturing organization.
Answer:Trading concern requires less fixed capital as compared tomanufacturing organization because
trading concern requires relatively much less investment in fixed assets.

Question. Ankit adopted a new policy in his business: Purchase computer on credit and sell them for cash.Will it affects the requirement of working capital?
Answer: Yes, it will reduce the need of working capital as there are no debtors due to cash sales and there is less investment in inventory due to credit availed.

Question. For optimal procurement of funds, a finance manager identifies different available sources and compares those in term of cost and associated risks. Identify and define the concept highlighted in the above lines.
Answer: The concept is financial management and is concerned with management of flow of funds and involves decisions relating to procurement and investment of funds, in long term and short term assets and distribution of earning to the owner.

Question. How do ‘Growing Opportunities’ as a factor affect dividend decision? State.
Answer: Companies having growing opportunities in near future declare lesser dividend as compared to companies, which do not have any growth plans.

Question. State how ‘Growth Prospects’ affect the working capital requirements of a company?
Answer: The firms which have sufficient possibilities of growth prospects in future require more working capital. However, for companieswith lesser prospects, lessworking capital is needed.

Short Answer Type Questions

Question. What are the objectives of financialmanagement for an organization? Give any three reasons in support of your answer.
Answer: 1. Financial management helps in determination of total funds required.
2. Helps in allocation of fund for fixed assets and current assets.
3. Helps in determination of sources to raise fund for the organization.
4. Wealth maximization

Question. What do you mean by Financial planning? Explain its two importances.
Answer: Financial planning is the process of estimating the funds requirement, specifying the sources
of fund and utilizing them in an optimum manner.
Importance of financial Planning-
1. To ensure availability of funds whenever required–financial needs are anticipated and then the sources of availability of finance are allocated.
2. It helps the company to prepare for the future-It forecasts whatmay happen in future under different business situations and decide what must be done in each situations.

Question. Financial decision is concerned with selection of fixed assets in which funds will be invested by the business? Identify the decision and explain any three factors affecting the decision.
Answer: Long term Investment decision/ Capital Budgeting Decision-It is concerned with investment of firm’s fund in different fixed assets like buying of machinery.
Factors Affecting –
1. Cash flowpositions of the company-Before considering an investment option, business must carefully analyse the net cash flow expected from the investment during the life of
the investment. Investment should be made if net cash flow is more.
2. Return on investment-Investment should be done in the projectswhich earn the higher rate of return. It should be calculated on the basis of expected return of the projects.
3. Investment criteria-Before taking decision, each investment opportunity must be compared by using the various capital budgeting techniques. These techniques involve calculation of rate of return, cash flow during the life of investment, cost of capital etc.

Question. ‘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 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 Rs.40 lakhs from IDBI and is bound by certain restrictions on the payment of dividend according to the terms of loan in agreement.
The above discussion about the company leads to various factors which decide howmuch of the profits should be retained and how much has to be distributed by the company.
Quoting the lines from the above discussion identity and explain any four such factor.
Answer: Dividend Decision- It refers decisions related to the amount of profit to be distributed among shareholders and amount of profit to be retained in the business for further growth of the business..
Factors affecting dividend decision:
(i) Stability of Earnings: It affects dividend decision as a company having stable earnings is in a position to declare higher dividends.
(ii) Cash Flow Position: Agood cash flow position is necessary for declaration of dividend.
‘There is availability of enough cash in the company’.
(iii) Growth prospects: If a company has good growth opportunities, it pays out fewer dividends. ‘Good prospects for the growth in the future’.
(iv) Shareholders’ Preferences: Shareholders’ preference is kept in mind by the management before declaring dividends. ‘It may have shareholders who prefer to receive regular
income from their investments’.

Long Answer Type Questions

Question. What is the Capital structure? Explain any five factors affecting the choice of capital structure?
Answer: Capital structure refers to mix sources of long term finance. Sources of finance include Share capital Borrowed fund and Retained earnings. The appropriate proportion of funds is made in such a manner that it can give more benefit or return to the shareholders.
Factors affecting the choice of capital structure
1. Cash Flow Position: Size of projected cash flows must be considered before issuing debt, to ensure that it has sufficient cash buffer after meeting its fixed cash obligations.
2. 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.
3. Debt Service Coverage Ratio (DSCR): Debt Service Coverage Ratio takes care of the deficiencies referred to in the Interest Coverage Ratio (ICR).
4. Return on Investment (RoI): If the RoI of the company is higher, it can choose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater.
5. Cost of debt: Afirm’s ability to borrow at a lower rate increases its capacity to employ higher debt. Thus, more debt can be used if debt can be raised at a lower rate.

Question. What do you mean byWorking capital? Explain any four factors affecting the requirement of working capital.
Answer: Working capital refers to the amount which is invested in current assets. This fund also needed for payment of daily expenses, payment of current liabilities etc. this investment facilitate smooth business operation.
Factors affecting the requirement of working capital .
1. Nature of business:- the requirement of working capital depends on the nature of business. Manufacturing business requires more amount of working capital because it takes lot of time in converting raw materials into finished goods while trading business requires less amount of working capital.
2. Scale of operation: - Business operating on larger scale requiremore funds to maintain the high quantum of inventory, debtors or meet day to day expenses as compared to small scale business.
3. Business Cycle: - Different phases of business cycle affect the requirement of working capital by a firm. In case of boom, there is increase in production and scales leading to the increased requirement for working capital whereas the requirements for working capital reduce during depression.
4. Seasonal factors: - many businesses may have high level of activity during specific period of time which may be referred as season time. Therefore, during peak season the level of activity is high leading to increased need of working capital as compared to the capital during lean period.

Question. Which decision is concerned with rising of finance using shareholders’ funds or borrowed funds? Identify and describe the financial decision involve in this decision. Explain any four factors affecting that decision.
Answer: Financing decision:- This decision concerned with raising of finance using shareholders fund or borrowed fund. It involves identification of various sources of finance and the quantum of finance to be raised from long term and short term sources.
Factors affecting the financing decision.
1. Cost: - cost of raising fund influences the financing decisions. A prudent financial manager selects the cheapest source of finance.
2. Risk: - Debt capital is most risky and from the point of view of risk it should not be used.
3. Floatation cost: - From the point of view of floating costs, retained profit is the most appropriate source. Therefore, it should be made.
4. Cash Flow position: - If the cash flow position of the company is good, the payment of interest on the debt and the refund of capital can be easily made. Therefore, in order to advantage of cheap finance, debt can be given priority.

Question. What do you mean by Fixed capital? Explain any four factors affecting the requirement of fixed capital.
Answer: Fixed capital refers to the amount which is invested in fixed assets of the business enterprise.
This capital is used to acquire Land & Building, Plant and Machinery, Furniture etc. This capital is raised from the long term sources of finance.
Factors affecting the requirement of fixed capital.
1. Nature of business:- The requirement of fixed capital depends on the nature of business.
Manufacturing business requires heavy amount of fixed capital to invest in the fixed assets like- Land&Building, Plant and Machinery, Furniture etc, whereas trading concern business require less capital.
2. Scale of operation:- Business operating on larger scale requires larger amount of fixed capital as they need heavy and bigger machinery and equipments. However, firms
operating at small scale need relatively lesser fixed capital.
3. Choice of Technique- Production technique adopted by business also influences the requirement of fixed capital. Companies using capital-intensive technique require more
fixed capital as larger investment is needed in the plant and machinery as it relies less on manual labour.
4. Growth prospects- Companies with growth plans in future need more fixed capital as more investment in the plant and machinery is needed to increase the production capacity.
In other situation requires less fixed capital.

Important Questions for NCERT Class 12 Business Studies Financial Management

Question.. 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
d. current liability

Answer : A

Question. What out of the following, financial planning helps to achieve?
(a) Arrangement of material
(b) Financial control
(c) Arrangement of machinery
(d) All of above

Answer : B

Question. Which out of the following happens to be a financial decision?
(a) Investment decision
(b) Financing decision
(c) Dividend decision
(d) All of these

Answer : D

Question. The meaning of capital structure relates to the percentage of ________ sources.
(a) Long-term
(b) Medium term
(c) Short-term
(d) Current

Answer : A

Question. Investment decision is also called
(a) Capital Budgeting decision
(b) Working capital decision
(c) Current Assets decision
(d) None of the above

Answer : A

Question. Capital Structure indicates ratio between
(a) Assets and liabilities of the firm
(b) Current Assets and Fixed Assets
(c) Debt and equity in the total capital
(d) Profit and Revenue of the firm

Answer : C

Question. Capital Structure is called ________ .
(a) Quantitative aspect
(b) Qualitative aspect
(c) Both (a) and (b)
(d) None of these

Answer : B

Question. ________ is not included in owner’s capital?
(a) Equity share capital
(b) Long-term debt
(c) Preference share capital
(d) Retained profit

Answer : B

True or False

1. Flotation cost is the cost involved in the issue of shares and debentures. (True) 

2. Flotation cost includes the cost of discount of issue of shares. (False)

3. If existing shareholders want to exercise complete control them they should prefer debt.(True)

4. If existing share holders can share the control then they may go for debt.(False)

5. Investment in current assets for longer duration is called fixed capital. (False)

6. Nature of business is an important factor to decide requirement of fixed capital. (True)

7. Fixed capital finance depends on the short term sources of finance.(False)

8. If a company followslabourintensive technique in production, they will go for less requirement of fixed capital.(True)

9. Firm having higher degree of operating efficiency require higher amount of working capital.(True)

10. Higher Inventory to be maintained when more working capital is required. (True)

11. Working capital refers to excess of current assets over current liabilities. (True)

12. Gross working capital refers to the investment in all the current liabilities. (False)

13. Net working capital refers to excess of current liabilities over current assets. (False)

14. Capital structure means the portion of current assets and current liabilities. (False)

15. Financial leverage refers to the portion of debt in the overall capital. (True)

Key points to remember for Chapter 09 Financial Management

• Financial Management :
It is concerned with decisions related to procurement and utilisation of fund.

• Objectives of Financial Management :
The primary objective of financial management is to maximise shareholders’ wealth. It means maximisation of the market value of equity shares. It can happen through appropriate decision making. The secondary objectives include profit maximization, ensuring effective utilisation of funds, availability of funds at reasonable costs, liquidity, avoidance of idle finance, etc.

• Role of Financial Management : The role of financial management cannot be overemphasised, since it has a direct bearing on the financial health of a business. The importance of financial management can be judged by the fact, that almost all items in the financial statements of a business are affected directly or indirectly through some financial management decisions. Some of the examples are :
(i) Size and composition of fixed assets by the business.
(ii) Quantum of current assets.
(iii) Amount of long term and short term funds to be used
(iv) Breakup of long term financing into debt, equity, etc.
(v) All items in the Profit and Loss Account.

• Types of Financial Decisions :
(i) Investment Decision : It is concerned with investment of firm’s funds in different assets.
(a) A long-term investment decision in fixed assets is called as capital budgeting decision.
(b) A short-term investment decision in cash, inventory, and debtors is called as working capital decision. Factors affecting capital budgeting decision are :
(a) Cash flows of the project.
(b) Rate of return.
(c) Investment criteria.

(ii) Financing Decision : It deals with the quantum of finance to be raised from various long-term sources viz. debt and equity. Factors affecting Financing Decision are :
(a) Cost of funds.
(b) Cost of floatation.
(c) Cash flow position of business.
(d) Control consideration.
(e) Capital market situation.
(f) Fixed operating cost.
(g) Risk.
(h) Return on investment.
(i) Tax rate.
(j) Flexibility.
(k) Regulatory frame work.

III. Dividend Decision : It determines how much of the profits are to be distributed as dividends and how much to be retained for the investment requirement. Factors affecting dividend decisions are :
(a) Amount of earnings.
(b) Stability of earnings.
(c) Stability of dividends.
(d) Growth opportunities.
(e) Cash flow position.
(f) Shareholders’ preference.
(g) Taxation policy.
(h) Stock market reaction.
(i) Access to capital market.
(j) Legal constraint.
(k) Contractual constraints.

• Features of Fixed Capital/Investment decision/Capital budgeting decision :
(i) Long-term growth and impact.
(ii) Large amount of funds involved.
(iii) Risk involved.
(iv) Irreversible decision.

• Factors affecting the requirement of fixed capital :
(i) Nature of business.
(ii) Scale of operation.
(iii) Choice of technique.
(iv) Technology upgradation.
(v) Growth prospects.
(vi) Diversification.
(vii) Financing alternatives.
(viii) Level of Collaboration.

• Working Capital = Current Assets – Current Liabilities

• Factors affecting the working capital requirements :
(i) Nature of business.
(ii) Scale of operations.
(iii) Business cycle.
(iv) Seasonal factors.
(v) Production cycle.
(vi) Credit availed.
(vii) Credit allowed.
(viii) Operating efficiency.
(ix) Availability of raw material
(x) Growth prospects.
(xi) Level of competition.
(xii) Inflation.

• Financial Planning : It is the process of estimating the fund requirement of a business and specifying the sources of funds.

• Objectives of Financial Planning :
(i) To ensure the availability of funds whenever required.
(ii) To ensure that the firm does not raise resources unnecessarily.

• Importance of Financial Planning :
(i) Prepares for future challenges.
(ii) Avoids business shocks and surprises.
(iii) Co-ordinates various business functions.
(iv) Eliminates wasteful efforts.
(v) Links present with future.
(vi) Links investment with financing decision.
(vii) Facilitates financial control.

• Capital Structure : It refers to the mix between owners funds i.e., equity and borrowed funds raised by a company i.e., Debt/Equity Capital.

• Trading on Equity : It refers to an increase in profit earned by the equity shareholders due to the presence of fixed financial charges like interest.

• Factors determining the capital structure :
(i) Cash flow position
(ii) Interest Coverage Ratio (ICR)
(iii) Debt Service Coverage Ratio (DSCR) (iv) Return on Investment (ROI)
(v) Cost of debt
(vi) Tax rate
(vii) Cost of equity
(viii) Floatation costs
(ix) Risk consideration
(x) Flexibility
(xi) Control
(xii) Regulatory framework
(xiii) Stock market condition
(xiv) Capital structure of other companies

Important Questions for NCERT Class 12 Business Studies Financial Management

Question. The amount of fixed assets is decided by
(a) Working capital concept
(b) Fixed capital
(c) Investment decision
(d) Financing decision

Answer : B

Question. The amount of current assets is decided by
(a) Working capital concept
(b) Fixed capital
(c) Investment decision
(d) Financing decision

Answer : A

Question. Positive leverage effect brings
(a) Gain for equity shareholders
(b) Loss for equity shareholders
(c) Both (a) and (b)
(d) None of the above

Answer : A

Question. Current assets of a business firm should be financed through: U
a. current liability only
b. long-term liability only
c. both types (i.e. long and short term liabilities)
d. shareholders’ funds

Answer : A

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

Answer : A

Question. Return on investment is computed as? U
a. Total Investment X EBIT
b. EBIT X EBT
c. EBIT / Total Investment
d. EBT / Total Investment

Answer : C

Question. Gross working capital refers to: U
a. Investment in Fixed Assets
b. Investment in Current Assets
c. Investment in Bank.
d. All of the above

Answer : B

Question. Companies with a higher growth pattern are likely to:
(a) Pay lower dividends
(b) Pay higher dividends
(c) Dividends are not affected by growth considerations
(d) None of the above

Answer : A

Question. 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

Answer : B

Question. What is meant by Financial Management'?
Answer. It refers to that branch of management which is concerned with the effective acquisition and use of money.

Question What is meant by "Capital Structure'? Explain any two factors that affect the capital structure of a company.
Answer. Meaning: Capital structure refers to relative proportion of different sources of long-term finance.
Determining Factors: Some of the chief factors affecting the choice of the capital structure t the following
(i)Cash Flow Position: While making a choice of the capital structure, the future cash flow position should be kept in mind. Debt capital should be used only if the cash flow position is really good because a lot of cash is needed in order to make payment of interest and refund of capital.
(ii) Cost of Debt: The capacity of a company to take debt depends on the cost of debt. In case rate of interest on the debt capital is less, more debt capital can be utilized and vice versa.

Question. What is meant by investment decision?
Answer. It refers to deciding about how the funds are invested in different assets so that they are able to earn the highest possible return for the investors.

Question. Give the meaning of 'Investment' and Financing decisions financial management.
Answer. (i) Investment Decision: It refers deciding about how the funds invested assets that they are able earn the highest possible return are obtained for the investors.
(ii) Financing Decision: It refers the determination how the total funds required the business will be obtained from various long-term sources. Long-term financial sources chiefly include equity share capital, preference share capital, retained long-term loan, etc.

Question. What is meant by 'Capital Structure"?
Answer. It refers to the proportion of long-term sources of funds.

Question. Explain any three factors that affect the working capital requirements of a company.
Answer. Factors affecting the Requirements of Working Capital:
(i) Scale of Operations. There is a direct link between the working capital and the sale d operations. In other words, more working capital is required in case of big organisation while less working capital is needed in case of small organisations.
(ii) Business Cycle: The need for the working capital is affected by various stages of the business cycle. During the boom period, the demand increases and sales also increase. Therefore, more working capital needed. On the contrary during period depression, the demand declines and affects both the production and sales of goods. Therefore in such a situation less working capital is required.
(iii)Production Cycle: Production cycle means time the involved converting material finished product. The longer this period, more will time which capital remain blocked in raw material and semi-manufactured products. Thus, more working will be needed. On the contrary, where period cycle is little, less working capital will be needed.

Case Studies – (Chapter - 9) Financial Management
 

Question. ‘Indian Logistics’ has its own warehousing arrangements at key locations across the country. Its warehousing services help business firms to reduce their overheads, increase efficiency and cut down distribution time. State with reason, whether the working capital requirements of ‘India Logistics’ will be high or low.
Answer. Low, as it is a service industry, which usually do not have to maintain inventory.

Question. ‘Adwitiya’ is a company enjoying market leadership in the food brands segment. Its portfolio includes three categories in the Foods business namely Snack Foods, Juices and Confectionery. Keeping in the 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:
1. 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.
2. Why the shareholder’s is of the company like to gain from the issue of debt by the company?
Answer.
1. As a financial manager of the company, I will opt for debt to raise the required amount of capital. I
support my decision by giving the following reasons:
a) Interest coverage ratio:
b) Tax rate:
2. The shareholders of the company are likely to gain from the issue of 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. Cost of debt is less than cost of equity. Still a company cannot go with entire debt. Why?
Answer. Because debt is more risky for a business, since payment of interest and return principal amount is compulsory for the business. Any default in meeting these commitments may force the business to go into liquidation. That is, increased use of debt increases financial risk of a business (the chance that a firm would fail to pay interest on debt and the principal amount).

Question. 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:
1. Identify the type of financial service that Subhash has offered to Bhuvan.
2. Briefly state any four points highlighting the importance of the type of financial service identified in
part (a)
Answer.
1. Financial planning is the type of financial service that Subhash has offered to Bhuvan.
2. The four points highlighting the importance of financial planning are as follows:
a) It ensures smooth running of a business enterprise by ensuring availability of funds at the right time.
b) It helps in anticipating future requirements of a funds and evading business shocks and surprises.
c) It facilitates co-ordination among various departments of an enterprise like marketing and production function, through well-defined policies and procedures.
d) It increases the efficiency of operations by curbing wastage of funds, duplication of efforts, and gaps in planning.

Question. 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 answer. 
Answer. Less working capital is required as service industries which usually do not have to maintain inventory require less working capital.

Question. 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 year, 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:
1. Name the different kinds of financial decisions taken by the company by quoting lines from the paragraph.
2. 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.
Answer.
1. The different kinds of financial decisions taken by the company are as follows:
♦ Investment decision:
♦ Financing decision:
♦ Dividend decision:
2. Yes, the financial management team of the company has been able to achieve its prime objective i.e. wealth maximization of the shareholders by maximizing the market price of the shares of the company.

Question. 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 was 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 week. She wanted to undertake
modernization 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 Rs. 50 lakh would be required for undertaking the modernization and expansion programme. He also informed her that her stock market was going through a bullish phase.
1. Keeping the above considerations in mind, name the source of finance Shalini should not choose for financing the modernization and expansion of her food processing business. Give one reason in support of your answer.
2. Explain any two other factors, apart from those stated in the above situation, which Shalini should keep in mind while taking this decision.
Answer.
1. Debt
Any one reason
a) Due to weak cash flow position, the firm may not be able to honour fixed cash payment obligations.
b) Increased fixed operating cost will increase the business risk therefore debt should not be issued as it further increases the financial risk.
c) The stock market condition being bullish, the investors will prefer to buy equity shares.
2. Other factors which Shalini would keep in mind are:
a) Return on Investment
b) Tax rate

Question. 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.’
1. 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.
2. “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.
Answer.
1. 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. 
2. It’s true that, “ With an increase in the investment in fixed assets, there is a commensurate increase in the working capital requirements,” Like in the above case, Wooden Peripheral Pvt. Ltd. is planning to investment in new showrooms. Consequently, its requirement of working capital will increase s 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 I Mumbai on lease so it will have to pay rentals.

Question. Krishna Ltd. is manufacturing steel at its plant at Noida. Due to economic growth, the demand for steel is also growing. The company is planning to set up a new steel plant at Gurgaon.
It needs Rs. 800 crores to start the new plant. It decides to raise Rs. 300 crores through debentures, Rs. 200 crores through long-term loan from banks and Rs. 200 crores by issue of equity share to the public. It decided to finance the remaining amount by utilizing its reserves and surplus.
1. State the importance of financial planning for this company.
2. What is the capital structure of this company? Explain.
3. Identify the financial decision involved when the company decides to raise Rs. 800 crores from different sources of funds.
4. How will the dividend decision of Krishna Ltd. be affected? Explain.
Answer.
1. Financial planning will help the company in avoiding business shocks and surprises. It will reduce waste and duplication of efforts.
2. Capital structure refers to the mix between owner’s funds and borrowed funds. It is calculated as debt equity ratio i.e., Debit. Equity
For Krishna Ltd.
Debt = Debentures + Long term loans from banks = 300 + 200 = Rs. 500 crores.
Equity = Share capital + Reserves and surplus (or retained earnings)= 200 + 100 = Rs. 300 crores.
Therefore, debt equity ratio = 500 = 1.67: 1300
3. Financing decision
4. Since the company has growth opportunities of setting up a new steel plant at Gurgaon, it retains Rs. 100 crores out of profits to finance the required investment. So, it is likely to pay fewer dividends. However, since the company makes more debt financing than funding through equity, it implies that cash flow position of the company is strong. Therefore, it can pay higher dividend.

Question. Amar is doing his transport business in Delhi. His buses are generally used for the tourists going to Jaipur and Agra. Identify the working capital requirement of Amar giving reason in support of your answer. Further Amar wants to expand and diversify his Transport business.
Enumerate any four factors that will affect his fixed capital requirements.
Answer. Working capital requirements of Amar would be less as it is a SERVICE industry.
Factors which will affect his fixed capital requirements are:
1. Scale of operations
2. Financing alternatives
3. Growth prospects
4. Diversification

Question. Yogesh, a business man is engaged in publishing and selling of Ice-creams. Identify the working capital requirement of Yogesh giving reason in support of your answer.
Answer. Working capital requirements of Yogesh would be less as it is a TRADING business.

Question. 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:
1. 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.
2. Comment upon the likely dividend policy of the company this years by stating any two reasons in support of your answer.
Answer.
1. Computer Tech Ltd. has been paying dividends at high rate to its shareholders over the past five years because of the following reasons:
♦ Earnings:
♦ Cash flow position:
♦ Access to capital market:
2. This year the company is likely to follow a conservative dividend policy because of the following reasons:
a) The cash flow position of the company is not god and dividends are paid in cash.
b) 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. ‘Ganesh Steel Ltd.’ is a large and credit-worthy company manufacturing steel for the Indian market. It now wants to cater to the Asian market and decides to invest in new hi-tech machines.
Since the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost the company decides to tap the money-market.
1. Name and explain the money-market instrument the company can use for the above purpose.
2. What is the duration for which the company can get funds through this instrument?
3. State any other purpose for which this instrument can be used.
Answer.
1. Commercial Paper:
It is an unsecured promissory note issued by large and credit worthy companies to raise short terms funds at lower rates of interest than the prevailing market rates.
2. 15 days to one year.
3. It can also be used for seasonal and working capital needs.

Question. Manish is engaged in business of garments manufacturing. Identify the working capital requirement of Manish giving reason in support of your answer.
Answer. Working capital requirements of Manish would be less as it is a MANUFACTURING business. So raw material needs to be converted into finished goods before any sales can become possible.

Question. The directors of a manufacturing company are thinking of issuing Rs. 20 crores worth additional debentures for expansion of their production capacity. This will lead to n increase in debt equity ratio from 2: 1 to 3: 1. What are the risks involved in it? What factors other than risk do you think the directors should keep in view before taking the decision? Name any four factors.
Answer. Higher use of debt increases the fixed financial charges of a business because payment of interest and return of principal amount is compulsory. Any default in meeting these commitments may force the business to go into liquidation. As a result, increased use of debt increases the financial risk of a business. Financial risk is the chance that a firm would fail to meet its payment obligations. Other factors affecting this decision are:
1. Cost
2. Cash flow position
3. Control
4. Return on investment (ROI)

Question. 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. Identify the decision that Ankit will have to take and also discuss any five factors which help him in taking this decision.
Answer. Dividend decision
Factors affecting dividend decision.
1. Earnings:
2. Stability of earnings:
3. Stability of dividends:
4. Growth opportunities:
5. Cash flow position:

Question. 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: 
1. Identify the type of investment decision taken by Manoj by deciding to set up a separate manufacturing unit for producing jute products.
2. State any two factors that he is likely to consider while taking this decision.
Answer.
1. Capital budgeting decision has been taken by Manoj.
2. The factors affecting Capital Budgeting Decision are as follows:
a) Cash inflows:
b) Rate of return:

Question. ‘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’re 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 Rs. 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.
Quoting the lines from the above discussion identify and explain and four such factors.
Answer. Factors affecting dividend decision: (Any four) 
1. Stability of earnings It has been consistently earning good profits for many years’. Stability of earnings affects dividend decision as a company having stable earnings is in a position to declare higher dividends.
2. Cash Flow position ‘There is available of enough cash in the company’. A good cash flow positions is necessary for declaration of dividend.
3. Growth Prospects ‘Good prospects for growth in the future.’ If a company has good growth opportunities, it pays out less dividend.
4. Shareholders’ preference ‘It has many shareholders who prefer to receive regular income from their investments.’ Shareholder’s preference is kept in mind by the management before declaring dividends.
5. Contractual constraints ‘It has taken a loan of Rs. Rs. 40 Lakhs from IDBI and … agreement.’
Which taking dividend decision, companies keep in mind the restrictions imposed by the lenders in the loan agreement.

Question. Shubh Ltd. is manufacturing 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. The company has decided to set up a new steel plant to cash on the increased demand. It is estimated that it will require about Rs. 2000 crores to set up and about Rs. 500 crores of working capital to start the new plant.
a) State the objective of financial management for this company.
b) Identify and state the decision taken by the finance manager in the above case.
c) State any two common factors affecting the fixed and working capital requirements of Shubh Ltd.
Answer.
a) Objectives of financial management of this company are:
1. To ensure availability of sufficient funds from different sources at reasonable costs.
2. To ensure effective utilization of such funds.
3. To ensure safety of funds procured by creating reserves, reinvesting profits, etc.
4. Value: Maximization of shareholders’ wealth.
b) Investment decision
It relates to how the firm’s funds are invested in different assets – fixed assets and working capital.
c) Factors affecting fixed and working capital requirements of Shubh Ltd.:
1. Nature of business:
2. Scale of operations:

Question. Adhi 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 in known as a pioneer in the activity of Agarbati 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:
1. Identify of the above case:
2. Identify the three factors mentioned in the paragraph which are likely to affect the working capital requirements of his business.
Answer.
1. Investment decision has been taken by Adhi. 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
2. The three factors mentioned in the paragraph which are likely to reduce the working capital requirements of his business are as follows:
a) Available of raw material:
b) Production cycle:
c) Credit availed:

Question. In a company profits are high and in future less scope of expansion exists. The company has decided to distribute less amount of share of profits to its shareholders.
1. Identify of share of profits to its shareholders.
2. State any one value which is affected by the company’s decision.
Answer.
1. Dividend decision
This decision involves how much of the profit earned by the company (after paying tax) is to be distributed to the shareholder and how much of it should be retained in the business.
2. Value affected: Shareholders’ wealth will not be maximized.

Question. 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 computerization 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:
1. How is the decision to undertake computerization of owned warehouses likely to affect the fixed capital requirements of its business?
2. Name any two sources that company may use to finance the implementation of this plan.
Answer.
1. The decision to undertake computerization 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 up gradation.
2. The company may use retained earnings and take loans from financial institutions to implement this plan.

Question. 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 305 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:
1. State any one reason because of which the company has been able to declare high dividend by quoting line from the paragraph.
2. Why do you think small investors are happy with the company for declaring stable dividend?
Answer.
1. Stability in earnings:
“Despite fierce competition in the industry, it has been able to maintain stability in its earnings.”
2. The small investors are happy with the company for declaring stable dividend as they enjoy a regular income on their investment.

Question. 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 area 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:
1. What are the two conditions necessary for taking advantage of trading on equity?
2. 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.
Answer.
1. The two conditions necessary for taking advantage of trading on equity are:
♦ The rate of return on investment should be more than the rate of interest.
♦ The amount of interest paid should be tax deductible.
2. Answer Yourself 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.

Question. ‘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:
1. Identify and explain the type of risk which increases with the higher use of debt.
2. Explain briefly any four factors because of which you think the company has decided to opt for equity capital.
Answer.
1. 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.
2. The factors because of which the company has decided to opt for equity capital are as follows:
♦ Capital market conditions:
♦ Fixed operating cost:
♦ Cash flow position:
♦ Risk