CBSE Class 12 Business Studies Financial Management Worksheet Set B

SHORT ANSWER QUESTIONS

Question. State the Current assets in the order of their liquidity.
Answer:
a) cash in hand/bank
b) Marketable securities
c) Bills receivable
d) Debtors
e) Finished goods Inventory
f) Work in progress inventory
g) Raw materials
h) Prepaid expenses

Question. “To avoid the problem of shortage and surplus of funds, what is required in Financial
management? Name the concept and explain four points of importance.
Answer: Financial Planning is required to avoid shortage or surplus of finance.
It is important becausea)
By planning utilization of finance, it reduces waste ,duplication of efforts and gaps in the planning.
b) It helps in coordinating the various business activities such as sales, purchases, production, finance etc.
c) Financial planning helps in setting up standard performance and thereafter it is compared with the actual performance. The deviations, if any are analysed,
Causes found out and corrective action is taken. Thus it is a technique of control.
d) It helps in avoiding shocks and surprises as proper provision regarding shortage or surplus is made in advance by anticipating future receipts and payments.

Question. State how ‘Leasing’ affects the requirement of fixed capital.
Answer: If a company, instead of purchasing the fixed asset, acquires it on lease will require less working capital. Thus the huge funds will not be blocked and by paying the lease rent periodically, the benefit of the Asset can be acquired without owning it The fund saved can be utilised at more significant urgent long term projects.

Question. Explain the role of ‘Operational efficiency’ in the determination of working capital requirement.
Answer: The firm with a better operational efficiency has to invest less in Debtors and stock ( Working capital) becausea)
they convert raw materials quickly into finished goods, and sell them at their earliest. i.e converts stock into sales quickly.
b) Promptly collects debts from debtors and bills receivable.

Question. Discuss how Working capital affects both the liquidity and profitability of a business.
Answer: Short term Investment decisions, also called working capital decisions are concerned with the decisions about the level of cash, inventory and debtors.
Efficient cash management, Inventory management and receivable management are essential ingredients of sound working capital management.
The working capital should be neither more or less than required. Both the situations are harmful. If the amount of working capital is more than required, it will no doubt increase the liquidity but decrease the profitability. Similarly if there is a shortage of working capital, it will face the problem of meeting day to day requirements.
Thus optimum amount of current assets and current liabilities should be determined so that the profitability of the business remains intact and there is no fall in the liquidity.

Question. How does ‘Interest coverage ratio’ affects the capital structure.
Answer: The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligations.
Interest coverage ratio = EBIT/Interest
Higher the ratio, better is the position of the firm to pay its interest obligations, so it should issue debt. On the other hand if it is low, the firm should avoid using debt
as interest is to be paid irrespective of profits.

Question. State four reasons why Capital budgeting decisions are more significant and should be taken rationally.
Answer: The long term Investment decision is called capital budgeting. It is more important due to the following reasonsa)
Long term growth and affects : As capital budgeting decisions involve investment in long term fixed assets, it affects the long term growth.
b) Large amount of funds involved : As huge amount of fund is blocked for a long period, the decision should be taken rationally.
c) Risk involved : As such a decision affects the returns of the firm as a whole, it involves more risk.

Important Questions for NCERT Class 12 Business Studies Financial Management

Question. ________ capital should be preferred while arranging for a long-term finance?
(a) Preference share capital
(b) Equity share capital
(c) Debt or borrowed capital
(d) Retained earning

Answer : B

Question. Keeping in view the high rate of Income Tax the company should give priority to ________ capital.
(a) Debt
(b) Equity
(c) Preference
(d) Owner

Answer : A

Question. The importance of ‘Trading on Equity’ lies in the fact that if the company is earning more profit, it can make use of borrowed capital and preference share capital and by doing so it can increase the income of ________
(a) Preference Shareholders
(b) Lenders
(c) Equity Shareholders
(d) Government

Answer : C

Question. With the help of financial planning capital can be made available at ________ cost.
(a) More
(b) Medium
(c) Minimum
(d) Zero

Answer : C

Question. Without ________ no business planning can be successfully implemented.
(a) Dividend decision
(b) Investment decision
(c) Both of above
(d) Financial planning

Answer : D

Question. What does affect the value of company?
(a) Capital cost
(b) Market price of shares
(c) Both (a) and (b)
(d) None of these

Answer : C

Question. What out of the following is the effect of optimum capital structure?
(a) Capital cost-minimum
(b) Total value of company-maximum
(c) Both (a) and (b)
(d) Market price of shares minimum

Answer : C

Question. What capital out of the following should be used in case of better cash flow position?
(a) Debt Capital
(b) Equity Share Capital
(c) Both of the above
(d) None of these

Answer : A

Question. What capital out of the following should be used in case of low rate of interest on debt?
(a) Equity Share Capital
(b) Preference Share Capital
(c) Debt Capital
(d) None of these

Answer : C

Question. What is the meaning of the management of working capital?
(a) To maintain the continuity of sufficient amount of working capital.
(b) To make cash available in large amount.
(c) To keep the working capital at the minimum level.
(d) To keep the working capital at the maximum level.

Answer : A

Question. What out of the following happens because of the optimum amount of working capital?
(a) Profitability increases
(b) No decrease in liquidity
(c) Both (a) & (b)
(d) Decrease in liquidity

Answer : C

Question. Besides the investment decision the finance function is concerned with two other broad decisions. Name these decisions.
Answer: Financing and dividend decisions

Question. ‘Cost of debt’ is lower than the ‘cost of equity share capital’. Give reasons why even the company can’t work only with the debt. ?
Answer: because a company cannot be formed without equity share capital.

Question. what does higher business risk indicate ? 
Answer: it indicates the inability of a company to meet the fixed operating costs such as salary, rent, etc.

Question. what is financial leverage ? 
Answer: It is the proportion of debt in the overall capital.

Question. A businessman who wants to start a manufacturing concern approaches you to suggest him whether the following manufacturing concerns would require large or small working capital:
(i) Smart Phone
(ii) Sugar
(iii) Furniture manufacturing against specific order
(iv) Refrigerator
Answer: Large or small working capital:
(i) Smart Phone– More
(ii) Sugar – More
(iii) Furniture manufacturing against specific order –less
(iv) Coolers – More

Question. “The success of Reliance Ltd. is owing to its prudent financial management policies, plans & control”.
Which four values are being promoted by Reliance in making & implementing such a sound financial management system.
Answer: The four values promoted by Reliance :
1. Optimum utilization of resources
2. Avoid wastage of funds
3. Contribute to the development of co. & the economy Promoting culture of savings & investments.

Question. What is meant by capital structure? What are the factors to be kept in mind while determining the capital structure of the company?
Answer: Cost of debt
• Cost of equity
• Risk considerations
• Tax rate
• Stock market conditions
• Regulatory framework

Question. explain any 4 factors which affect the working capital requirements of a business.
Answer: Nature of business
• Business cycle.
• Scale of operations.
• Production cycle.
• Growth prospects.
• Credit allowed.
• Credit availed.
• Availability of raw materials.

Question. Explain the meaning of Fixed Capital. Explain any three factors that determine the fixed capital of a company.
Answer: Meaning of Fixed capital:- Fixed capital refers to investment in long-term assets. Management of fixed capital involves around allocation of firm’s capital to different projects or assets with long-term implications for the business.
Factors that determine the fixed capital:-
1. Nature of Business: The type of business has a bearing upon the fixed capital requirements. For example, a trading concern needs lower investment in fixed assets compared with a manufacturing organisation.
2. Scale of Operations: A 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.
3. Choice of Technique: Some organisations are capital intensive whereas others are labour intensive. A capital-intensive organisation requires higher investment in plant and machinery as it relies less on manual labour.

Question. There are a number of factors which affect the fixation of the price of a product. Explain any four such factors.
Answer: Factors effectingfixation of price:-
a) Product cost
b) Utility & demand
c) Govt. and legal regulations
d) Pricing objectives.

True or False

1. Debt and equity differ in cost and risk. True

2. A company employs more of debt securities in its capital structure if company is sure of generating enough cash inflows. True

3. High Interest Coverage Ratio means companies can have more of borrowed funds.True

4. Lower Interest Coverage Ratio means less broadband securities. True

5. If Debt Service Coverage Ratio is high then company can have more debt in capital structure. True

6. Capital budgeting decision has a direct impact on liquidity as well as profitability of a business False

7. Financial planning provides a link between investment and financing decisions .True

8. Debt causes a dilution of control .False

9. Companies having good growth opportunities usually declare higher dividend. False

10. Use of borrowed capital increases the financial risk of a business. True

11. Provisions of Companies Act must be adhered while declaring dividend . True

12. Trading on equity does not lead to increase in EPS . False

13. Short term financial plan are called budget. True

14. Short term investment decisions are Irreversible. False

15. A public issue of shares and debentures have to be made under SEBI guidelines. True

16. Financial management and financial planning are synonyms of each other.   False

17. If tax rate is high, firms prefer to give high dividend.    False

18. Firms can avoid Floatation Cost by raising funds through loan.   True

19. Firms having stable earnings prefer to give less dividend.   False

20. Easy access to capital market allows firms to give more dividend.  True

Question. Name the kind of issue in which shares are offered to existing shareholder.
Answer: Right Issue.

Question. Give example of any two financial intermediaries.
Answer: a) Banks. b) Financial markets.

Question. give examples of any two money market instruments.
Answer: a) Commercial Paper. B) Call Money.

Question. what was the traditional system of trading on a stock exchange?
Answer: Outcry or auction system

Question. What are the two basis on which transactions on a stock exchange may be carried out?
Answer: Cash basis or Carry over basis.

Question. Give names of any two places where regional offices of SEBI is located.
Answer: a) Chennai b) Delhi

Question. What is the settlement cycle in NSE.
Answer: a) T+2

Question. the director of a newly established company having paid up equity share capital of 25 crores desire to get its shares traded at all India Level Stock exchange. As finance Manager of the company, Suggest the name of stock exchange for the purpose. Give any 3 reasons in support of your answer.
Answer: The company should get its share listed at OTCEI. The main features of OTCEL are the following-
1) Nation-wide listing, Listing on one exchange one can have transactions with all the counters in the whole country.
2) Exclusive list of companies, on the OTCEL only those companies are listed whose issued capital is 30 Lakh or more.
3) Investor’s registration- All the investor doing transactions on the OTCEL have got to register themselves compulsorily.
4) Transparency in transactions- All the transactions are done in the presence of the investor. The rates of buying and selling can be seen on the computer screen.

Question. “Securities and exchange Board of India (SEBI) is the watchdog of the securities market.” Do you agree ? Give four reasons in support of your answer.
Answer: 1) regulatory functions of SEBI.

Question. The director of a company want to modernize its plants and machinery by making a public issue of Shares. They wish to approach stock exchange, while the finance manager prefers to approach a consultant for the new public issue of shares. Advice the directors whether to approach stock exchange ro a consultant for new public issue of shares and why? Also advise about the different methods which the company may adopt for the new public issue of shares.
Answer: the directors should approach the consultant for the new public issue of shares as the company wish to make new public issue of shares to modernize its plants and machinery.
Following are the methods which the company may adopt for the new public issue of shares:
i) Right Issue: Since it appears from the question that the company is an existing company as it wants to modernize its plant and machinery, the company by statute is required to offer these shares first to the existing shareholders in proportion to their holdings. If the existing shareholders do not take these shares then company can resort to other methods as given below.
ii) Public Offer through Prospectus: Under this method, the company can directly offer its shares to the public at large after issuing prospectus.
iii) Offer for sale: In this case, an intermediary buys all the shares from the company at agreed price and offers it to the investors at a higher rate.
iv) Private Placement: In this case also an intermediary buys the shares from the company but offers it to only a selected few for sale.

Question. the directors of a newly established company having a paid up equity share capital of Rs 25 crores, desire to get its shares traded at an all India level stock exchange. As finance manager of the company, suggest the name of the stock exchange for the purpose. Give any 3 reasons in support of your answer.
Answer: In the given situation, I would recommend the shares of the company to be listed at the outlet the counter exchange of India(OTCEI). The reasons are:
i) In the OTCEI, there is an existence of compulsory market makers(banks/financial institutions) that buys/sells securities of the selected companies which improves the liquidity of the securities.
ii) The Company has a paid-up share capital of less than Rs 3crores.
iii) Less stringent conditions are applicable for listing of the securities as compared to those applicable for listing in National Stock exchange of India.

Important Questions for NCERT Class 12 Business Studies Financial Management

Question. The decision related to distribution of residual profit is called
(a) Investment decision
(b) Financing decision
(c) Dividend decision
(d) None of the above

Answer : C

Question. If a firm has growth opportunities, it should prefer giving
(a) Low dividend
(b) High dividend
(c) Does not effect dividend decision
(d) None of the above

Answer : A

Question. When the fixed assets are available on rent the need for fixed capital is ________.
(a) More
(b) Excessive
(c) Nil
(d) Less

Answer : D

Question. The difference between current assets and current liabilities is called ________.
(a) Net working capital
(b) Gross working capital
(c) Fixed capital
(d) Working capital

Answer : A

Question. ________ will be the amount of net working capital if the value of current assets is ™ 50,000 and the current liabilities is ™35,000?
(a) ™ 50,000
(b) ™ 35,000
(c) ™15,000
(d) ™ 85,000

Answer : C

Question. Enough working capital is an index of the ________ of business.
(a) Strength
(b) Weakness
(c) Liquidity
(d) Loss

Answer : C

Question. The objective of working capital is to determine the ________ amount of current assets and current liabilities.
(a) Maximum
(b) Minimum
(c) Optimum
(d) Equal

Answer : C

Question. Those organisations which make cash sales need ________ working capital.
(a) Less
(b) Nil
(c) More
(d) Very much

Answer : A

Question. Which of the following is not included in current assets?
(a) Cash
(b) Stock
(c) Debtor
(d) Long-term investment

Answer : D

Question. Why is working capital important?
(a) To buy land
(b) To buy building
(c) To make payment for routine expenses
(d) To buy machine

Answer : C

Question. There is more need of working capital in businesses where the demand to be seasonal. What out of the following is the cause?
(a) Capital remains stuck up for a long time in the raw material
(b) Capital remains stuck up for a long time in the manufactured goods
(c) Both the above
(d) More machines are needed

Answer : C

Question. Acquiring a new fixed asset is an example of :
A. Capital budgeting decisions
B. Dividend decision
C financing decision
D working capital decision
Answer :  A

Question. The cheapest source of finance is: 
a. debenture
b. equity share capital
c. preference share
d. retained earnings
Answer:   D

Question. The concept which provides a link between investment and financing decision
A. Trading on equity
B. Financial leverage
C. Capital structure
D. Financial planning
Answer :  D

Question. Financial planning arrives at: 
a. minimising the external borrowing by resorting to equity issues
b. entering that the firm always have significantly more funds 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
Answer :   C

Question. Other things remaining the same if fixed operating cost is high the firm would opt to raise finance from
A. Debentures
B. Bills receivable
C. Equity shares
D. Commercial paper
Answer :  C

Question. 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
Answer :   C

Question. Other things remaining the same, an increase in the tax rate on corporate profits 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
Answer :  A

Fill in the blanks

1. Capital market is a link between Financial and Planning opportunities.
2. In India, there are Composition or Types number of depositories.
3. NSDL refers to Source of Structure.
4. CDSL refers to central Profit.
5. The agent between Investor and Depositories is called Equity.
6. The day when investor has to deliver shares sold or pay cash for shares bought is called Gainful.
7. The day when stock exchange delivers the share or makes payment to the other broker is called Less.
8. Bombay Stock Exchange Index is called More.
9. National Stock Exchange Index is called More.
10. To promote and develop activities in stock exchange, SEBI performs More function.

Question. When is financial leverage considered favorable?
Answer: Financial leverage is considered favourable 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 Maximisation.

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.
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 floatation 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.

Question. “ A decision to acquire a new and modern plant to upgrade an old one”.
Identify the aspect of financial decision.
Answer: Investment decision (Capital Budgeting).

Important Questions for NCERT Class 12 Business Studies Financial Management

Question. The cheapest source of finance is:
(a) Debenture
(b) Equity share capital
(c) Preference share
(d) Retained earning

Answer : D

Question. 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

Answer : C

Question. Other things remaining the same, an increase in the tax rate on corporate profits will:
(a) Make the debt relatively cheaper
(b) Make the debt relatively dearer
(c) Have No impact on the cost of debt
(d) We Can’t stay

Answer : A

Question. 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

Answer : C

Question. Current assets are those assets which get converted into cash:
(a) Within six months
(b) Within one year
(c) Between one and three years
(d) Between three and five years

Answer : B

Question. In case of price-rise ________ working capital is required in order to maintain the previous level of production.
(a) Less
(b) More
(c) Nil
(d) Very little

Answer : B

Question. In what type of organisations is the investment in fixed assets essential?
(a) Trading
(b) Manufacturing
(c) Both (a) & (b)
(d) None of these

Answer : B

Question. 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 have at its disposal

Answer : C

Question. 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

Answer : C

Fill in the blanks :

Question. Avik is the finance manager of Mars Ltd. In the current year, the company earned high profit. However, Avik thinks that it is better to declare smaller dividend as he is unsure about the earning potential of the company in the coming years. Avik’s choice of dividend decision is based on which of the factor that affect it?
Answer : Stability of Dividend.

Question. ___________ is concerned with optimum procurement as well as the usage of finance.
Answer : Financial management.

Question. Suppose there are two projects, A and B (with the same risk involved), with a rate of return of 10% and 12% respectively, then under normal circumstance, ___________ (Project A/ Project B) should be selected.
Answer : Project B

Question. The decision involved in launching a new product line or opening of a new branch is called _____.
Answer : Investment or Capital budgeting decision

Question. The decision in financial management which influences the overall business risk complexion of the firm is called ______.
Answer : Capital budgeting decision (long-term investment decision)

Question. The decision to invest in a particular project involves a number of calculations regarding.
Answer : The amount of investment, interest rate, cash flows and rate of return.

Question. Short-term investment decisions are also called ________________________.
Answer : Working capital decisions.

Question. Capital budgeting decisions are very crucial for any business because _______.
Answer : they affect the earning capacity of the business in the long run. The size of assets, the profitability and competitiveness are all affected by the capital budgeting decisions.

Question. ‘The size of assets, the profitability and competitiveness are affected by one of the financial decisions’.
The decision involved with reference to the given statement is _______. 
Answer : Capital budgeting decision

Question. What does a higher business risk indicate?
Answer : Higher business risk means higher fixed operating costs (e.g., building rent, salaries, etc.), which indicates that company’s capacity to use debt is lower.

Question. _______________ decisions are concerned with the decisions about the levels of cash, inventory and receivables.
Answer : Working capital.

Question. Koby Ltd. is an 87-year-old reputed consumer goods company. It is known for offering good quality electronic products at reasonable prices. It has branches all over India. It has a large shareholder base. The shareholders desired that some dividend is paid every year on their investments. Company’s management understands that it is important to keep the shareholders happy and satisfied. As a matter of policy, they declare a certain amount of dividend every year out of profits rather than reinvesting the whole as retained earnings. The factor affecting dividend decision being highlighted in the above situation is _______ .
Answer : Shareholders preference

Question. A long-term investment decision is also called a _____________________.
Answer : Capital Budgeting Decision.

Question. State the objective of Financial Management'.
Answer: The objective of financial management is maximizing shareholder's wealth.

Question.  What is meant by Investment decision? State any three factors which affect the ‘Investment Decision’.
Answer: Meaning of Investment Decision: refers deciding about how the funds are invested in different assets so that they are able earn the highest possible return the investors.
Factors affecting the investment decisions:
(i)Cash Flows of the Project: As we know investment decision (capital budgeting decision) is related with investment in long-term. These assets involve both cash outflows and cash inflows over a series of years. Both of these need to be analyzed carefully before finalizing the investment. (ii) The Rate of Return: A project may not be profitable compared to other. The criteria to decide the profitability of various projects is their respective rate of returns. The rate of return is calculated on the basis of expected return the project and risk attached with it.
(iii) Investment Criteria Involved: There may be many criteria of the investor while investing the long-term assets. These are funds involve, rate of interest, rate return, cash flow, etc. All these factors influence the decision go for particular investment not. For same purpose, capital techniques are applied and accordingly decisions are taken.

Question. What is meant by Financial Planning?
Answer: It refers to the preparation of a financial blueprint of an organization’s future operations.

Question. Explain any four factors which affect the ‘Dividend Decision’ of a company.
Answer: The chief factors affecting dividend decision are the following:
(i) Amount of Earning: The dividend paid out of the present and reserved profit. Therefore, greater amount of total profit will ensure greater dividend.
(ii) Stability Earnings: company having stable earning is in a position to declare more dividends and vice-versa.
(ii) Stability Dividend: Every company adopts policy maintaining dividend stability dividend per share. It is always good if the dividend remains stable or increase.
(w) Growth Opportunities: the company has more opportunities growth, it will require more finance. In such situation, major part the income should retained and a small part of should be paid as dividend.

Question. What is meant by 'Financial Risk?
Answer: It refers to the risk of not able to cover fixed financial costs by a business.

Question. Explain the importance of ‘Financial Planning'.
Answer:
(i) Helps to Face the Eventualities: It tries to forecast various business situations. On this basis alternative financial plans are prepared. By doing so, it helps to face the eventual situation
in a better way.
(ii) Helps in Avoiding Business: Shocks and Surprises: Proper provision regarding shortage or surplus of funds is made by anticipating future receipts and payments. Hence, it helps in avoiding business shocks and surprises.
(iii) Helps in Coordination: It helps in coordinating various business activities, such as, ale purchase, production, finance, etc.

Question. What is meant by fixed capital?
Answer: It refers to that capital which is used for the purchase of fixed assets, such as land, building, machinery, furniture, etc.

Question. What is meant by Gross Working Capital?
Answer: It refers to the aggregate of current assets.