case study class 12 financial management

CBSE Class 12 Case Studies In Business Studies – Financial Markets

FINANCIAL MARKET Financial Market: Definition A financial market is a market for the creation (new issue of securities) and exchange (sale of existing securities) of financial assets.

Financial Markets: Purpose Financial market serves as an intermediary between the surplus sector (households which have savings) and deficit sector (business firms which needs funds).

Functions of Financial Market

• It performs the allocative function by mobilisation of savings and channelising them into the most productive avenues.
• It helps to determine the price for the financial asset in a particular financial market through the market forces of demand and supply.
• It provides liquidity to the financial assets by providing ready markets wherein the securities can be easily converted into cash or vice versa.
• It provides a common platform for exchange of securities thereby reducing the cost of transactions by saving time, effort and money spent by the buyers and sellers in locating each other.

Financial Intermediation: Definition Financial intermediation refers to the process through which allocation of funds is done by the savers in the household sectors through two main mechanisms; banks and financial markets. Types / Segments of Financial Market

• Capital Market
• Money Market

CAPITAL MARKET Capital Market: Definition Capital Market refers to facilities and institutional arrangements through which long term funds, both debt and equity, are raised and invested. Capital market is a segment of financial market.

Features of Capital Market

• It is a market for long term funds.
• The main participants in capital market are banks, financial institutions, corporate bodies, foreign investors and retail investors.
• Since the cost of securities may be low, investment can be made in the capital market with less capital.
• The securities in capital market enjoy good liquidity.
• The instruments in capital market carry high risk as the expected return on them is high.

Main Instruments in Capital Market

• Equity Shares
• Preference Shares

Types / Segments of Capital Market

• Primary Market
• Secondary Market

Constituents of the Capital Market

• Development Banks
• Commercial Banks
• Stock Exchanges

PRIMARY MARKET Primary Market: Definition Primary market is also known as new issue market as the securities are issued for the first time by the companies through this market. Primary Market is a segment of capital market.

Features of Primary Market

• It is the new issue market.
• Only buying of securities takes place.
• Prices of the securities are determined by the company.
• It involves dealings between the company and investors.
• There is no fixed location of primary market.

Instruments of Primary Market

Methods of Floatation in Primary Market

• Offer through Prospectus (The company approaches the members of the general public directly by issuing a prospectus)
• Offer For Sale (The company approaches members of the general public indirectly through intermediaries like issuing houses, stock brokers etc.)
• Private Placement (The company can raise finance by allotting securities to selective individuals and institutions only)
• e-IPOs (The investors may subscribe to the securities of a company online)
• Rights Issue (It is a pre-emptive right given only to the existing shareholders to subscribe to the securities of the company as per its terms and conditions)

SECONDARY MARKET Secondary Market: Definition It is a market for old or existing securities It is a segment of capital market.

Features of Secondary Market / Stock Exchanges

• It is the market for old/existing securities.
• Both buying and selling of securities takes place.
• Prices of the securities are determined by the forces of demand and supply.
• It involves dealings between two investors.
• Stock exchanges exist at fixed location.

MONEY MARKET The money market is a market for short term debt instruments whose period of maturity is upto one year. It is a segment of financial market.

Features of Money Market

• It is a market for short term funds.
• The main participants are institutional investors.
• Since the cost of securities may be high, investment in the money market may require huge capital outlay.
• The money market enjoys high liquidity as The Discount Finance House of India works as a compulsory market maker for it.
• The instruments in money market carry low risk as the expected return is low on

INSTRUMENTS IN MONEY MARKET

  STOCK EXCHANGE Stock Exchange: Definition According To Securities Contracts (Regulation) Act 1956, “Stock Exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying and selling or dealings in securities.”

Functions of Stock Exchange

• Ensures liquidity and marketability of existing securities by a providing a ready and continuous market for the sale and purchase of securities.
• Helps in determining the prices of the securities through the forces of demand and supply.
• It promotes the habit of saving and investment among the general public.
• It provides a legal framework for fair and safe dealings.
• It helps the companies in raising finance thus facilitating capital formation and economic growth.
• It provides scope for healthy speculation in a controlled and restricted way.

Dematerialisation: Definition Dematerialisation refers to the process of holding securities in electronic form.

Depository: Definition Depository is the organisation with which an investor has to open a D-Mat account to hold securities in electronic form. In India there are two depositories:

• National Secuities Depository Limited (NSDL)
• Central Depository Services Limited (CDSL)

The depository participant serves as a link between the investor and the depository i.e. either NSDL or CDSL.

Screen Based Trading: Definition Screen-based trading refers to the process of buying or selling securities on-line.

Advantages of Screen-based Trading

• As the investors get an access to the stock market during real time, there is complete transparency and in the dealings.
• It provides a common platform for exchange of securities thereby increasing the efficient transactions by saving time, effort and money.
• This virtual market has a very wide reach hence it increases its liquidity.

STEPS IN THE TRADING AND SETTLEMENT PROCEDURE

• The investor has to furnish certain details and information about himself including PAN number which is mandatory, date of birth, bank account details, income details etc.
• A broker acts as an intermediary between the buyers and sellers.
• After the completion of the above formalities, the broker opens a trading account in the name of the investor.
• The investor has to open a demat account with a depository participant and a bank account for trading transactions in cash.
• By giving clear instructions about the desired quantity and price.
• The broker will then make the investor aware about the feasibility of the order.
• The broker will issue an order confirmation slip to the investor.
• The broker will then execute the order through screen based trading by considering the best available deal.
• The broker will issue a trade confirmation slip to the investor.
• A contract note contains details about the deal i.e. the number of securities bought/sold, price, date and time of transaction etc. The contract note includes a unique order code generated by the stock exchange for that transaction.
• A contract note is a legal which may be used to settle the claims between the investor and the broker.
• Since the settlement cycle is T +2 therefore, within two days of receiving the Contract Note, the investor has to pay cash or deliver shares sold as the case may be. The broker can then forward it to the exchange. This is called pay-in-day.
• On the T+2 day, cash will be paid or shares will be delivered as the case may be by the exchange to the other broker. This is called pay-out-day. Then, in case of sale of shares, the broker has to make the payment to the investor within 24 hours.
• However, in the case of purchase of securities, the amount will be transferred electronically to the investor’s demat account.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India.

• It was established in the year 1988 by the Government of India. It was to function under the overall administrative control of Ministry of Finance of the Government of India.
• It was given statutory powers on 30th January 1992 through an ordinance.
• The ordinance was later on replaced by an Act of Parliament known as the SEBI Act, 1992.

The Organisation Structure of SEBI

• The various activities undertaken by SEBI are now divided into five operational departments.
• Each department is headed by an executive director.
• The head office of SEBI is located at Mumbai.
• Besides, regional offices have been set up in Kolkata, Chennai and Delhi to attend to consumers complaints and maintain liaison with the issuers, intermediaries and stock exchanges in the concerned regions.
• SEBI has also formed Primary Market Advisory Committee and Secondary Market Advisory Committee to assist in the process of SEBI’S policies formation.
• These two committees consist of the market players, the investor’s association recognised by SEBI and the eminent persons in the capital market.

Objectives of SEBI

• To prevent trading malpractice in thesecurities markets.
• To protect the rights and interest of investors, and to guide and educate them.
• To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers, etc. with a view to making them competitive and professional.
• To regulate stock exchanges and the securities market to promote their orderly functioning.

Purpose and Role of SEBI SEBI has to be responsive to the needs of three groups, which constitue the market namely:

• The issuers of securities so as to provide them a platform for raising capital in an easy, effective and efficient manner.
• The investors so as to protect their interests in securities by keeping them abreast about the developments through true and appropriate information.
• The market intermediaries in order to provide them a framework so as to enable them to perform their functions effectively and efficiently.

Objectives of Advisory Committees Formed by SEBI

• To advise SEBI on matters relating to regulation of intermediaries for ensuring investor protection in the primary market.
• To advise SEBI on issues related to development of primary market in India.
• To advise SEBi on matters required to be taken by for changes in legal framework to introduce simplification and transparency in the primary market.
• To advise SEBI on disclosure requirements for companies.
• To advise the board in matters relating to the development and regulation of secondary market in the country.

FUNCTIONS OF SEBI Protective Functions of SEBI

• SEBI prohibits fraudulent and unfair trade practices in the securities market
• Promotion of fair practices and code of conduct in securities market
• Undertaking steps for investor protection
• Controlling insider trading and imposing penalties for such malpractices.

The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as “…to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”

Developmental Functions of SEBI

• Ensuring training of intermediaries of securities market
• Conducting research and publishing information useful to all market participants
• Facilitating flexibility in the working of capital markets.

Regulatory Functions of SEBI

• Registration and regulation of of brokers, sub-brokers and other players in the financial market.
• Registration of collective investment schemes and Mutual Funds.
• Conducting enquiries and audits of stock exchanges & intermediaries.
• Regulation portfolio exchanges, underwriters, merchant bankers and the dealings in the stock exchanges.
• Regulation of take over bids by the companies

LATEST CBSE QUESTIONS

Question 1. Meca Ltd. a reputed automobile manufacturer needs Rupees ten crores as additional capital to expand its business. Atul Jalan, the CEO of the company wanted to raise funds through equity. On the other hand the Finance Manager, Nimi Sahdev said that the public issue may be expensive on account of various mandatory and non-mandatory expenses. Therefore, it was decided to allot the securities to institutional investors. Name the method through which the company decided to raise additional capital. (CBSE, Delhi 2017) Answer: Private placement is method through which the company decided to raise additional capital.

Question 2. These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed most. To give strength to the economy, SEBI is undertaking measures to develop the capital market. In addition to this there is another market in which unsecured and short-term debt instruments are actively traded everyday. These markets together help the savers and investors in directing the available funds into their most productive investment opportunity.

• Name the function being performed by the market in the above case.
• Also, explain briefly three other functions performed by this market. (CBSE, Delhi 2017)
• Mobilisation of funds is the function being performed by the financial market in the above case. It performs the allocative function by mobilisation of savings and channelising them into the most productive avenues.

Question 3. These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed the most. To give strength to the economy, SEBI is undertaking measures to develop the capital market. In addition to this, there is another market in which unsecured and short-term debt instruments are actively traded every day. These markets together help the savers and investors in directing the available funds into their most productive investment opportunity.

• Name the market segment other than the capital market segment in which unsecured and short-term debt instrument are traded. Also, give any three points of difference between the two. (CBSE, OD 2017)

Question 4. ABC Ltd. issued prospectus for the subscription of its shares for Rs. 500 crores in 2008. The issue was oversubscribed by 20 times. The company issued shares to all the applicants on pro-rata basis. Later SEBI inspected the prospectus and found some misleading statement about the management of the company in it. SEBI imposed a penalty of Rs. 5 crores and banned its three executive directors for dealing in securities market for three years. Identify the function and its type performed by SEBI in the above case.  (CBSE, Sample Paper, 2017) Answer: Protective function has been performed by SEBI in the above case. And the type of Protective function is Prohibition of fraudulent and unfair trade practices.

Question 5. “Money market is essentially a market for short-term funds’. In the light of this statement state any three features of money market. (CBSE, Sample Paper, 2017) Answer: The three features of money market are described below:

• It is a market for short term funds whose maturity period is upto one year.
• Since the cost of securities may be high, investment in the money market requires huge capital outlay.

Question 6. “Unicon Securities Pvt. Ltd” was established to deal in securities. It was registered as a stock broker with National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) to trade in securities listed at these exchanges. It is also a depository participant with CDSL and NSDL. In the first three years, it developed its business successfully. After that the composition of Board of Directors changed. Some customers complained to the customer care centre of the company that shares purchased by them and for which the payment has been duly made, were not transferred to their D’mat Accounts by “Unicon securities Pvt. Ltd” . The executive of customer care centre promised the aggrieved customers that their shares will be transferred to their respective D’mat Accounts very soon. But the company delayed the matter and didn’t transfer the shares of the customers to their D’mat Accounts. This eroded investors confidence and multiplied, their grievances.

• Identify the step of trading procedure in a stock exchange which has not been followed by “Unicon Securities Pvt. Ltd” .
• Name the Apex statutory body of capital market to whom customer can complain to redress their grievances.
• Write two values not followed by Unicon Security Pvt. Ltd.(CBSE, Sample Paper, 2017)
• The step of trading procedure in a stock exchange which has not been followed by “Unicon Securities Pvt. Ltd” is settlement i.e. the delivery of shares through the D’mat Account of the broker to D’mat account of the investors.
• The Securities and Exchange Board of India (SEBI) is the Apex statutory body of capital market to whom customer can complain to redress their grievances.
• Truthfulness
• Fair practices

Question 7. Reshu’s father has gifted her the shares of a large cement company with which he had been working. The securities were in physical form. She already has a bank account and does not possess any other forms of securities. She wished to sell the shares and approached a registered broker for the purpose. Mention one mandatory detail which she will have to provide with the broker. (CBSE, Sample Paper, 2016) Answer: Reshu will have to give her Permanent Account Number (PAN) to the broker as it is mandatory as per law.

Question 8. Squib Ltd. is a large creditworthy company operating in the Kashmir Valley. It is an export- oriented unit, dealing in exclusive embroidered shawls. The floods in the Valley have created many problems for the company. Many craftsmen and workers have been dislocated and raw material has been destroyed. The firm is therefore, unable to get an uninterrupted supply of raw materials and the duration of the production cycle has also increased. To add to the problems of the organisation, the suppliers of raw materials who were earlier selling on credit are asking the company for advance payment or cash payment on delivery. The company is facing a liquidity crisis. The CEO of the company feels that taking a bank loan is the only option with the company to meet its short-term shortage of cash. As a finance manager of the company, name and explain the alternative to bank borrowings that the company can use to resolve the crisis. (CBSE, Sample Paper 2016) Answer: Commercial Papers may be used by Squib Ltd. as it is a popular short term instrument which is issued by large and credit worthy companies. The instrument is an unsecured promissory note and is freely transferable by endorsement. Its maturity period may range from a fortnight to a year. It is sold at discount and redeemed at par.

Question 9. Mr. Sanjay Nehra was the Chairman of Taran Bank. The bank was earning good profits. Shareholders were happy as the bank was paying regular dividends. The market price of their shares was also steadily rising. The bank was about to announce taking over the ‘Vena Bank.’ Mr. Sanjay Nehra knew that the share price of Taran Bank would rise on this announcement. Being a part of the bank, he was not allowed to buy shares of the bank. He called one of his rich friends Sudhir and asked him to invest Rs.5 crores in shares of his bank promising him the capital gains. As expected, the share prices went up by 40% and the market price of Sudhir’s shares was now ? 7 crores. He earned a profit of Rs. 2 crores. He gave Rs. 1 crore to Mr. Sanjay Nehra and kept Rs. 1 crore with himself. On regular inspection and by conducting enquiries of the brokers involved, the Securities and Exchange Board of India (SEBI) was able to detect this irregularity. The SEBI imposed a heavy penalty on Mr. Sanjay Nehra. By quoting the lines from the above paragraph, identify and state any two functions that were performed by SEBI in the above case Answer: The two functions performed by SEBI in the given case are stated below:

• Regulatory function is being performed by SEBI: “On regular inspection and by conducting inquires of the brokers involved.”
• Protective function is performed by SEBI: “The SEBI imposed a heavy penalty on Mr. Sanjay Nehra.”

Question 10. Mr. Vikas Mehra was the Chairman of IBM Bank. The bank was earning good profits. Shareholders were happy as the bank was paying regular dividends. The market price of their shares was also steadily rising. The bank was about to announce the taking over of ‘UK Bank’. Mr. Vikas Mehra knew that the share price of IBM Bank, would rise on this announcement. Being a part of the bank, he was not allowed to buy shares of the bank. He called one of his rich friends Mukand and asked him to invest Rs. 4 crores in the shares of his bank promising him the capital gains. As expected, after the announcement, the share prices went up by 50% and the market price of Mukand’s shares was now Rs. 6 crores. Mukand earned a profit of Rs. 2 crores. He gave Rs. 1 crore to Vikas Mehra and kept Rs. 1 crore with him. On regular inspection and by conducting enquiries of the brokers involved, the Securities and Exchange Board of India (SEBI) was able to detect this irregularity. SEBI imposed a heavy penalty on Vikas Mehra. Quoting lines from the above paragraph, identify and state any two functions performed by the SEBI in the above case. (CBSE, OD 2016) Answer: The two functions performed by SEBI in the given case are stated below:

• Regulatory function is being performed by SEBI: “on regular inspection and conducting inquires of the brokers involved.”
• Protective function is performed by SEBI: “The SEBI imposed heavy penalty on Mr.Vikas Mehra.”

Question 11. Supriya’s grandmother who, was unwell, called her and gave her a gift packet. Supriya opened the packet and saw many crumpled share certificates inside. Her grandmother told her that they had been left behind by her late grandfather. As no trading is now done in physical form, Supriya wants to know the process by adopting which she is in a position to deal with these certificates.

• Identify and state the process.
• Also, give two reasons to Supriya why dealing with shares in physical form has been stopped. (CBSE, Sample Paper 2015)
• Dematerialisation refers to the process of holding securities in electronic form.
• When the shares certificates are held in physical form, there is danger of loss or theft.
• There is risk of forgery, as the buyer may be delivered fake certificates .

Question 12. Mission Coach Ltd. is a large creditworthy company that manufactures coaches for the Indian Railways. It now wants to export these coaches to other countries 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.

• Name and explain the money-market instrument the company can use for the above purpose.
• What is the duration for which the company can get funds through this instrument?
• State any other purpose for which this instrument can be used. (CBSE, OD 2015)
• Commercial Papers can be used for Bridge financing by Mission Coach Ltd. as it is issued by large and credit worthy companies. The instrument is in the form of an unsecured promissory note and is freely transferable by endorsement. It is sold at discount and redeemed at par.
• Its maturity period may range from a fortnight to a year.
• It is also used to meet the short term seasonal and working capital requirements of a business enterprise.

Question 13. Ganesh Steel Ltd. is a large and creditworthy company that manufactures 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.

• State any other purpose for which this instrument can be used. (CBSE, Delhi 2015)
• Commercial Papers can be used for Bridge financing by Ganesh Steel Ltd. as they are issued by large and credit worthy companies. The instrument is in the form of an unsecured promissory note and is freely transferable by endorsement. It is sold at discount and redeemed at par.

ADDITIONAL QUESTIONS

Question 1. Incorporated in 1990, Raju Dairy Ltd., is one of the leading manufacturers and marketers of dairy-based branded foods in India. In the initial years, its operations were restricted only to collection and distribution of milk. But, over the years it has gained a reasonable market share by offering a diverse range of dairy based products including fresh milk, flavoured yogurt, ice creams, butter milk, cheese, ghee, milk powders etc. In order to raise capital to finance its expansion plans, Raju Dairy Ltd. has decided to approach capital market through a mix of Offer for sale of Rs. 4 crore shares and a public issue of Rs. 2 crore shares. In context of the above case:

• Name and explain the segment of capital market being approached by the company.
• Identify the two methods of floatation used by the company to raise the required capital. Give one difference between them.
• Primary market is the segment of capital market being approached by the company. It is also known as the new issue market as the securities are issued for the first time by the companies through this market.
• The two methods of floatation used by the company to raise the required capital are – Issue through prospectus and Offer for sale. In case of issue through prospectus, the company approaches the members of the general public directly by issuing a prospectus whereas in case of Offer for sale, the company approaches members of the general public indirectly through intermediaries like issuing houses, stock brokers etc.

Question 2. The SEBI has imposed a penalty of Rs. 7,269.5 crore on Pearls Agrotech Corporation Limited (PACL) and its four directors — Tarlochan Singh, Sukhdev Singh, Gurmeet Singh and Subrata Bhattacharya who had mobilised funds from the general public through illegal collective investment schemes in the name of purchase and development of agriculture land. While imposing the penalty, the biggest in its history, Securities and Exchange Board of India (SEBI) said the company deserved “maximum penalty” for duping the common man. Its Prevention of Fraudulent and Unfair Trade Practices Regulations provides for “severe to severe penalties” for dealing with such violations. As per SEBI norms, it can impose a penalty of Rs. 25 crore or three times of the profit made by indulging in fraudulent and unfair trade practices and in the present case, the regulator has imposed a fine equivalent to three times of the illicit gains. In the context of the above case:

• State the objectives of setting up SEBI.
• Identify the type of function performed by SEBI by quoting lines from the paragraph.
• To prevent trading malpractice in the securities markets.
• Protective function is performed by SEBI: “The SEBI has imposed a penalty of Rs. 7,269.5 crore on Pearls Agrotech Corporation Limited.”

Question 3. Harsh works as a manager in a software company. He opened a Demat account with a broking house in order to trade in securities with the money he received as his first performance bonus. Since then he has been very active in stock trading under the guidance of a stock broker. However, when he was hospitalised for a few days this year, his wife received several calls from the his stock broker for permission to transact on Harsh’s behalf. Though she told him to wait till her husband had recovered, the stock broker went ahead and executed the transactions. When Harsh got home from hospital, he discovered that the unauthorised transactions had led to a loss for him. Harsh complained to the broking house, but they claimed he had authorised the transactions. Keeping in view, the guidelines issued by the National Stock Exchange that he had read in the national newspaper Harsh demanded proof and threatened to file a complain. Since, the broking house had no evidence that the deals had been authorised they made good the loss that Harsh had incurred due to the transactions. In the context of the above case:

• What is a Demat account?
• Who is acting as the depository participant for Harsh?
• Name the document that is legally enforceable and helps to settle the claims between the investor and the broker.
• A Demat account is an account used for holding securities in electronic form.
• The Broking house is acting as the depository participant for Harsh.
• A contract note is a legally enforceable document that helps to settle the claims between the investor and the broker.

Question 4. Make Good Technologies Ltd. is one of the top suppliers of security software products and solutions in India with a market share of over 20% in the retail segment. Its customers includes people all sections of the society i.e. both households and corporates. Its unique threat detection system works to detect security threats including virus attacks in real time to protect users’ IT assets across varied platforms and devices. The company has an established track record of growth and financial performance. At present the company operates only through its website. The company now intends to launch a range of computer accessories and plans to market it by opening its own retail outlets. So, the board of directors of the company have decided to only raise capital for the first time through an issue of shares, but at the same time they do not wish to get into the hassles of launching a public issue of shares. In context of the above case:

• Name and explain the way through which the company can raise finance by allotting securities to selective individuals and institutions only.
• Can the company also raise capital through a right issue? Why or why not? Give a reason to justify your answer.
• The company can raise finance by allotting securities to selective individuals and institutions only through Private Placement. It is a relatively economical way of raising money as it helps to save time, cost and money involved in the process of issuing securities.
• No, the company cannot raise capital through a right issue as it is issuing securities for the first time. A rights issue is a pre-emptive right given only to the existing shareholders to subscribe to the securities of the company as per its terms and conditions.

Question 5. After doing a course in online trading, Arsh started an online portal for stock trading under the name ‘Investment Guru’. He met his school friend Ajay after a long time in a bank where Ajay had come to open a D-Mat account. Arsh urged Ajay to invest in the forthcoming IPO of a blue chip companies whereas Ajay was inclined to buy existing securities of the other companies to build his investment portfolio. In context of the above case:

• Identify the two different types of capital market being referred to by quoting lines from the para.
• State any four differences between the two different types of capital markets as identified in part (1).
• Primary Market: “Arsh urged Ajay to invest in the forthcoming IPO of a blue chip companies.”
• Secondary Market: “Ajay was inclined to buy existing securities of the other companies to build his investment portfolio.”

Question 6. Ketan won a cash prize of Rs. 20,000 in the National level Robotics Competition. On the advise of his father, he visits a nearby bank to open a Fixed deposit account in his name with the prize money. His sister Suhasini accompanied him to the bank. On reaching the bank, he notices big banners which are placed within the premises containing information about the various arrangements through which corporates may raise their capital through the bank. Being a finance graduate, Suhasini explains to Ketan that banks play the role of the financial intermediary by helping in the process of channelizing the savings of the households into the most profitable business ventures. In context of the above case: .

• Name another financial intermediary that helps in the process of channelizing the savings of the households into the most productive use.
• Also, outline any two functions of another financial intermediary as identified in part (1).
• Financial markets is the other financial intermediary that helps in the process of channelizing the savings of the households into the most productive use.
• It provides liquidity to the financial assets by providing ready markets wherein the securities can be converted into cash or vice versa easily.

Question 7. Ragu works as a waiter in a five star hotel in Mumbai. While serving the customer he overhears him at the table saying that the he has made profits higher than expected by investing in securities market. So, Ragu also decides to make a nominal investment from his savings in the stock market in pursuit of higher gains. In context of the above case: As a financial consultant, apprise him of the steps involved in the working of a Demat system. Answer: Ragu will have to initiate the following steps for trading through a Demat system:

• He will have to first open a Demat account with a depository participant (DP) who may either be a bank, broker or financial services company by furnishing certain details and information about himself including PAN number, date of birth, bank account details, income details etc.
• If he plans to buy shares through a public offer he will have to give details of his Demat account, bank account etc. On allotment the shares will be directly credited to his account.
• If he decides to buy shares otherwise, he will have to instruct his broker with the details about the name of the company, number of shares, price etc. The transaction will be executed through the depository participant and he will have to make payment for them within T + 2 days.
• On contrary, whenever he decides to sell shares, he will have to instruct his broker with the details about the name of the company, number of shares, price etc. The transaction will be executed through the depository participant and his account will be debited accordingly. He will receive the payment in T + 2 days.

Question 8. The Bombay Stock Exchange (BSE) is Asia’s first stock exchange and the world’s 11th largest stock exchange. It became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act. Its automated, screen-based trading platform called BSE On-Line Trading (BOLT) had a capacity of 8 million orders per day. The BSE has also introduced a centralized exchange-based internet trading system, BSEWEBx.co.in to enable investors anywhere in the world to trade on the BSE platform. In context of the above case:

• Name the organisation that regulates the working of stock exchanges in India.
• State any three functions performed by stock exchanges.
• Give any two advantages of screen-based trading.
• Securities And Exchange Board of India (SEBI) regulates the working of stock exchanges in India.
• As the investors get access to the stock market during real time, there is complete transparency in the dealings.

Question 9. Ragunath Ahuja is one of the Promoter-Director of Vishwas Ltd. The company is engaged in the real estate sector, which has recently witnessed a steady fall in its revenue and the value of its assets due to a downward trend persisting in the market in specific and the economy in general. The periodical financial results of the company were to be declared in a fortnight time. Ragunath Ahuja, being an insider, had access to unpublished price sensitive information related to it. Consequently, he sells a major portion of his holdings in an anticipation of a fall in the market price of the shares of the Company subsequent to the announcement of periodical financial results of the company. Moreover, he doesn’t inform The Securities and Exchange Commission (SEC) about the dealings. On conducting a probe, Securities and Exchange Board Of India (SEBI) finds Ragunath Ahuja guilty of insider trading. As per law, company directors, officials or any individual with a stake of 10% or more in the company are considered to be insiders and they are required to report their insider transactions within two business days of the date the transaction occurred. In context of the above case:

• State the purpose of setting up SEBI.
• The market intermediaries in order to provide them a framework so as to enable them perform their functions effectively and efficiently.
• Regulatory function is being performed by SEBI: “On conducting a probe Securities and Exchange Board of India (SEBI) finds Ragunath Ahuja guilty of insider trading.”

Question 10. Sumita is a professor in a reputed business institute. While explaining the procedure of stock exchange trading, she shared with her students that many years back she had bought 200 shares of a leading automobiles company. As per the settlement procedure she paid for the shares and received the share certificates in physical form. However, when she had sent those certificates to the company to get them endorsed in her name, she was informed by the company that those certificates were duplicate. Therefore, in order to protect the investors from many such malpractices, now only screen-based trading is done and dematerialisation is compulsory. In context of the above case:

• What is screen based trading?
• Give the meaning of ‘dematerialisation’. State any two of its advantages.
• Screen-based trading refers to the process of buying or selling securities online.
• The securities in the demat account can be offered as security to raise loans.
• Since the shares certificates are not held in physical form, there is no danger of loss, theft or forgery.

Question 11. Madhav’s is one of the India’s most trusted brands in Indian sweets and snacks segment. The company has manufacturing plants in Kota, Kanpur, New Delhi, and Mumbai. Madhav’s has its own retail chain stores and a range of restaurants in these cities. Now, the company plans to extend its business in 12 more cities in India. In order to raise the funds, its directors have decided to float a public issue through prospectus. Besides, it intends to raise money to meet the floatation costs in terms of brokerage, underwriting commission, advertising etc. In context of the above case:

• What is the other name used for the funds required to meet floatation costs?
• Describe briefly the short term instrument popularly used by the companies to raise for the funds required to meet floatation costs. Who can issue them?
• Distinguish between the two types of financial markets that the company intends to approach to meet its financial needs.
• Bridge financing is the other name used for the funds required to meet floatation costs.
• Commercial Papers issued by large and credit worthy companies. The instrument is in the form of an unsecured promissory note and is freely transferable by endorsement. It is sold at discount and redeemed at par. Its maturity period may range from a fortnight to a year. It is also used to meet the short term seasonal and working capital requirements of a business enterprise. For example it is used for the purpose of bridge financing.

Question 12. During navratras ,Varun finalises a deal to buy a new house. So, he visits a nearby branch of ‘Subh Bank’ to withdraw Rs. 10 lakhs from his account in order to pay the token money to the seller. In the bank he observes that a large number of customers are present to make cash with drawls, probably because it is an auspicious time to make purchases. After sometime, he overhearsone of the bank staff members telling his colleague that, “Today ‘Subh Bank’ is likely to fall short of cash and to make up for the deficit and maintain its cash reserve ratio it will have to approach another bank.” In context of the above case:

• Identify the instrument that ‘Subh Bank’ will use to meet its short term requirements of funds.
• State any three feature of the instrument as identified in part (1).
• Call money is the instrument used by ‘Subh Bank’ to meet its short term requirements of funds.
• Call money is an instrument through which one bank may borrow money from another bank to maintain the cash reserve ratio as per the guidelines of RBI.
• Its maturity period may be from a single day to a fortnight.
• The rate at which the interest is paid on call money is called call rate.

Question 13. The stock market regulator, Securities and Exchange Board of India (SEBI), has initiated a certification programme for all market intermediaries. Under this programme, people associated with stock markets in any way, will have to obtain a qualifying certificate from the regulator.The National Institute of Securities Market (NISM), a trust formed by SEBI, is tasked with the certification programme. In the context of the above case:

• Identify the type of function performed by SEBI.
• Outline any two reasons for setting up SEBI.
• Developmental function is being carried out by SEBI by starting a certification programme for all market intermediaries.
• To curb malpractices in the financial market.
• To enhance the confidence of the investors by ensuring fair, efficient and transparent dealings.

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

By QB365 on 08 Sep, 2022

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

QB365 - Question Bank Software

Financial management case study questions with answer key.

12th Standard CBSE

Final Semester - June 2015

Business Studies

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

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

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

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

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

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

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

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

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Financial management case study questions with answer key answer keys.

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

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

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Financial Management Class 12 Business Studies Notes and Questions

Please refer to Financial Management Class 12 Business Studies notes and questions with solutions below. These revision notes and important examination questions have been prepared based on the latest Business Studies books for  Class 12 . You can go through the questions and solutions below which will help you to get better marks in your examinations.

Class 12 Business Studies Financial Management Notes and Questions

Q. 1. Arun is a successful businessman in the paper industry. During his recent visit to his friend’s place in Mysore, he was fascinated by the exclusive variety of incense sticks available there. His friend tells him that Mysore region in known as a pioneer in the activity of Agarbathi manufacturing because it has a natural reserve of forest products especially Sandalwood to provide for the base material used in production. Moreover, the suppliers of other types of raw material needed for production follow a liberal credit policy and the time required to manufacture incense sticks is relatively less. Considering the various factors, Arun decides to venture into this line of business by setting up a manufacturing unit in Mysore. In context of the above case: 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. Ans. 1. Investment decision has been taken by Arun. Investment decision seeks to determine as to how the firm’s funds are invested in different assets. It helps to evaluate new investment proposals and select the best option on the basis of associated risk and return. Investment decision can be long term or short-term. A long-term investment decision is also called a Capital Budgeting decision 2. The three factors mentioned in the paragraph which are likely to reduce the working capital requirements of his business are as follows: 1. Available of raw material: 2. Production cycle: 3. Credit availed: Q. 2. ‘Adwitiya’ is a company enjoying market leadership in the food brands segment. It’s portfolio includes three categories in the Foods business namely Snack Foods, Juices and Confectionery. Keeping in the with the growing demand for packaged food it now plans to introduce ready-To-Eat Foods. Therefore, the company has planned to undertakeinvestments 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 are the shareholder’s of the company like to gain from the issue of debt by the company? Ans. 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: Interest coverage ratio: 2. Tax rate: 1. 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. Q. 3. Computer Tech Ltd., is one of the leading information technology outsourcing services providers in India. The company provides business consultancy and outsourcing services to its clients. Over the past five years the company has been paying dividends at high rate to its shareholders. However, this year, although the earnings of the company are high, its liquidity position is not so good. Moreover, the company plans to undertake new ventures in order to expand its business. In context of the above case: 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. Ans. 1. Computer Tech Ltd. has been paying dividends at high rate to its shareholders over the past five years because of the following reasons: 1. Earnings: 2. Cash flow position: 3. Access to capital market: This year the company is likely to follow a conservative dividend policy because of the following reasons: 1. The cash flow position of the company is not god and dividends are paid in cash. 2. 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. Q. 4. Bhuvn 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) Ans. 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: 1. It ensures smooth running of a business enterprise by ensuring availability of funds at the right time. 2. It helps in anticipating future requirements of a funds and evading business shocks and surprises. 3. It facilitates co-ordination among various departments of an enterprise like marketing and production function, through well-defined policies and procedures. 4. It increases the efficiency of operations by curbing wastage of funds, duplication of efforts, and gaps in planning. Q. 5. ‘Madhur Milan’ is a popular online matrimonial portal. It seeks to provide personalized match making service. The company has 80 offices in India, and is now planning to open offices in Singapore, Dubai and Canada to cater to its customers beyond the country. The company has decided to opt for the sources of equity capital to raise the required amount of capital. In context of the above case: 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. Ans. 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: 1. Capital market conditions: 2. Fixed operating cost: 3. Cash flow position: 4. Risk: Q. 6. Wooden Peripheral Pvt. Ltd. is counted among the top furniture companies in Delhi. It is known for offering innovative designs and high quality furniture at affordable prices. The company deals in a wide product range of home and office furniture through its eight showrooms in Delhi. The company is now planning to open five new showrooms each in Mumbai and Bangalore. In Bangalore it intends to take the space for the showrooms on lease whereas for opening showrooms in Mumbai, it has collaborated with a popular home furnishing brand, ‘Creations.’ 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. Ans. 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. 1. 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. Q. 7. 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 crore to start the new plant. It decides to raise Rs. 300 crore through debentures, Rs. 200 crore through long-term loan from banks and Rs. 200 crore 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 crore from different sources of funds. 4. How will the dividend decision of Krishna Ltd. be affected? Explain.  Ans. 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 owners funds and borrowed funds. It is calculated as debt equity ratio i.e., Debit. Equity For Krishna Ltd. Debt = Debentures + Long tgerm loans from banks = 300 + 200 = Rs. 500 crore. Equity = Share capital + Reserves and surplus (or retained earnings) = 200 + 100 = Rs. 300 crores. Therefore, debt equity ratio = 500 = 1.67 : 1 300 1. Financing decision 2. Since the company have growth opportunities of setting up a new steel plant at Gurgaon, it retains Rs. 100 crore out of profits to finance the required investment. So, it is likely to pay less dividend. 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. Q. 8. Cost of debt is less than cost of equity. Still a company cannot go with entire debt. Why?  Ans.  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). Q. 9. 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. Ans. Working capital requirements of Amar would be less as it is a SERVICE industry. Factors which will affects his fixed capital requirements are: 1. Scale of operations 2. Financing alternatives 3. Growth prospects 4. Diversification Q. 10. 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.  Ans.  Working capital requirements of Yogesh would be less as it is a TRADING business. Q. 11. Manish is engaged in business of garments manufacturing. Identify the working capital requirement of Manish giving reason in support of your answer.  Ans.  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. Q. 12. 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.  Ans.  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) Q. 13. 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.  Ans.  Less working capital is required as service industries which usually do not have to maintain inventory require less working capital. Q. 14. Tata International Ltd. earned a net profit of Rs. 50 crores. Ankit the finance manager of Tata International Ltd. wants to decide how to appropriate these profits. Identify the decision that Ankit will have to take and also discuss any five factors which help him in taking this decision.  Ans.  Dividend decision Factors affecting dividend decision. 1. Earnings: 2. Stability of earnings: 3. Stability of dividends: 4. Growth opportunities: 5. Cash flow position: Q. 15. 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.  Ans. 1. Debt Any one reason 1. Due to weak cash flow position, the firm may not be able to honour fixed cash payment obligations. 2. Increased fixed operating cost will increase the business risk therefore debt should not be issued as it further increases the financial risk. 3. The stock market condition being bullish, the investors will prefer to buy equity shares. Other factors which Shalini would keep in mind are: 1. Return on Investment 2. Tax rate Q. 16. ‘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.  Ans.  Low, as it is a service industry, which usually do not have to maintain inventory. Q. 17. ‘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. Ans.  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. 1. Cash Flow position ‘There is available of enough cash in the company’. A good cash flow positions is necessary for declaration of dividend. 1. Growth Prospects ‘Good prospects for growth in the future.’ If a company has good growth opportunities, it pays out less dividend. 1. 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. 1. 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. Q. 18. 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 crore to set up and about Rs. 500 crore of working capital to start the new plant. 1. State the objective of financial management for this company. 2. Identify and state the decision taken by the finance manager in the above case. 3. State any two common factors affecting the fixed and working capital requirements of Shubh Ltd. (6 Marks) Ans. 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. Value: Maximisation of shareholders’ wealth. 1. Investment decision It relates to how the firm’s funds are invested in different assets – fixed assets and working capital. Factors affecting fixed and working capital requirements of Shubh Ltd.: 1. Nature of business: 2. Scale of operations: Q. 19. 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.  Ans. 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. 1. Value affected: Shareholders’ wealth will not be maximized. Q. 20. A company’s earnings before interest and tax is Rs. 7 lac. It pays 10% interest on its debt. Total investment of company is rs. 50 lac. 1. Advise company whenever it should include debt or equity to raise its capital. 2. Name the concept related to this. 3. Will be company’s decision to raise funds from debt or equity will change if company’s EBIT becomes 3 lac. Ans. 1. Company should prefer debt to raise fund as debt is gainful for equity shareholders till ROI > Rate of Interest. In the above case ROI = EBIT × 100 Total Income = 7 × 100 = 14% 1. 2. 14 > 10 so debt it more suitable. 1. The concept is leverage effect or trading in equity. 2. Yes company’s decision will change if EBIT becomes 3 lac, because with 3 lac ROI will become less than interest. ROI = EBIT × 100 = 3 × 100 = 6% Total Income 50 Interest = 10% 6% < 10% So, now company must prefer equity to raise capital. Q. 21. 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. Ans. 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. Q. 22. 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. Ans. The different kinds of financial decisions taken by the company are as follows: 1. Investment decision: 2. Financing decision: 3. Dividend decision: 1. 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. Q. 23. 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? Ans. 1. Stability in earnings: “Despite fierce competition in the industry, it has been able to maintain stability in its earnings.” 1. The small investors are happy with the company for declaring stable dividend as they enjoy a regular income on their investment. Q. 24. 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. Ans. 1. Capital budgeting decision has been taken by Manoj. 2. The factors affecting Capital Budgeting Decision are as follows: 1. Cash inflows: 2. Rate of return: Q. 25. 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 yis 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. Ans. 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.

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. Q. 26. ‘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. Ans. 1. Commercial Paper: It is a 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. 1. 15 days to one year. 2. It can also be used for seasonal and working capital needs

Important Notes for NCERT Class 12 Business Studies Chapter Financial Management

Introduction: – Money required for carrying out business activities is called business finance. Finance is needed to establish a business, to run it, to modernise it, to expand or diversify it. Financial management is the activity concerned with the planning, raising controlling and administering of funds used in the business. It is concerned with optimal procurement as well as usage of finance. It aims at ensuring availability of enough funds whenever required as well as avoiding idle finance. The Main Objective of Financial Management is to maximise shareholder wealth, for which achievement of optimum capital structure and proper utilisation of funds is a must. Every company is required to take three main financial decisions which are as follow: 1. Investment Decision: – It relates to how the firm s funds are invested in different assets. Investment decision can be long-term or short term. A long-term investment decision is called capital budgeting decisions which involve huge amounts of investments and are irreversible except at a huge cost while short term investment decisions are called working capital decisions, which affect day to day working of a business. 2. Financing Decision: – It relates to the amount of finance to be raised from various long-term sources. The main sources of funds are owner s funds i.e. equity / share holder s funds and the borrowed funds i.e. Debts. Borrowed funds have to be repaid at a fixed time and thus some amount of financial risk (i.e. risk of default on payment) is there in debt financing. Moreover, interest on borrowed funds have to be paid regardless of whether or not a firm has made a profit. On the other hand, shareholder funds involve no commitment regarding payment of returns or repayment of capital. A firm mix both debt and equity in making financing decisions. 3. Dividend Decision: – Dividend refers to that part of the profit which is distributed to shareholders. A company is required to decide how much of the profit earned by it should be distributed among shareholders and how much should be retained. The decision regarding dividend sh ould be taken keeping in view the overall objective of maximising shareholder s wealth. Financial Planning: – The process of estimating the fund requirement of a business and specifying the sources of funds is called financial planning. It ensures that enough funds are available at right time so that a firm could honour its commitments and carry out, its plans. Importance of Financial Planning 1. To ensure availability of adequate funds at right time. 2. To see that the firm does not raise funds unnecessarily. Factors affecting Investment Decisions / Capital Budgeting decisions 1. Cash flows of the project:  The series of cash receipts and payments over the life of an investment proposal should be considered and analysed for selecting the best proposal. 2. Rate of Return:  The expected returns from each proposal and risk involved in them should be taken into account to select the best proposal. 3. Investment Criteria Involved:  The various investment proposals are evaluated on the basis of capital budgeting techniques. Which involve calculation regarding investment amount, interest rate, cash flows, rate of return etc. Factors Affecting Financing Decision 1. Cost: –  The cost of raising funds from different sources are different. The cheapest source should be selected. 2. Risk: –  The risk associated with different sources is different, more risk is associated with borrowed funds as compared to owner s fund as interest is paid on it and it is rapid also, after a fixed period of time or on expiry of its tenure. 3. Flotation Cost: –  The cost involved in issuing securities such as broker commission, underwriters’ fees, expenses on prospectus etc are called flotation cost. Higher the flotation ost, less attractive is the source of finance. 4. Cash flow position of the business: –  In case the cash flow position of a company is good enough then it can easily use borrowed funds. 5. Control Considerations:  In case the existing shareholders want to retain the complete control of business then finance can be raised through borrowed funds but when they are ready for dilution of control over business, equity can be used for raising finance. 6. State of Capital Markets: –  During boom, finance can easily be raised by issuing shares but during depression period, raising finance by means of debt is easy. Factors affecting Dividend Decision: 1. Earnings: –  Company having high and stable earning could declare high rate of dividends as dividends are paid out of current and past earnings. 2. Stability of Dividends:  Companies generally follow the policy of stable dividend. The dividend per share is not altered/changed in case earning changes by small proportion or increase in earnings is temporary in nature. 3. Growth Prospects:  In case there are growth prospects for the company in the near future them, it will retain its earning and thus, no or less dividend will be declared. 4. Cash Flow Positions:  Dividends involve an outflow of cash and thus, availability of adequate cash is foremost requirement for declaration of dividends. Trading on Equity: It refers to the increase in profit earned by the equity shareholders due to the presence of fixed financial charges like interest. Trading on equity happen when the rate of earning of an organisation is higher than the cost at which funds have been borrowed and as a result equity shareholder get higher rate of dividend per share.

We hope the above  Financial Management Class 12 Business Studies  are useful for you. If you have any questions then post them in the comments section below. Our teachers will provide you an answer. Also refer to  MCQ Questions for Class 12 Business Studies

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Case Studies - Financial Management | Business Studies (BST) Class 12 - Commerce PDF Download

As a student of business studies, you are expected to learn about the various aspects of management, such as planning, organizing, staffing, directing, and controlling. Case studies are an essential part of the  Class 12 Business Studies  curriculum as they provide students with an opportunity to apply theoretical knowledge to practical situations. Let's see some  Case Study Questions on Financial Management of Business Studies.  

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

In context of the above case:

• Identify of the above case:
• Identify the three factors mentioned in the paragraph which are likely to affect the working capital requirements of his business.
• Investment decision has been taken by Arun.  Investment decision seeks to determine as to how the firm’s funds are invested in different assets.  It helps to evaluate new investment proposals and select the best option on the basis of associated risk and return.  Investment decision can be long term or short-term.  A long-term investment decision is also called a Capital Budgeting decision
• The three factors mentioned in the paragraph which are likely to reduce the working capital requirements of his business are as follows:
• Available of raw material:
• Production cycle:
• Credit availed:

Q. 2. ‘Adwitiya’ is a company enjoying market leadership in the food brands segment.  It’s portfolio includes three categories in the Foods business namely Snack Foods, Juices and Confectionery.  Keeping in 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.

• As a financial manager of the company, which source of finance will you opt for debt or equity, to raise the required amount of capital?  Explain by giving any two suitable reasons in support of your answer.
• Why are the shareholder’s of the company like to gain from the issue of debt by the company?

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:

• Interest coverage ratio:

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.

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

• Give any three reasons because of which you think Computer Tech Ltd. has been paying dividends at high rate to its shareholders over the past five years.
• Comment upon the likely dividend policy of the company this years by stating any two reasons in support of your answer.
• Cash flow position:
• Access to capital market:
• This year the company is likely to follow a conservative dividend policy because of the following reasons:
• The cash flow position of the company is not god and dividends are paid in cash.
• The company may like to retain profits to finance its expansion projects.  Retained profits do not involve any explicit cost and are considered to be the cheapest source of finance.

Q. 4. Bhuvn 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.

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

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

• Identify and explain the type of risk which increases with the higher use of debt.
• Explain briefly any four factors because of which you think the company has decided to opt for equity capital.
• Financial risk of the company increases with the higher use of debt.  This is because issue of debt involves fixed commitment in terms of payment of interest and repayment of capital.  Financial risk refers to a situation when a company is unable to meet its fixed financial charges.
• The factors because of which the company has decided to opt for equity capital are as follows:
• Capital market conditions:
• Fixed operating cost:

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

• Identify the factors mentioned in the paragraph which are likely to affect the fixed capital requirements of the business for opening new showrooms both in Bangalore and Mumbai separately.
• “With an increase in the investment in fixed assets, there is a commensurate increase in the working capital requirement.” Explain the statement with reference to the case above.

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.

Q. 7. 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 crore to start the new plant.  It decides to raise Rs. 300 crore through debentures, Rs. 200 crore through long-term loan from banks and Rs. 200 crore by issue of equity share to the public.  It decided to finance the remaining amount by utilizing its reserves and surplus.

• State the importance of financial planning for this company.
• What is the capital structure of this company?  Explain.
• Identify the financial decision involved when the company decides to raise Rs. 800 crore from different sources of funds.
• How will the dividend decision of Krishna Ltd. be affected?  Explain.           (6 marks)
• Financial planning will help the company in avoiding business shocks and surprises.  It will reduce waste and duplication of efforts.
• Capital structure refers to the mix between owners funds and borrowed funds.  It is calculated as debt equity ratio

i.e., Debit.

                  Equity

For Krishna Ltd.

Debt    = Debentures + Long tgerm loans from banks = 300 + 200 = Rs. 500 crore.

Equity  = Share capital + Reserves and surplus (or retained earnings)

= 200 + 100 = Rs. 300 crores.

Therefore, debt equity ratio = 500 = 1.67 : 1

• Financing decision
• Since the company have growth opportunities of setting up a new steel plant at Gurgaon, it retains Rs. 100 crore out of profits to finance the required investment.  So, it is likely to pay less dividend.  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.

Q. 8. Cost of debt is less than cost of equity.  Still a company cannot go with entire debt.  Why?            (3 marks)

Ans.  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).

Q. 9. 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.     (3Marks)

Ans.  Working capital requirements of Amar would be less as it is a SERVICE industry.

Factors which will affects his fixed capital requirements are:

• Scale of operations
• Financing alternatives
• Growth prospects
• Diversification

Q. 10. 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.     (1 Mark)

Ans.  Working capital requirements of Yogesh would be less as it is a TRADING business.

Q. 11. Manish is engaged in business of garments manufacturing.  Identify the working capital requirement of Manish giving reason in support of your answer.          (1 Mark)

Ans.  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.

Q. 12. 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 .       (3 Marks)

Ans.  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:

• Cash flow position
• Return on investment (ROI)

Q. 13. 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.      ( 1 Mark)

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

Q. 14. Tata International Ltd. earned a net profit of Rs. 50 crores.  Ankit the finance manager of Tata International Ltd. wants to decide how to appropriate these profits.  Identify the decision that Ankit will have to take and also discuss any five factors which help him in taking this decision.              (6 Marks)

Ans.     Dividend decision

Factors affecting dividend decision.

• Stability of earnings:
• Stability of dividends:
• Growth opportunities:

Q. 15. 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.

• 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.
• Explain any two other factors, apart from those stated in the above situation, which Shalini should keep in mind while taking this decision.   (6 Marks)

Any one reason

• Due to weak cash flow position, the firm may not be able to honour fixed cash payment obligations.
• Increased fixed operating cost will increase the business risk therefore debt should not be issued as it further increases the financial risk.
• The stock market condition being bullish, the investors will prefer to buy equity shares.
• Return on Investment

Q. 16.  ‘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.               (1 Mark)

Ans.  Low, as it is a service industry, which usually do not have to maintain inventory.

Q. 17. ‘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.         (6 Marks)

Ans.  Factors affecting dividend decision: (Any four)

• 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.

• Cash Flow position

‘There is available of enough cash in the company’.

A good cash flow positions is necessary for declaration of dividend.

• Growth Prospects

‘Good prospects for growth in the future.’

If a company has good growth opportunities, it pays out less dividend.

• 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.

• 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.

Q. 18. 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 crore to set up and about Rs. 500 crore of working capital to start the new plant.

• State the objective of financial management for this company.
• Identify and state the decision taken by the finance manager in the above case.
• State any two common factors affecting the fixed and working capital requirements of Shubh Ltd.                               (6 Marks)
• Objectives of financial management of this company are:
• To ensure availability of sufficient funds from different sources at reasonable costs.
• To ensure effective utilization of such funds.
• To ensure safety of funds procured by creating reserves, reinvesting profits, etc.

Value: Maximisation of shareholders’ wealth.

• Investment decision

It relates to how the firm’s funds are invested in different assets – fixed assets and working capital.

• Factors affecting fixed and working capital requirements of Shubh Ltd.:
• Nature of business:
• Scale of operations:

Q. 19. 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.

• Identify of share of profits to its shareholders.
• State any one value which is affected by the company’s decision.        (3 Marks)
• 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.

• Value affected: Shareholders’ wealth will not be maximized.

Q. 20. 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.

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

Q. 21. 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.

• Name the different kinds of financial decisions taken by the company by quoting lines from the paragraph.
• Do you think the financial management team of the company has been able to achieve its prime objective?  Why or why not?  Give a reason in support of your answer.
• Investment decision:
• Financing decision:
• Dividend decision:
• 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.

Q. 22. 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.

• State any one reason because of which the company has been able to declare high dividend by quoting line from the paragraph.
• Why do you think small investors are happy with the company for declaring stable dividend?
• Stability in earnings:

“Despite fierce competition in the industry, it has been able to maintain stability in its earnings.”

• The small investors are happy with the company for declaring stable dividend as they enjoy a regular income on their investment.

Q. 23. 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.

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

Q. 24. 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 yis 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:

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

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.

Q. 25. ‘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.

• Name and explain the money-market instrument the company can use for the above purpose.
• What is the duration for which the company can get funds through this instrument?
• State any other purpose for which this instrument can be used.
• Commercial Paper:

It is a 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.

• 15 days to one year.
• It can also be used for seasonal and working capital needs.

Get an overview of Business Finance through this  video. Find NCERT Solutions of Financial Management  here .  

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

NCERT Solutions are extremely helpful books while preparing for the CBSE Class 12 Business Studies examination. These Solutions of NCERT are collated by the subject matter experts to help students learn and grasp the concepts easily.

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

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Very short answer questions ncert business studies solutions class 12 chapter 9.

Q1. What is meant by capital structure?

Capital structure is the combination of debt and equity, which is used by a company to finance its requirements for funds. Debt can be obtained in the form of loans, while equity is generated through retained earnings or common stock.

Q2. Discuss the two objectives of Financial Planning.

Financial planning is the process of framing financial policies, procedures, programs and budgets that are necessary for the financial activities of the enterprise.

Objectives of financial planning are:

1. To ensure proper utilisation of funds available for the organisational activities.

2. To determine the capital structure, which is the composition of debt and equity that is necessary for a business.

Q3. Name the concept of financial management, which increases the return to equity shareholders due to the presence of fixed financial charges.

Trading on equity concept increases returns to equity shareholders due to the presence of fixed financial charges.

Q4. Amrit is running a ‘transport service’ and earning good returns by providing this service to industries. Giving reason, state whether the working capital requirement of the firm will be ‘less’ or ‘more’.

The type of business conducted by Amrit is transport service which will be operating on a large scale. Hence, there is a need for more amount of working capital.

Q5. Ramnath is into the business of assembling and selling televisions. Recently he has adopted a new policy of purchasing the components on three months’ credit and selling the complete product in cash. Will it affect the requirement for working capital? Give reasons in support of your answer

As Ramnath has adopted the policy of purchasing components on credit for 3 months and selling the product in cash, the working capital requirement is reduced.

Short Answer Questions NCERT Business Studies Solutions Class 12 Chapter 9

Q1. What is financial risk? Why does it arise?

Financial risk is said to be the situation when a company is unable to meet its set of fixed expenses such as interest payment, loan repayment and preference dividend pay-out. It is a situation where a company is unable to meet its financial obligations. Financial risk arises due to the high level of debt in the capital structure. A high level of debt leads to a high amount of interest which increases the chances of defaulting on payment.

Q2. Define a ‘current asset’. Give four examples of such assets.

The current assets of a firm are those assets that have the potential to be converted into cash or cash equivalents within the current accounting period. Current assets provide liquidity to the company. Examples of current assets are cash, short-term investment, marketable securities and debtors.

Q3. What are the main objectives of financial management? Briefly explain.

The main objective of financial management is the maximisation of shareholders’ wealth. Therefore, financial management is all about making those decisions that will bring gains for the shareholders. Gains can be said to be achieved when the market value of shares rises. Once the primary objective of wealth maximisation is achieved, the other objectives, such as maintaining liquidity and proper utilisation of funds, are fulfilled along with it.

Q4. Financial management is based on three broad financial decisions. What are these?

Financial management is the technique of proper allocation, acquisition and use of funds by the company. The three broad financial decisions on which financial management is based are investment decisions, financial decisions and dividend decisions.

Q5. Sunrises Ltd., dealing in readymade garments, is planning to expand its business operations in order to cater to the international market. For this purpose, the company needs an additional 80,00,000 to replace machines with modern machinery of higher production capacity. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was 8,00,000, and the total capital investment was 1,00,00,000. Suggest whether the issue of debenture would be considered a rational decision by the company. Give reasons to justify your answer. (Ans. No, the Cost of Debt (10%) is more than ROI which is 8%).

A company is able to issue debentures for fundraising when the debt cost is less than the cost of capital.

In this question, the cost of capital of Sunrises Limited is 10% which is 8,00,000, as the total capital is 80,00,000.

Now, the return on investment is calculated as

ROI = Return / Investment

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

Assuming that the company will be operating with the same efficiency, the additional investment of 80,00,000 will have an ROI of 8%, which will amount to 6,40,000.

The cost of debt will be 8,00,000, which is more than the ROI of 6,40,000. Therefore, it is advisable for a company not to issue a debenture when the cost of debt is higher than the cost of capital.

Q6. How does working capital affect both the liquidity as well as the profitability of a business?

Working capital in a business is the surplus that is determined by subtracting current liabilities from the current assets of the organisation. By increasing the working capital, the liquidity of an organisation increases. But more current assets present in business results in a fall in profitability of the organisation, as current assets offer low returns, which cause a decline in the profit of a business.

Q7. Aval Ltd. is engaged in the business of export of canvas goods and bags. In the past, the performance of the company had been up to expectations. In line with the latest demand in the market, the company decided to venture into leather goods, for which it required specialised machinery. For this, the Finance Manager Prabhu prepared a financial blueprint of the organisation’s future operations to estimate the number of funds required and the timings with the objective of ensuring that enough funds are available at the right time. He also collected relevant data about the profit estimates for the coming years. By doing this, he wanted to be sure about the availability of funds from the internal sources of the business. For the remaining funds, he is trying to find out alternative sources from outside.

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

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

a. The financial concept discussed here is capital budgeting; it is the decision regarding capital investment which will have an impact on the profitability of the company in the long term.

The company wants to invest in new machinery, which needs investment, this will have a direct impact on the operations, which will result in affecting the profitability of the organisation.

The following objectives can be achieved:

1. Cash flow: Investment will bring new machinery, which will increase organisations’ profitability.

2. When a company wants to raise funds from both inside and outside the organisation, it will be helpful to analyse that return generated from such investment will be more than the cost of capital.

3. Investment used: The company is planning to raise funds from both inside and outside. It is important to know that funds from internal and external sources will have different rates of interest.

b. Companies pay dividends to shareholders, which are part of the company earnings. Paying of dividends is based on the following factors:

1. Legal Constraint: Legal constraints are such constraints that are mentioned in the company laws which impact paying out dividends on certain occasions. It should be followed properly.

2. Contractual Constraints: Paying out of dividends reduces cash in the company. Money that is raised as a loan will put certain restrictions on the company for paying dividends, such constraints are called contractual constraints.

Long Answer Questions NCERT Business Studies Solutions Class 12 Chapter 9

Q1. What is working capital? How is it calculated? Discuss five important determinants of working capital requirement.

Working capital in a business is the surplus that is determined by subtracting current liabilities from the current assets of the organisation. Current assets are those assets that can be converted into cash or cash equivalent within the current accounting period. Two broad categories of working capital can be classified:

1. Gross Working Capital

2. Net Working Capital

Gross Working Capital is referred to as the current assets that are present in the balance sheet of a company.

Net Working Capital is the difference between current assets and current liabilities present in the balance sheet of an organisation. Net working capital is considered to be more relevant for capital financing and management.

Working capital is calculated as

Working Capital = Current Assets – Current Liabilities

The following are the determinants of the working capital requirement:

1. Business Type: The nature of the business of a firm determines its working capital requirement. The size and type of operations of an organisation will affect the extent of working capital required. For example, firms that offer services will have low working capital requirements, whereas a manufacturing plant will have a large working capital requirement. The operating cycle of such a firm is more.

2. Scale of operations: The extent of the scale of operations is a determining factor for working capital. A firm having a large scale of operation will see an increase in working capital requirement as firms have a high requirement of maintaining inventory. Similarly, a firm having a small scale of operations will have a low working capital requirement.

3. Fluctuations of Business Cycle: The working capital will also vary with the different phases in which a business is running. During high demand in the market, there will be a high requirement for production; so, working capital will be more, whereas in terms of low demand.

4. Production Cycle: Every industry will have a different production cycle depending on the type of industry. A firm having a longer production cycle will have a higher requirement of working capital, and firms having a short production cycle will have a low working capital requirement.

5. Growth Prospects: Companies that have higher growth prospects and are looking for expansion have a higher working capital requirement.

Q2. “Capital structure decision is essentially optimisation of risk-return relationship.” Comment.

Capital structure is the combination of debt and equity, which is used by a company to finance its requirements for funds. Debt can be obtained in the form of loans, while equity is generated through retained earnings or common stock. Borrowed funds can be in the form of loans, debentures, bank loans, etc. While in the case of an owner’s fund, it can be in the form of preference share capital, reserves, retained earnings, equity share capital, etc.

Debt and equity both have their risk and profitability. Debt is a relatively cheap source while the greater risk is there, and equity is comparatively expensive but is of lower risk for the firm. Fundraising through debt is cheaper, while same with equity is expensive. Debt, though cheaper, has more risks, as it has an obligation towards lenders. For equity, there is no such compulsion to pay dividends.

Also, the return offered by the sources leads to an increase in value per share. Debt gives higher returns per share but increases the risk comparatively many times.

Therefore, capital structure decisions should be taken into consideration with return and the amount of risk involved.

Q3. “A capital budgeting decision is capable of changing the financial fortunes of a business.” Do you agree? Why or why not?

Capital budgeting decision needs to be taken very carefully, as the fortunes of a business can be changed with such a decision. The decision of capital budgeting is the allocation of fixed capital to different projects. Capital budgeting involves purchasing new assets, or it can be regarding the replacement or modernisation of the assets. All these decisions have a long-term impact on the business and can affect profitability and risk.

The following points highlight the importance of capital budgeting decisions:

1. Investment in long-term assets will yield returns in future and, by doing so, affect the future prospects of a business. Therefore, the kind of decision taken by a company will reflect on its long-term growth.

2. A large amount of funds is required to acquire assets. Therefore, the money that is invested will be blocked for a certain period, which makes it all the more important to plan capital budgeting decisions.

3. Acquiring assets is of high risk because it has a long-term impact on the business. If the return on the asset is less than the investment, the business will be impacted.

4. Decisions, once made, are irreversible as reversing leads to a great amount of loss.

Q4. Explain the factors affecting the dividend decision.

A dividend decision is a decision to share a portion of profit which is to be shared between shareholders and what should be kept as retained earnings. The following factors affect dividend decisions:

1. Businesses are able to pay dividends from current and past earnings. A company which is having higher earnings will be in a better position to pay dividends in comparison to a company having limited earnings.

2. Companies having stable earning are in a good position to provide dividends as compared to companies which are inconsistent in earnings.

3. Companies follow a stable dividend-sharing policy. It will only be changed when there is a rise in earning.

4. Companies that are looking for higher growth may keep a certain portion of earning as dividends while investing the majority in expansion. Therefore, such companies offer lesser dividends.

5. If the company does not have a good cash flow, it will impact the dividends paid out.

6. Company must also check the shareholder preferences while paying dividends, as shareholders may require a certain amount of dividend.

7. Taxation policies play a major role in deciding the dividends. A policy levying high tax on dividend distribution leads to companies offering lower dividends and vice versa.

8. Stock market prices will fluctuate depending on the dividend that is declared. It can rise with a high dividend payout while declining with a low dividend payout.

9. There can be contractual constraints at the time of offering loans that are imposed by the lender in the form of an agreement. Such agreements need to be checked before issuing dividend payouts.

10. Companies having greater access to capital markets can pay a higher dividend and vice versa.

11. Companies have to follow the rules, regulations and restrictions of the Companies Act while declaring dividend pay-out.

Q5. Explain the term ”Trading on Equity”. Why, when and how it can be used by a company?

Trading on equity is a process of using debt in order to produce a gain for the owners. In this process, new debt is taken in order to gain new assets with which they can earn a greater level of interest, which is more than the interest that is paid for the debt. This process is practised as the equity shareholders are only interested in the income that is generated from the business. It is only practised by a company when the rate of return on investment is greater than the rate of interest for the fund that is borrowed. This practice is a form of financial leverage that a company exercises. There is an increase in earnings per share when this process is adopted.

Trading on equity is profitable only when the return on investment is greater than the amount of funds borrowed. It is said that trading on equity shall be avoided if the return on investment is less than the rate of interest from the funds that are borrowed.

Q6. ‘S’ Limited manufactures steel at its plant in India. It is enjoying a buoyant demand for its products as economic growth is about 7%-8%, and the demand for steel is growing. It is planning to set up a new steel plant to cash on the increased demand. It is estimated that it will require about Rs 5000 crores to set up and about Rs 500 crores of working capital to start the new plant.

1. Describe the role and objectives of financial management for this company.

2. Explain the importance of having a financial plan for this company. Give an imaginary plan to support your answer.

3. What are the factors which will affect the capital structure of this company?

4. Keeping in mind that it is a highly capital-intensive sector, what factors will affect the fixed and working capital? Give reasons in support of your answer.

1. Role of financial management in this company is as follows:

1. Financial management will help in taking decisions to purchase fixed assets which will increase the composition of fixed assets.

2. The composition of funds that are used by a company refers to the mix of short and long-term funds that are used by the company. Fund composition is determined by the company’s decision which is regarding profitability and liquidity. It can be said that if a company is looking to attain higher liquidity, it would be looking to opt for long-term financing and companies looking for short-term liquidity will opt for short-term financing.

3. The proportion of debt and equity that should be used in long-term financing or, in other words, the distribution of funds that are raised with a mix of debt and equity, which is taken by financial management.

4. The amount of current assets that a company holds is dependent on the financial decision of the company. A higher amount will lead to more working capital but a decrease in profits and vice versa.

In this case, the basic objective of financial management will be towards increasing or maximising shareholders’ wealth. Decisions that will be beneficial for the shareholders, i.e., help in increasing their market value of shares. This can be achieved if financial management takes a decision that results in an increase in the value of shares where benefits obtained from making this decision exceed the cost of taking the financial decision.

2. These points highlight the importance of financial planning for the company:

i. It enables the company to forecast future requirements.

ii. Financial plan will be helpful in avoiding any kind of shortage that may occur or surplus that can also occur. It ensures that funds are used optimally.

iii. It helps in better coordination between the sales and production teams.

iv. It helps in avoiding any type of waste such as time, money and effort.

v. If the targets and policies are well defined, then financial planning helps in evaluating the performance in a good way.

Proposed Financial Plan

The company can use the 50% through the issue of shares, and the other 50% can be collected using funds that are borrowed from outside in the form of debts.

3. Following factors will affect the capital structure choice:

i. Company should be opting for debt capital in case of strong cash flow is present. Debt requires payment of principal as well as interest that is applicable to the principal.

ii. Debt service coverage ratio determines the obligations towards cash payment of a company as against the cash availability. Having a high DSCR can make the company opt for debt as a source of funds.

iii. Equity cost can be directly related to the financial risk that a company faces. A company having a higher financial risk will see the expectations of shareholders rise, which raises the cost of equity. The rising cost of equity makes it difficult to opt for equity.

iv. Good stock market conditions are very much conducive to for opting equity capital, whereas poor stock market conditions are difficult for opting for equity capital.

v. Higher interest coverage ratio, which is a measure of the times EBIT is able to meet interest rate obligations. A higher interest coverage ratio translates to lower risk for the company, which enables a company to opt for a high portion of debt in the composition of its capital structure.

vi. A high rate of floatation cost leads to a reduction of the component in capital structure. A high floatation cost of equity results in a low capital structure.

vii. Higher rate of interest applicable on debt leads to higher debt cost, which makes it difficult to choose debt as capital structure.

4. Factors affecting fixed capital requirements are as follows:

i. Fixed capital can be determined by the type of business. As the company mentioned here (S Limited) is a company which is into manufacturing, it will have a large operating cycle which therefore results in a need for a large amount of fixed capital.

ii. The scale of operations of a company also determines the need for investment in assets such as machinery, land, plants and buildings, which requires a large sum of fixed capital.

iii. A growing company or a company which is seeking expansion will need more amount of fixed capital which is the case with S Limited.

Factors affecting working capital requirements will be as follows:

i. The working capital requirements for a company will vary on the type of business it is conducting. As it is a manufacturing firm will, it will have a large operating cycle as goods need to be transformed from raw materials to finished goods. Therefore, the requirement for working capital will be more for this firm.

ii. As this company is conducting large-scale operations, there will be requirements for a large amount of working capital.

iii. The company is looking to expand its business which requires more working capital as it will lead to higher growth prospects.

iv. As the product that is being manufactured by this company is in high demand, the company would need to produce more to meet the requirements. Therefore, there will be a need for a large amount of working capital.

NCERT Solution for Class 12 Business Studies Chapter 9 – Financial Management provides students with a comprehensive introduction to the concepts. It also provides a clear picture of how the company finances are managed in order to receive more revenue.

Concepts covered in this chapter

• Meaning of  financial management
• Meaning of business finance
• Role of  financial management
• Objectives of  financial management

NCERT Solutions for Class 12 Business Studies Chapter 9 provides a range of illustrative examples, which help the students to comprehend and learn quickly. The above-mentioned are the concepts discussed in the Class 12 CBSE syllabus. For more solutions and study materials of NCERT Solutions for Class 12 Business Studies, visit BYJU’S website or download the app.

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

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

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

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

CBSE Class 12 Business Studies Syllabus 2023-2024

CBSE Class 12 Business Studies Sample Paper 2023-2024

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

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

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

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

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management

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

Very Short Answer Type

1. What is meant by capital structure?

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

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

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

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

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

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

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

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

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

Short Answer Type

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

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

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

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

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

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

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

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

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

ROI = Return/Investment

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

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

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

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

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

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

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

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

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

Long Answer Type

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

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

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

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

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

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

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

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

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

4. Explain the factors affecting dividend decision?

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

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• How are Business Studies chapter 9 class 12 solutions useful for students? + Business Studies chapter 9 class 12 solutions are useful for students because they present a detailed analysis of the chapter and questions that are frequently asked in the examination. Further, these solutions can help you clear your basic understanding of the chapter and topics present in it.
• How to download NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management? + NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Managemen can be easily downloaded by clicking on the PDF download link attached in the article. After clicking on the link, a new page will be opened with NCERT Solutions in PDF. Then, students just have to click on the downward arrow button to download the solutions in PDF.
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• CBSE Class 12 Business Studies Chapter 9 – Financial Class 12 Notes

Financial Management Class 12 Revision Notes

In the financial management class 12 notes, we will discuss the meaning of Business Finance. Then, will describe financial management and its role in the enterprise. Also, we will discuss the objectives of financial management and how they could be achieved. Hence, we will come to know that the primary aim of financial management is to maximize shareholder’s wealth. Moreover, we will explain the meaning and importance of financial planning. Financial planning strives to achieve twin objectives. The first is to ensure the availability of funds whenever these are required. The other is to see that the firm does not raise resources unnecessarily. Furthermore, we will study the three broad decisions under financial decision-making. Thus, we will discuss Investment, financing and dividend decisions in detail.

Then, we will study about owners’ funds’ and ‘borrowed funds’.  Also, we will analyze the factors affecting the choice of an appropriate capital structure. Further, we will state the meaning of fixed and working capital. Then, analyze the factors affecting the requirement of fixed and working capital.

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Sub-topics under Financial Management:

• Meaning of Business Finance :  In this Sub-topic, we will discuss the meaning of Business Finance.
• Financial Management and Objectives of Financial Management :  Here, we will describe financial management and its role in the enterprise. Also, we will discuss the objectives of financial management and how they could be achieved.
• Financial Planning : In this Sub-topic, we will explain the meaning and importance of financial planning.
• Financing Decision : In this Sub-topic, we will study the three broad decisions under financial decision-making. Thus, we will discuss Investment, financing and dividend decisions in detail.
• Capital Structure : We will study about owners’ funds’ and ‘borrowed funds’. Also, we will analyze the factors affecting the choice of an appropriate capital structure. Further, we will state the meaning of fixed and working capital. Then, analyze the factors affecting the requirement of fixed and working capital.

You can download CBSE Class 12 Business Studies Chapter 9 Revision Notes by clicking on the download button below

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CBSE Class 12 Business Studies Revision Notes

• CBSE Class 12 Business Studies Chapter 13 – Entrepreneurship Development Class 12 Notes
• CBSE Class 12 Business Studies Chapter 12 – Consumer Protection Class 12 Notes
• CBSE Class 12 Business Studies Chapter 11 – Marketing Class 12 Notes
• CBSE Class 12 Business Studies Chapter 10 – Financial Markets Class 12 Notes
• CBSE Class 12 Business Studies Chapter 8 – Controlling Class 12 Notes
• CBSE Class 12 Business Studies Chapter 7 – Directing Class 12 Notes
• CBSE Class 12 Business Studies Chapter 6 – Staffing Class 12 Notes
• CBSE Class 12 Business Studies Chapter 5 – Organising Class 12 Notes
• CBSE Class 12 Business Studies Chapter 4 – Planning Class 12 Notes

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• CBSE Important Questions on Class 12 Business Studies Chapter 9 - Financial Management

Important Practice Problems for CBSE Class 12 Business Studies Chapter 9: Financial Management

Free PDF download of Important Questions with Answers for CBSE Class 12 Business Studies Chapter 9 - Financial Management prepared by expert Business Studies teachers from latest edition of CBSE(NCERT) books. Register for Online tuition on Vedantu.com to score more marks in CBSE board examination.

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Effective Preparation for Class 12 Business Studies Chapter 9: Important Questions and Answers

Very short questions and answers (1 or 2 marks questions).

1. 'Reliable Transport Services Ltd.' specializes in transporting fruits and vegetables. It has a good reputation in the market as it delivers the fruits and vegetables at the right time and at the right place." State with reason whether the working capital requirements of 'Reliable Transport Services" will be high or low.    

Ans: Reliable Transport Services Ltd.'s working capital requirements will be minimal. Because fruits and vegetables are perishable by nature, there will be no need to have a big amount of stock on hand.

2. How do 'Floatation costs" affect the choice of capital structure of a company? State.

Ans: The cost of obtaining cash is known as the flotation cost. The floatation cost for issuing debt is normally lesser than that of issuing equity, hence in such cases a higher ratio of debt in the capital structure can be preferred by the companies.

3. What is meant by 'financial management'?                                        

Ans: Financial management encompasses all business activities including the acquisition and preservation of capital funds in order to achieve a company's financial demands and overall objectives.

4. Besides the investment decision the finance function is concerned with two other broad decisions. Name these decisions.                                                   

Ans: The decision other than investment decision are:

Financing Decision: This refers to the decision regarding the amount of finance to be raised, choosing from the various long term and short term sources of finance, as well as the decisions regarding choosing the most optimum source of finance.

Dividend Decision: A dividend is a portion of a company's profit that is delivered to stockholders. The stockholders receive current income as a result of this. The financial choice concerns the distribution of profits to investors who provided cash to the company. The amount of earnings to be distributed among the  shareholders is the subject of the dividend decision.

It must be decided that, 

If all profits are to be dispersed, 

Whether all earnings will be retained in the business, or 

Whether a portion of profits will be retained in the business and the remainder distributed among shareholders.

5. A textile company is diversifying and starting a steel manufacturing plant. State with reason the effect of diversification on the fixed capital requirements of the company.

Ans: Due to diversification, the investment will increase thus leading to increased fixed capital requirements.

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

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

Ans: "Technology Upgrade” because mobile phones are more prone to get obsolete due to technology upgradation.

7. The size of assets, the profitability and competitiveness are affected by one of the financial decisions. Name and state the decision. 

Ans: Capital budgeting/investment decisions have an impact on asset size, profitability, and competitiveness.

8. Why does financial risk arise?

Ans: Regardless of whether the company makes a profit, interest on borrowed funds must be paid. Furthermore, borrowed funds must be repaid after a defined period of time, and they are subject to a charge on assets. This gives rise to financial risk.

9. How does the production cycle affect working capital?

Ans: The longer the production cycle, the longer the capital will be stuck in raw materials and semi-manufactured products. As a result, more working capital will be required when the production cycle is long, whereas less working capital will be required when the cycle is short.

10. Enumerate two objectives of financial management?

Ans: The two objectives of financial management are:

Profit Maximization: The primary objective is concerned with the increasing earning per share (EPS) of the company. It is also the traditional objectives of the financial management that focuses on the fact that all the financial efforts should be made to increase the overall profit of the company,

Wealth Maximization : This objective focuses on increasing the overall shareholder wealth of the company, by directing the financing efforts on increasing the share price of the company. Higher the share price, higher the wealth. The goal of financial management in this is to optimize the current value of the company's equity shares.

Other Objectives: There can be other objectives such as optimum utilisation of financial resources, choosing the most appropriate source, ensuring easy availability of funds at reasonable costs etc.

11. Radhika and Vani who are young fashion designers left their job with a famous fashion designer chain to set-up a company "Fashionate Pvt. Ltd.' They decided to run a boutique during the day and coaching classes for entrance examinations of National Institute of Fashion Designing in the evening. For the coaching centre they hired the first floor of a nearby building. Their major expense was money spent on photocopying of notes for their students. They thought of buying a photocopier knowing fully that their scale of operations was not sufficient to make full use of the photocopier.

In the basement of the building of 'Fashionate Pvt. Ltd.' Praveen and Ramesh were carrying on a printing and stationery business in the name of 'Neo Prints Pvt. Ltd.' Radhika approached Praveen with the proposal to buy a photocopier jointly which could be used by both of them without making separate investment, Praveen agreed to this.

Identify the factors affecting fixed capital requirements of 'Fashionate Put. Ltd."

Ans: The level of collaboration has an impact on "Fashionate Pvt. Ltd. fixed capital requirements. Occasionally, business organizations would collaborate and develop certain facilities together. In such cases, an individual organization's requirement for fixed capital reduces.

12. What is meant by 'Capital Structure'?                                                

Ans: The term "capital structure" refers to a company's prudent use of debt and equity. One of the most essential considerations in financial management is the financing pattern, or the proportion of funds raised from various sources.

13. Name & state the aspect of financial management that provides a link between investment and financing decisions.                                                        

Ans: Financial Planning provides a link between investment and financing decisions. Financial Planning involves designing the blueprint of the financial operations of a firm.

14. Name and state the aspect of financial management that enables to foresee the fund requirements both in terms of "the quantum' and 'in terms of the timings".

Ans: "Financial Planning" is the component of financial management that provides foresight of fund requirements both in terms of "quantity" and "timings." Financial planning is creating a blueprint for a company's entire financial operations so that the appropriate quantity of funds are available for various operations at the appropriate time.

Short Questions and Answers (3 or 4 Marks Questions)

15. State any four factors which affect the requirements of working capital requirements of a company.

Ans: Working capital requirements are influenced by the following factors:

Nature of Business: A company's basic nature has an impact on the quantity of working capital it requires. A trading firm, for example, requires less working capital than a manufacturing organization.

Scale of Operations: A large-scale operation will require more inventory since its working capital requirements are higher than a small-scale operation.

Business Cycle: When the economy is booming, more manufacturing is undertaken, and thus more working capital is required, as opposed to when the economy is in a slump.

Seasonal Factors: Demand for a product will be greater during peak season, necessitating more working capital than during lean season.

16. 'Best Bulbs Pvt. Ltd. was manufacturing good quality LED bulbs and catering to the local market. The current production of the company is 800 bulbs a day. Sumit, the marketing manager of the company surveyed the market and decided to supply the bulbs to five-star-hotels also. He anticipated the higher demand in future and decided to buy a sophisticated machine to further improve the quality and quantity of the bulbs produced.

Identify the factors affecting fixed capital requirements of the company.

Ans: The factor determining a company's fixed capital requirements is 'Growth Prospects’. Higher output, more sales, more inputs, and so on are all related to a company's expansion and growth. This necessitates the use of more advanced machinery. As a result, organizations with strong growth potential require more fixed capital, and vice versa. High growth prospects lead to Large fixed capital requirements, whereas low growth prospects lead to low fixed capital requirements.

17. Every manager has to take three major decisions while performing the finance function. Explain them.

Ans: A management must make three main decisions:

Investment Decision: Investment decision refers to the prudent allocation of a firm's resources among various alternative offers, with the minimum cost, maximum return.

Dividend Decision: Dividend decision is whether to distribute earnings to shareholders as dividends or to retain earnings to finance long-term projects of the firm.

Long Questions and Answers (5 or 6 Marks Questions)

18. Sakshi Ltd. is a company manufacturing electronic goods. It has a share capital of Rs. 120 lakhs. The earning per share in the previous years was Rs 0.5. For diversification the company requires additional capital of Rs 80 lakhs. The company raised funds by issuing 10 % debentures for the same. During the current year the company earned profit of Rs 16 lakhs on capital employed, It paid tax of 40%.

(a) State whether the shareholders gained or lost in respect of earning per share on diversification. Show your calculations clearly.

Ans: (a) Profit before Interest $\& \operatorname{Tax}=R_{s} 16,00,000$ (Given) 

Interest on $10 \%$ debenture $=\operatorname{Rs} 8,00,000$ 

Profit before Tax $=$ Profit before Interest and Tax

Interest $=16,00,000-8,00,000=\operatorname{Rs} 8,00,000 .$

$\operatorname{Tax}(a) 40 \%=\operatorname{Rs} 3,20,000\left\{8,00,000 \times \frac{40}{100}\right\}$

Profit after Tax =  Profit before tax - Tax=8,00,000-3,20,000=4,80,000

$\mathrm{EPS}=\frac{\text { profit after tax }}{\text { Number of equity shares }}=\dfrac{4,80,000}{12,00,000}=0.4$

Note: Equity shares are considered to have a face value of Rs 10 each.

Hence, the number of equity shares is 12,00,000.

(b) Also state any three factors that favour the issue of debentures by the company as part of its capital structure. 

Ans: The following are three characteristics that favour the corporation issuing debentures as part of its capital structure.

Tax Deductibility: The company's interest payments on its debentures are tax deductible. In the above scenario, the company is paying tax 40 %. Thus, it is beneficial for the company to issue debentures.

Say in Management : Issuing more shares will dilute management's control. Thus, companies who aren’t willing to dilute the control may opt for more debt and less equity.

Relatively Low Cost: For a company, the cost of raising capital through debentures is relatively lower than that through equity. Debenture investors require a lower rate of return due to the assurance (of rate of return) and guaranteed repayment (of debenture amount at maturity). Aside from that, interest paid to debenture holders is a tax-deductible expense. This means that after deducting interest from the company's earnings, the net amount is utilised to calculate tax liabilities. As a result, corporations prefer debentures since a higher usage of debt decreases the overall cost of capital while leaving the cost of equity the same.

19. Explain briefly any four factors that affect the working capital requirement of a company.

Ans: The different factors that influence a company's working capital requirements are outlined below.

The effective interest rate that a firm pays on its debts, such as bonds and loans, is known as the cost of debt.

Business Type: Companies that provide services or trade (and have a short operational cycle) require less working capital than companies that manufacture goods. The raw materials are generally the same as the final outputs and the sales transaction takes place immediately in service and trading organization, thus leading to low working capital requirements.. A manufacturing firm, on the other hand, has a long operational cycle, and raw resources must be turned into completed goods before they can be sold, thus leading to large working capital needs. Small working capital needs are for service or trading businesses, while manufacturing companies have a high need for working capital.

Credit Extends to the Firm's Ability: When a corporation has a generous credit policy, the number of borrowers grows. This, in turn, raises the company's working capital requirements. A strict credit strategy, on the other hand, decreases the need for working capital. Large working capital is required with a company having a liberal credit policy. Whereas, a strict credit policy leads to low working capital needs.

Extent of Availability of Raw Material: If the raw materials required by the company can be availed easily, then the firm need not maintain a large stock of inventories of raw material. In such circumstances, the company's working capital requirements are reduced. If on the other hand, raw materials aren't readily available or their supply isn't consistent, the company will need to keep a significant stock of raw materials on hand to assure uninterrupted operations, necessitating a substantial amount of working capital. Hence if raw materials are readily available, then working capital requirements are minimal. But if obtaining raw materials is difficult then it will result in a high working capital demand.

Scale of Operations: Companies operating on a large scale require large working capital. This is due to the fact that such businesses must keep a large stock of merchandise and debtors. When the scope of operations is limited, however, the amount of working capital required is lower. Hence, large-scale operations necessitate a large amount of working capital. Operating on a small scale necessitates a low level of working capital.

20. The board of Directors has asked you to design the capital structure of the company. Explain the factors that you would consider while doing so.

Ans: The following seven elements are used to establish a company's capital structure:-

Cash Flow Position: The cash position at the end of the month on a cash flow statement represents the amount of cash the company has in hand at that point in time. This cash position reflects the company's financial strength and liquidity, indicating the company's capacity to satisfy its existing obligations. Hence, a company with high liquidity and a good cash flow position can issue debt capital, as the company will have less chances of facing financial risk than the company with a low cash position.

Tax Rate: Higher the tax rate, more preference for debt capital in the capital structure, as interest on debt capital  being a tax deductible expense makes the debt cheaper.

Cost of Debt: Lower the cost of debt, higher will be the preference for debt capital in the equity share as against equity capital.

Control: If the existing shareholders want to maintain the control in the firm, the company may prefer more debt over equity in the capital structure, as issuing debt will not affect the control stake of existing shareholders.

Stock Market Situations: If the stock market is flourishing, and there is a condition of boom then the companies may prefer more equity over debt in the capital structure. However, in the case of a bear market, to avoid any more risks, the companies will prefer more debt over equity in the capital structure.

Return on Investment (ROI): It is a performance metric used to assess an investment's efficiency or profitability, as well as to compare the efficiency of many investments. A higher ROI over the rate of interest will make the companies prefer debt capital because of lower cost and higher returns. While in the case of ROI being less than rate of interest, equity would be preferred, as in this case debt would be more costly affair for the company

Size of Business: Small businesses generally go for retained earnings, and equity capital, as if they go for debt or borrowed capital, the company has to face a fixed interest burden. However in the case of large companies, issuing debt is not a big issue, and they can raise long term finance from borrowed sources cheaper than that of small firms.

21. The directors of a company have decided to expand their business activities by increasing the stock of raw materials and finished goods at an estimated cost of Rs. 50 lakhs. Describe the various ways open to the company to raise necessary finance for the purpose.

Ans: The company can raise necessary finance for the purpose of expansion through the following function.

Issue of Shares: The technique through which businesses distribute additional shares to shareholders is known as the issue of shares. Individuals or corporations can be shareholders. While circulating the shares, the company adheres to the rules set forth by the Companies Act of 2013. The three major fundamental steps in the process of issuing shares are the distribution of prospectuses, the receipt of applications, and the allocation of shares.

Issue of Debentures: The term "issuing debentures" refers to the company's issuance of a certificate under its seal that serves as an acknowledgement of the company's debt. The process of a firm issuing debentures is similar to that of issuing shares. A prospectus is published, applications are accepted, and allotment letters are sent out.

Loans from Banks and Financial Institutions: Banks are the main actors in all areas of the financial markets, including credit, cash, securities, foreign exchange, and derivatives, due to their vast monetary holdings. The growth of the business sector determines a country's economic development. By making funds available to businesses, a well-developed financial system aids their growth.

Retained Earnings: Accounting's idea of retained earnings is crucial. The word refers to a company's previous profits, less whatever dividends it has paid in the past. The term "retained" refers to the fact that the earnings were not distributed to shareholders as dividends, but rather were kept by the corporation.

22. Explain briefly any four factors affecting the fixed capital requirements of an organization.

Ans: Factors affecting an organization's fixed capital requirements include:

Nature of Business: the type of business is a factor in determining the fixed capital requirements. The type of fixed asset used in manufacturing business (namely plant machinery etc., whereas in trading its merely sale and purchase. For e.g. manufacturing businesses necessitate a large capital investment in fixed assets such as plant and machinery etc., whereas trade concerns necessitate a smaller capital investment in fixed assets.

Scale of Operations: A larger organization operating on a large scale requires more fixed capital investment as compared to an organization operating on a small scale. Large firm has more people, more products to produce, more land space, thus fixed expenses increase in terms of salaries, rent, etc.

Choice of Technique: An organization using capital-intensive techniques requires more investment in fixed assets as compared to an organization using labour intensive techniques. on the other hand the capital intensive as it uses machinery etc .,which is costly.

Technology Upgrade: When compared to other businesses, a company with obsolete techniques and assets needs to revamp their assets and techniques time and again.

Growth Prospects: In order to expand their production capacity, companies with stronger growth prospects require larger fixed capital investments.

Diversification: If a corporation diversifies, it will need to invest more fixed capital in plant and machinery, among other things.

Alternatives to Outright Buying: A well-developed financial sector might offer leasing options as an alternative to outright purchase and more of the alternatives available, lesser the fixed capital required.

Collaboration Level: If companies are collaborating, forming a joint venture, and so forth, then they need less fixed capital as they share plants and machinery with their collaborators.

23. Silkiya Ltd." is a company manufacturing silk cloth. It has been consistently earning good profits for many years. This year too, it has been able to generate enough profits. There is availability of enough cash in the company and good prospects for growth in future. It is a well-managed organization and believes in quality, equal employment opportunities and good remuneration practices. It has many shareholders who prefer to receive a regular income from their investments. It has taken a loan of more than 60 lakhs from SBI Bank and is bound by certain restrictions on the payment of dividend according to the terms of the loan agreement. The above discussion about the company leads to various factors which decide how much profit should be retained and how much has to be distributed by the company. 

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

Ans: The choice on dividends has been considered in the question. 

The following factors affect the dividend decision, along with their quotations:

Stable Earnings:   A company's earnings are used to determine the amount of dividends it will pay out. A company with stable and smooth earnings can pay higher dividends to shareholders than a company which has unstable and uneven earnings. Quotation: “It has been consistently earning good profits for many years”. 

Future Growth Prospects: Companies with better future growth prospects tend to save more of their earnings for future reinvestment. As a result, they pay lower dividends. Quotation : “There is availability of enough cash in the company and good prospects for growth in future”.

Shareholder Preferences: When deciding on dividends, shareholders' preferences must be taken into account. If shareholders, for example, want a specified minimum amount of dividends paid, the corporation can proclaim that. Quotation: “It has many shareholders who prefer to receive a regular income from their investments. ”

Legal Restrictions: The extent of dividend payment also depends on the legal restrictions a company faces from the external environment. The company has to provide a dividend in accordance with the restrictions and rules and regulations it is bound in. Quotation: “I t has taken a loan of more than 60 lakhs from SBI Bank and is bound by certain restrictions on the payment of dividend according to the terms of the loan agreement.”

Chapter-Wise Important Questions

Chapter 1 - Nature and Significance of Management

Chapter 2 - Principles of Management

Chapter 3 - Business Environment

Chapter 4 - Planning

Chapter 5 - Organising

Chapter 6 - Staffing

Chapter 7 - Directing

Chapter 8 - Controlling

Chapter 10 - Financial Markets

Chapter 11 - Marketing

Chapter 12 - Consumer Protection

Chapter-Wise Revision Notes on Class 12 Business Studies  

Chapter 1 - Nature and Significance of Management Notes

Chapter 2 - Principles of Management Notes

Chapter 3 - Business Environment Notes

Chapter 4 - Planning Notes

Chapter 5 - Organising Notes

Chapter 6 - Staffing Notes

Chapter 7 - Directing Notes

Chapter 8 - Controlling Notes

Chapter 9 - Financial Management Notes

Chapter 10 - Financial Markets Notes

Chapter 11 - Marketing Notes

Chapter 12 - Consumer Protection Notes

Chapter 13 - Entrepreneurship Development Notes

FAQs on CBSE Important Questions on Class 12 Business Studies Chapter 9 - Financial Management

1. While performing the financial function every manager makes three decisions. Explain those decisions in accordance with Chapter 9 Financial Management of Class 12 Business Studies.

While performing the financial role, management must make the three decisions listed below -

Financing Choice - This decision involves selecting the lowest source of funding from a pool of short and long-term options.

Investment Decision - This is the process of selecting the lowest proposal from among all the alternatives that provide the best potential return to investors.

Dividend Choice - This decision involves deciding whether earnings should be paid as a dividend to stockholders or retained to fund the company's long-term objectives.

2. State the four factors which affect the working capital requirements of a company.

Four factors which affect the working capital requirements of a company are:

The principal nature of business has an impact on the quantity of the type of business that is necessary. In comparison to a larger organization, a trading firm requires a modest quantity of operating capital.

The size of the operation - A large firm requires more inventory as a source of working capital than a small one.

When the economy is growing, a company's output grows, and more working capital is necessary, but when the economy is in crisis, less working capital is required.

Seasonal Factors - Demand will be strong during the peak season, thus working capital will be higher than during the offseason.

3. State any three points of importance of financial planning.

Financial planning aids you in identifying your short- and long-term financial goals, as well as designing a well-balanced strategy to meet them. The following factors demonstrate its significance:

It is critical to ensure that sufficient funds are available.

By maintaining a proper balance between cash output and inflow, financial planning contributes to preserving stability.

Financial planning ensures that fund providers can invest easily in companies that adhere to financial planning criteria.

To know more about  Chapter 9 Financial Management of Class 12 Business Studies refer to the notes provided by Vedantu . They are available on the website of Vedantu and their App and that too free of cost.

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

A company's working capital is critical to the efficient running of its day-to-day activities. Working capital has an impact on a company's liquidity as well as its profitability. An increase in working capital will boost the company's liquidity. For example, as the amount of cash in hand or at the bank grows, so does the ability to make day-to-day payments. A reduction in working capital decreases a company's liquidity and profitability since it is unable to pay off day-to-day expenditures and must thus use capital to do so, further reducing the company's profitability. As a result, working capital should be managed in such a way that profitability and liquidity are maintained.

5. Explain briefly any four factors affecting the fixed capital requirements of an organization.

Four factors affecting the fixed capital requirements of an organization are:

The nature of the business in which Co. is involved is the first element that influences the amount of fixed capital required. A manufacturing firm requires more fixed capital than a trading firm, which does not require plant, machinery, or other fixed assets.

The scale of Operations: Large-scale businesses require more fixed capital since they require more machinery and other assets, whereas small-scale businesses require less fixed capital.

The capital-intensive procedures rely on plant and machinery, and firms require more fixed capital to purchase plants and machinery.

Technology Development: Industries with rapid technological advancements require more fixed capital because old machines become obsolete as new technology is developed, necessitating the purchase of new plants and machinery, whereas companies with slower technological advancements require less fixed capital because they can manage with older machines.

CBSE Class 12 Business Studies Important Questions

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CBSE class 12 Business Studies Financial Management class 12 Notes Business Studies in PDF are available for free download in myCBSEguide mobile app. The best app for CBSE students now provides Financial Management class 12 Notes Business Studies latest chapter wise notes for quick preparation of CBSE board exams and school based annual examinations. Class 12 Business Studies notes on chapter 9 Financial Management are also available for download in CBSE Guide website.

CBSE Guide Financial Management class 12 Notes Business Studies

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12 Business Studies notes Chapter 9 Financial Management

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CBSE Class 12 Business Studies Revision Notes CHAPTER – 9 Financial Management class 12 Notes Business Studies

Introduction

• Business Finance = Money or funds available for a business for its operations (that is, for some specific purpose) is called finance. It is indispensable for survival and growth of business, for production and distribution of goods and meeting day to day expenses etc.

• It involves acquiring funds to buy Fixed assets (tangible and intangible) and Raw materials and maintain working capital.

Financial Financial Management includes those business activities that are concerned with acquisition and conservation of capital funds in meeting the financial needs and overall objectives of a business enterprise.

Aims of Financial Financial Management:

• Reduce cost of funds procured
• Keep risks under control
• Achieve effective employment of fund
• Ensure availability of sufficient funds while avoiding idle funds

•bjectives of Financial Financial Management

• Primary objective: To maximize wealth of owners in the long run – Wealth Maximization concept.

• ‘Owners’ of a company are the shareholders.

• The term wealth refers to wealth of owners as reflected by the market price of their shares.

• The market price of shares is linked to three basic financial decisions:

• Investment decision • Financing decision and • Dividend decision

• Market price of a share will increase if benefits from a decision are greater than the cost involved in it.

• The goal of a firm should be to maximize the wealth of owners in the long run.

• Increase in the market price of shares is an indicator of the financial health of a firm.

• Other objectives that help a firm achieve the primary objective are:

Ensure availability of funds at reasonable costs:

Ensure effective utilization of funds:

Ensure safety of funds thro creation of reserves:

Maintain liquidity and solvency:

Every company is required to take three main financial decisions which are as follows:

1. Investment Decision

Resources are scarce and can be put to alternate use. A firm must choose where to invest so as to earn the highest possible profits.

Investment decision relates to decisions about how the firm‘s funds are invested in different assets that is, different investment proposals

Has two components:

• Working Capital Decisions – Short Term investment decisions.

• Capital Budgeting decisions – Long Term investment decisions

Factors affecting Investment Decisions/Capital Budgeting decisions

1. Cash flows of the project: The series of cash receipts and payments over the life of an investment proposal should be considered and analyzed for selecting the best proposal.

2. Rate of Return: The expected returns from each proposal and risk involved in them should be taken into account to select the best proposal.

3. Investment Criteria Involved: The various investment proposals are evaluated on the basis of capital budgeting techniques. These involve calculation regarding investment amount, interest rate, cash flows, rate of return etc.

2. Financing Decision

• These are decisions w.r.t quantum of finance or composition of funds from various longterm sources.(short term = working capital Financial Management)

• Financing decisions involve: a) Decision whether or not to use a combination of ownership and borrowed funds. b) Determining their precise ratio.

• Firm needs a judicious mix of debt and equity as :

• Debt involves ‘Financial Risk‘ = risk of default on payment of interest on borrowed funds and the repayment of the principle amount whereas

• Shareholders‘ funds involve no fixed commitment w.r.t payment of returns or repayment of capital.

• Ownership fund vs. Debt fund: They can be compared on the basis of factors such as examples, interest/dividend payout and repayment of principle, tax deductibility, and risk and floatation costs.

Factors Affecting Financing Decision

1. Cost: The cost of raising funds from different sources are different. The cheapest source should be selected.

2. Risk: The risk associated with different sources is different. More risk is associated with borrowed funds as compared to owner’s fund as interest is paid on it and it is repaid also, after a fixed period of time or on expiry of its; tenure.

3. Flotation Cost: The costs involved in issuing securities such as brokers commission, underwriters’ fees, expenses on prospectus etc. are called flotation costs. Higher the flotation cost, less attractive is the source of finance.

4. Cash flow position of the business: In case the cash flow position of a company is good enough then it can easily use borrowed funds and pay interest on time.

5. Control Considerations: In case the existing shareholders want to retain the complete control of business then finance can be raised through borrowed funds but when they are ready for dilution of control over business, equity can be used for raising finance.

6. State of Capital Markets: During boom, finance can easily be raised by issuing shares but during depression period, raising finance by means of debt is easy.

7. Period of Finance: For permanent capital requirement, Equity shares must be issued as they are not to be paid back and for long and medium term requirement, preference shares or debentures can be issued.

3. Dividend Decision

• Dividend is that portion of divisible profits that is distributed to the owners i.e. the shareholders. It results in current income for the shareholders.

• Retained earnings= proportion of profits kept in, that is, reinvested in the business for the business.

• Dividend decision= whether to distribute earnings to shareholder as dividends or retain earnings to finance long-term profits of the firm. Must be done keeping in mind the firms overall objective of maximizing the shareholders wealth.

Factors affecting Dividend Decision

1. Earnings: Companies having high and stable earning could declare high rate of dividends as dividends are paid out of current and paste earnings.

2. Stability of Dividends: Companies generally follow the policy of stable dividend. The dividend per share is not altered and changed in case earnings change by small proportion or increase in earnings is temporary in nature.

3. Growth Prospects: In case there are growth prospects for the company in the near future them it will retain its earning and thus, no or less dividend will be declared.

4. Cash Flow Positions: Dividends involve an outflow of cash and thus, availability of adequate cash is for most requirement for declaration of dividends.

5. Preference of Shareholders: While deciding about dividend the preference of shareholders is also taken into account. In case shareholders desire for dividend then company may go for declaring the same.

6. Taxation Policy: A company is required to pay tax on dividend declared by it. If tax on dividend is higher, company will prefer to pay less by way of dividends whereas if tax rates are lower then more dividends can be declared by the company.

7. Issue of bonus shares: Companies with large reserves may also distribute bonus shares to increase their capital base as it signifies growth of the company and enhances its reputation also.

8. Legal constraints: Under provisions of Companies Act, all earnings can’t be distributed and the company has to provide for various reserves. This limits the capacity of company to declare dividend.

Financial Planning

• It involves preparation of a financial blueprint of an organization. It is the process of estimating the fund requirement of a business and determining the possible sources from which it can be raised.

• Objectives of Financial Planning:

• To ensure availability of funds whenever they are required o Includes estimation of the funds required for different purposes (long term assets/working cap requirement)

• Estimate the time at which these funds need to be made available.

• Specify sources of these funds.

• To see that the firm does not raise resources unnecessarily:

• Shortage of funds => firm cannot meet its payment obligations.

• Surplus funds => do not earn returns but adds to costs.

Importance of Financial Planning

1. To ensure availability of adequate funds at right time.

2. To see that the firm does not raise funds unnecessarily.

3. It provides policies and procedures for the sound administration of finance function.

4. It results in preparation of plans for future. Thus new projects can he under taken smoothly.

5. It attempts to achieve a balance between inflow and outflow of funds. Adequate liquidity is ensured throughout the year.

6. It serves as the basis of financial control. The Financial Management attempts to ensure utilization of funds in tune with the financial plans.

Capital Structure

• On the basis of ownership, funds => owners funds + borrowed funds.

• Owners funds = equity share capital + preference share capital + reserves and surpluses + retained earnings = EQUITY

• Borrowed funds = loans + debentures + public deposits = DEBT • Capital Structure = The mix of long-term sources of funds

• Refers to the proportion of debt and equity used for financing the operations of a business.

• Cost and risk- Debt Vs Equity:

• Cost of Debt is lower than cost of equity but Debt is more risky than equity.

• Cost of debt < cost of equity as lenders risk < owners risk.

• Lender earns an assured interest and repayment of capital..

• Interest on debt is a tax deductible expense so brings down the tax liability for a business whereas dividends are paid out of profit after tax.

• Debt is more risky for the business as it adds to the financial risk faced by a business.

• Any default w.r.t payment of interest or repayment of principle amt may lead to liquidation.

• Capital structure affects both the profitability and the financial risk faced by a business.

• Optimal Capital Structure is that combination of debt and equity that maximizes the market value of shares of that company

Factors Affecting Capital Structure

i. Cash flow position: a. The size of the projected cash flows must be considered before deciding the capital structure of the firm. If there is sufficient cash flow, debt cab be used. b. It must cover fixed payment obligations w r t: i. Normal business operations ii. Investment in fixed assets iii. Meeting debt service commitments as well as provide a sufficient buffer.

ii. Interest coverage ratio : a. Higher the Interest coverage ratio which is calculated as follows: EBIT/ Interest, lower shall be the risk of the company failing to meet its interest payment obligations. b. Low Interest coverage ratio => debt ≠ used.

iii. Debt Service Coverage Ratio: a. Debt service coverage ratio = Profit after tax + Depreciation + Interest + Non Cash exp. Pref. Div + Interest + Repayment obligation b. A higher Debt service coverage ratio, in which the cash profits generated by the operations are compared with the total cash required for the service of debt and the preference share capital, the better will the ability of the firm to increase debt component in the capital structure. c. Low Debt service coverage ratio => debt ≠ used.

iv. Return On Investment a. If return on investment of the company is higher, the company can choose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater.

v. Cost Of Debt a. More debt can be used if cost of Debt is low.

vi. Tax Rate a. A higher tax rate makes debt relatively cheaper and increases its attraction as compared to equity.

vii. Cost Of Equity a. when the company uses more debt, the financial risk faced by equity holders increase so their desired rate of return increases. b. If debt is used beyond a point, cost of equity may go up sharply and share price may decrease in spite of increased EPS.

viii. Floatation Cost a. Cost of Public issue is more than the floatation cost of taking a loan. b. The floatation cost may affect the choice between debt and equity and hence the capital structure

ix. Risk Consideration: a. The total risk of business depends upon both the business risk and financial risk. If a firm‘s business risk is lower, its capacity to use debt is higher and vice versa.

x. Flexibility: a. If the firm uses its debt potential, it loses the flexibility to use more debt. b. To maintain flexibility the company must maintain some borrowing power to take care of unforeseen circumstances.

xi. Control: a. Debt normally does not cause dilution of control whereas a public issue makes the firm vulnerable to takeovers. b. To retain control, firm should issue debt.

Fixed Capital

Fixed capital refers to investment in long-term assets. Investment in fixed assets is for longer duration and they must be financed through long-term sources of capital. Decisions relating to fixed capital involve huge capital funds and are not reversible without incurring heavy losses.

Factors Affecting Requirement of Fixed Capital

1. Nature of Business: Manufacturing concerns require huge investment in fixed assets & thus huge fixed capital is required for them but trading concerns need less fixed capital as they are not required to purchase plant and machinery etc.

2. Scale of Operations: An organization operating on large scale requires more fixed capital as compared to an organization operating on small scale.

For Example – A large scale steel enterprise like TISCO requires large investment as compared to a mini steel plant.

3. Choice of Technique: An organization using capital intensive techniques requires more investment in plant & machinery as compared to an organization using labour intensive techniques.

4. Technology upgradation: Organizations using assets which become obsolete faster require more fixed capital as compared to other organizations.

5. Growth Prospects: Companies having more growth plans require more fixed capital. In order to expand production capacity more plant & machinery are required.

6. Diversification: In case a company goes for diversification then it will require more fixed capital to invest in fixed assets like plant and machinery.

7. Distribution Channels: The firm which sells its product through wholesalers and retailers requires less fixed capital.

8. Collaboration: If companies are under collaboration, Joint venture, then they need less fixed capital as they share plant & machinery with their collaborators.

Working Capital

Working Capital refers to the capital required for day to day working of an organization. Apart from the investment in fixed assets every business organization needs to invest in current assets, which can be converted into cash or cash equivalents within a period of one year. They provide liquidity to the business. Working capital is of two types – Gross working capital and Net working capital. Investment in all the current assets is called Gross Working Capital whereas the excess of current assets over current liabilities is called Net Working Capital. Following are the factors which affect working capital requirements of an organization:

l. Nature of Business: A trading organization needs a lower amount of working capital as compared to a manufacturing organization, as trading organization undertakes no processing work.

2. Scale of Operations: An organization operating on large scale will require more inventory and thus, its working capital requirement will be more as compared to small organization.

3. Business Cycle: In the time of boom more production will be undertaken and so more working capital will be required during that time as compared to depression.

4. Seasonal Factors: During peak season demand of a product will be high and thus high working capital will be required as compared to lean season.

5. Credit Allowed: If credit is allowed by a concern to its customers than it will require more working capital but if goods are sold on cash basis than less working capital is required.

6. Credit Availed: If a firm is able to purchase raw materials on credit from its suppliers than less working capital will be required.

7. Inflation: Working capital requirement is also determined by price level changes. For example, during inflation prices of raw material, wages also rise resulting in increase in working capital requirements.

8. Operating Cycle/Turnover of Working Capital: Turnover means speed with which the working capital is converted into cash by sale of goods. If it is speedier, the amount of working capital required will be less.

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