Please refer toFinancial ManagementClass 12Business Studiesnotes and questions with solutions below. These revision notes and important examination questions have been prepared based on the latestBusiness Studies books forClass 12. You can go through the questions and solutions below which will help you to get better marks in your examinations.
Q. 1. Arun is a successful businessman in the paper industry. During his recent visit to hisfriend’s place in Mysore, he was fascinated by the exclusive variety of incense sticksavailable there. His friend tells him that Mysore region in known as a pioneer in the activityof Agarbathi manufacturing because it has a natural reserve of forest products especiallySandalwood to provide for the base material used in production. Moreover, the suppliers ofother types of raw material needed for production follow a liberal credit policy and the timerequired 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 inMysore.
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 theworking capital requirements of his business.
1. Investment decision has been taken by Arun. Investment decision seeks todetermine as to how the firm’s funds are invested in different assets. It helps toevaluate new investment proposals and select the best option on the basis ofassociated 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 workingcapital 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’sportfolio includes three categories in the Foods business namely Snack Foods, Juices andConfectionery. Keeping in the with the growing demand for packaged food it now plans tointroduce 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 currentfinancial report, the interest coverage ratio of the company and return on investment ishigher. 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 debtor equity, to raise the required amount of capital? Explain by giving any two suitablereasons in support of your answer.
2. Why are the shareholder’s of the company like to gain from the issue of debt by thecompany?
1. As a financial manager of the company, I will opt for debt to raise the requiredamount 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 thecompany because the return on investment is higher. It helps a company to takeadvantage of trading on equity to increase the earnings per share.
Q. 3. Computer Tech Ltd., is one of the leading information technology outsourcing servicesproviders in India. The company provides business consultancy and outsourcing services toits clients. Over the past five years the company has been paying dividends at high rate toits shareholders. However, this year, although the earnings of the company are high, itsliquidity position is not so good. Moreover, the company plans to undertake new ventures inorder to expand its business.
In context of the above case:
1. Give any three reasons because of which you think Computer Tech Ltd. has beenpaying 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 tworeasons in support of your answer.
1. Computer Tech Ltd. has been paying dividends at high rate to its shareholders overthe past five years because of the following reasons:
2. Cash flow position:
3. Access to capital market:
This year the company is likely to follow a conservative dividend policy because ofthe 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. Retainedprofits do not involve any explicit cost and are considered to be the cheapest sourceof finance.
Q. 4. Bhuvn inherited a very large area of agricultural land in Haryana after the death of hisgrandfather. He plans to sell this piece of land and use the money to set up a small scalepaper factory to manufacture all kinds of stationary items from recycled paper. Being anamateur in business, he decides to consult his friend Subhash who works in a financialconsultancy firm. Subhash helps him to prepare a blue print of his future businessoperations on the basis of sales forecast in next five years. Based on these estimates, hehelps 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 serviceidentified in part (a)
1. Financial planning is the type of financial service that Subhash has offered toBhuvan.
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 atthe right time.
2. It helps in anticipating future requirements of a funds and evading business shocksand surprises.
3. It facilitates co-ordination among various departments of an enterprise like marketingand production function, through well-defined policies and procedures.
4. It increases the efficiency of operations by curbing wastage of funds, duplication ofefforts, and gaps in planning.
Q. 5. ‘Madhur Milan’ is a popular online matrimonial portal. It seeks to provide personalizedmatch making service. The company has 80 offices in India, and is now planning to openoffices in Singapore, Dubai and Canada to cater to its customers beyond the country. Thecompany has decided to opt for the sources of equity capital to raise the required amount ofcapital.
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 decidedto opt for equity capital.
1. Financial risk of the company increases with the higher use of debt. This is becauseissue of debt involves fixed commitment in terms of payment of interest andrepayment of capital. Financial risk refers to a situation when a company is unable tomeet its fixed financial charges.
2. The factors because of which the company has decided to opt for equity capital areas follows:
1. Capital market conditions:
2. Fixed operating cost:
3. Cash flow position:
Q. 6. Wooden Peripheral Pvt. Ltd. is counted among the top furniture companies in Delhi. Itis known for offering innovative designs and high quality furniture at affordable prices. Thecompany deals in a wide product range of home and office furniture through its eightshowrooms in Delhi. The company is now planning to open five new showrooms each inMumbai and Bangalore. In Bangalore it intends to take the space for the showrooms onlease whereas for opening showrooms in Mumbai, it has collaborated with a popular homefurnishing brand, ‘Creations.’
1. Identify the factors mentioned in the paragraph which are likely to affect the fixedcapital requirements of the business for opening new showrooms both in Bangaloreand 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 caseabove.
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 atGurgaon. 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 byissue 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.
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 : 1300
1. Financing decision
2. Since the company have growth opportunities of setting up a new steel plant atGurgaon, 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 debtfinancing than funding through equity, it implies that cash flow position of thecompany 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 returnprincipal 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 increasesfinancial 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 thetourists going to Jaipur and Agra. Identify the working capital requirement of Amar givingreason in support of your answer. Further Amar wants to expand and diversify his Transportbusiness. 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
Q. 10. Yogesh, a business man is engaged in publishing and selling of Ice-creams. Identifythe 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 workingcapital requirement of Manish giving reason in support of your answer.
Ans.Working capital requirements of Manish would be less as it is a MANUFACTURINGbusiness. So raw material needs to be converted into finished goods before any sales can
Q. 12. The directors of a manufacturing company are thinking of issuing Rs. 20 crores worthadditional debentures for expansion of their production capacity. This will lead to n increasein debt equity ratio from 2 : 1 to 3 : 1. What are the risks involved in it? What factors otherthan 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 becausepayment of interest and return of principal amount is compulsory. Any default in meetingthese commitments may force the business to go into liquidation. As a result, increased useof debt increases the financial risk of a business. Financial risk is the chance that a firmwould fail to meet its payment obligations.
Other factors affecting this decision are:
2. Cash flow position
4. Return on investment (ROI)
Q. 13. Amit is running an ‘Advertising agency’ and earning a lot by providing this service tobig 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 tomaintain inventory require less working capital.
Q. 14. Tata International Ltd. earned a net profit of Rs. 50 crores. Ankit the financemanager of Tata International Ltd. wants to decide how to appropriate these profits. Identifythe decision that Ankit will have to take and also discuss any five factors which help him intaking this decision.
Factors affecting dividend decision.
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 administrationtook over her family food processing company of manufacturing pickles, jams andsquashes. The business was established by her great grandmother and was doingreasonably well. However the fixed operating costs of the business were high and the cashflow position was week. She wanted to undertake modernization of the existing business tointroduce the latest manufacturing processes and diversify into the market of chocolates andcandies. She was very enthusiastic and approached a finance consultant, who told her thatapproximately Rs. 50 lakh would be required for undertaking the modernization andexpansion programme. He also informed her that her stock market was going through abullish phase.
1. Keeping the above considerations in mind, name the source of finance Shalini shouldnot choose for financing the modernization and expansion of her food processingbusiness. Give one reason in support of your answer.
2. Explain any two other factors, apart from those stated in the above situation, whichShalini should keep in mind while taking this decision.
1. DebtAny one reason
1. Due to weak cash flow position, the firm may not be able to honour fixed cashpayment obligations.
2. Increased fixed operating cost will increase the business risk therefore debt shouldnot be issued as it further increases the financial risk.
3. The stock market condition being bullish, the investors will prefer to buy equityshares.
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 thecountry. Its warehousing services help business firms to reduce their overheads, increaseefficiency and cut down distribution time.
State with reason, whether the working capital requirements of ‘India Logistics’ will be highor 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 consistentlyearning good profits for many years. This year too, it has been able to generate enoughprofits. There’re is availability of enough cash in the company and good prospects forgrowth in future. It is a well managed organization and believes in quality, equalemployment opportunities and good remuneration practices. It has many shareholders whoprefer 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 thepayment of dividend according to the terms of loan agreement.
The above discussion about the company leads to various factors which decide how muchof 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 earningsIt 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 thelenders in the loan agreement.
Q. 18. Shubh Ltd. is manufacturing steel at its plant in India. It is enjoying a buoyantdemand for its products as economic growth is about 7%-8% and the demand for steel isgrowing. The company has decided to set up a new steel plant to cash on the increaseddemand. It is estimated that it will require about Rs. 2000 crore to set up and about Rs. 500crore 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 ofShubh Ltd. (6 Marks)
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 workingcapital.
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. Thecompany 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.
1. Dividend decision
This decision involves how much of the profit earned by the company (after paying tax) is tobe 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 itsdebt. 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 ifcompany’s EBIT becomes 3 lac.
1. Company should prefer debt to raise fund as debt is gainful for equity shareholders tillROI > Rate of Interest.
In the above case ROI = EBIT × 100
Total Income = 7 × 100 = 14%
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 ROIwill 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 achain of warehouses at 40 different locations across India. The company now intends toundertake computerization of its owned ware houses as it seeks to provide better valueadded and cost effective solutions for scientific storage and preservation services to themarket 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 toaffect the fixed capital requirements of its business?
2. Name any two sources that company may use to finance the implementation of thisplan.
1. The decision to undertake computerization of owned warehouses will increase thefixed capital requirements of its business both in present and future as aftersometime, the technology being used will become obsolete and need up gradation.
2. The company may use retained earnings and take loans from financial institutions toimplement this plan.
Q. 22. Visions Ltd. is a renowned multiplex operator in India. Presently, it owns 234 screensin 45 properties at 20 locations in the country. Considering the fact that the there is agrowing trend among the people to spend more of their disposable income onentertainment, two years back the company had decided to add more screens to its existingset up and increase facilities to enhance leisure, food chains etc. it had then floated aninitial public offer of equity shares in order to raise the desired capital. The issue was fullysubscribed and paid. Over the year, the sales and profits of the company have increasedtremendously and it has been declaring higher dividend and the market price of its shareshas increased manifolds.
In context of the above case:
1. Name the different kinds of financial decisions taken by the company by quoting linesfrom the paragraph.
2. Do you think the financial management team of the company has been able toachieve its prime objective? Why or why not? Give a reason in support of youranswer.
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 itsprime objective i.e. wealth maximization of the shareholders by maximizing themarket price of the shares of the company.
Q. 23. Wireworks Ltd. is a company manufacturing different kinds of wires. Despite fiercecompetition in the industry, it has been able to maintain stability in its earnings and as apolicy, uses 305 of its profits to distribute dividends. The small investors are very happywith 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 highdividend by quoting line from the paragraph.
2. Why do you think small investors are happy with the company for declaring stabledividend?
1. Stability in earnings:
“Despite fierce competition in the industry, it has been able to maintain stability in itsearnings.”
1. The small investors are happy with the company for declaring stable dividend as theyenjoy a regular income on their investment.
Q. 24. Manoj is a renowned businessman involved in export business of leather goods. Asa 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 aesthetichandicrafts, keeping in view the growing demand for natural goods. In order to implementhis plan, after conducting a feasibility study, he decides to set up a separate manufacturingunit 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 aseparate manufacturing unit for producing jute products.
2. State any two factors that he is likely to consider while taking this decision.
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, itsells its products through indirect channels of distribution. But, considering the suddensurge in the demand for organic products, the company yis now inclined to start its onlineportal for direct marketing. The financial managers of the company area planning to usedebt 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 industrialbank. 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 thecurrent year i.e. 15%, do you think the financial managers will be able to meet theirgoal. Show your workings clearly.
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.
Money required for carrying out business activities is called business finance. Finance isneeded 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 andadministering 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 wellas avoiding idle finance.
The Main Objective of Financial Management is to maximise shareholder wealth, for whichachievement 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 belong-term or short term. A long-term investment decision is called capital budgeting decisionswhich involve huge amounts of investments and are irreversible except at a huge cost whileshort term investment decisions are called working capital decisions, which affect day to dayworking of a business.
2. Financing Decision: –
It relates to the amount of finance to be raised from various long-term sources. The mainsources 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 financialrisk (i.e. risk of default on payment) is there in debt financing. Moreover, interest on borrowedfunds 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 ofcapital. 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 isrequired to decide how much of the profit earned by it should be distributed amongshareholders and how much should be retained. The decision regarding dividend sh ould betaken 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 offunds 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 aninvestment 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 shouldbe taken into account to select the best proposal.
3. Investment Criteria Involved:The various investment proposals are evaluated on thebasis 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 sourceshould be selected.
2. Risk: –The risk associated with different sources is different, more risk is associated withborrowed 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 flotationost, less attractive is the source of finance.
4. Cash flow position of the business: –In case the cash flow position of a company is goodenough then it can easily use borrowed funds.
5. Control Considerations:In case the existing shareholders want to retain the completecontrol 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 sharesbut 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 dividendsas dividends are paid out of current and past earnings.
2. Stability of Dividends:Companies generally follow the policy of stable dividend. Thedividend 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 futurethem, 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 ofadequate 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 fixedfinancial 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 equityshareholder get higher rate of dividend per share.
We hope the aboveFinancial ManagementClass 12Business Studiesare 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 toMCQ Questions for Class 12Business Studies
I'm an expert in financial management, and based on the provided article on Financial Management for Class 12 Business Studies, I can offer insights into the concepts discussed. Here's a breakdown:
Q1: Arun's Venture into Agarbathi Manufacturing
- Arun has made an investment decision to set up a manufacturing unit for agarbathi manufacturing in Mysore.
Factors Affecting Working Capital:
- Availability of raw material
- Production cycle
- Credit availed
Q2: 'Adwitiya' and Capital Raise for Ready-To-Eat Foods
Source of Finance:
- Opting for debt to raise capital.
- Reasons include interest coverage ratio and tax rate.
Shareholders' Gain from Debt:
- Return on investment is higher.
- Trading on equity to increase earnings per share.
Q3: Computer Tech Ltd. and Dividend Policy
Reasons for High Dividends:
- Cash flow position
- Access to capital market
Likely Dividend Policy Change:
- Conservative dividend policy due to cash flow and expansion project financing.
Q4: Bhuvn's Agricultural Land to Paper Factory
- Financial planning provided by Subhash.
Importance of Financial Planning:
- Ensures smooth operations, anticipates fund needs, facilitates coordination, increases efficiency.
Q5: 'Madhur Milan' and Equity Capital for Expansion
Type of Risk with Higher Debt:
- Financial risk increases with higher debt.
Factors for Choosing Equity Capital:
- Capital market conditions
- Fixed operating cost
- Cash flow position
Q6: Wooden Peripheral's New Showrooms
Factors Affecting Fixed Capital:
- Leasing in Bangalore reduces fixed capital.
- Collaboration in Mumbai reduces fixed capital.
Relationship Between Investment in Fixed Assets and Working Capital:
- Increase in fixed assets investment leads to an increase in working capital requirements.
Q7: Krishna Ltd.'s Fundraising and Capital Structure
Importance of Financial Planning:
- Avoids shocks, reduces waste.
- Debt: Rs. 500 crore, Equity: Rs. 300 crore.
- Debt-equity ratio: 1.67:1.
- Financing decision to raise Rs. 800 crore.
Impact on Dividend Decision:
- Retaining profits for expansion may lead to lower dividends.
Q8: Why Companies Don't Go Entirely with Debt
- Risk of Debt:
- Debt is riskier due to compulsory interest and principal payments, increasing financial risk.
Q9-Q11: Working Capital Requirements for Different Businesses
- Working Capital:
- Amar's transport business (service): Less.
- Yogesh's ice cream trading: Less.
- Manish's garments manufacturing: More.
Q12: Manufacturing Company Issuing Debentures
- Risks Involved:
- Higher financial risk due to increased debt.
Q13-Q15: Working Capital Requirements and Dividend Decision
- Working Capital:
- Amit's advertising agency (service): Less.
- Yogesh's publishing and selling ice creams (trading): Less.
- Manish's garments manufacturing (manufacturing): More.
Q16-Q17: 'Indian Logistics' and 'Sarah Ltd.'
- Indian Logistics (service): Low.
- Sarah Ltd. (manufacturing): High.
- Sarah Ltd.'s factors: Earnings, stability, growth, cash flow, contractual constraints.
Q18-Q20: Visions Ltd.'s Financial Decisions
- Investment decision: Adding screens.
- Financing decision: IPO for raising capital.
- Dividend decision: Higher dividends with increased profits.
Achievement of Objective:
- Yes, maximization of shareholder wealth through increased market price.
Q21-Q22: Storage Solution Ltd. and Visions Ltd.
Effect of Computerization Decision:
- Increases fixed capital requirements.
Financial Sources for Computerization:
- Retained earnings and loans from financial institutions.
Visions Ltd.'s Financial Decisions:
- Investment, financing, dividend decisions.
Q23-Q25: Wireworks Ltd., Manoj's Jute Products, and Well-being Ltd.
- Declares high dividends due to stability in earnings.
Manoj's Investment Decision:
- Capital budgeting decision for a separate manufacturing unit.
- Using debt to finance expansion.
- Conditions for trading on equity: Higher rate of earning and tax-deductible interest.
These insights cover the concepts and decisions discussed in the provided article on Financial Management for Class 12 Business Studies. If you have any specific questions or need further clarification on any topic, feel free to ask.