case study on financial management class 12

• Skip to main content
• Skip to secondary menu
• Skip to primary sidebar
• Skip to footer

CBSE Maths notes, CBSE physics notes, CBSE chemistry notes

CBSE Class 12 Business Studies Case Studies – Financial Management

ESSENTIAL POINTS TO SOLVE CASE STUDIES Financial Management Financial Management is the process of acquiring funds optimally (at minimum cost possible keeping the risk factor also low) and utilising them in the best possible manner to maximise shareholders’ wealth.

Objectives of Financial Management The objective of financial management is maximisation of shareholders’ wealth. Shareholder’s wealth = No. of shares possessed by a shareholder x Market price of a share. If there is proper financial management the shareholders’ wealth will maximise.

Role of Financial Management The role of financial management is very important as the following activities are influenced by financial management:

• Size and composition of Fixed Assets (Fixed Capital decisions)
• Size and composition of Current Assets (Working Capital Management decisions)
• Financing decisions (Amount of Debt or Equity to be used)
• Financing decisions (Amount of Long-term funds or Short-term funds to be used for financing)
• All items in the Profit & Loss Account (sales expenses, distribution expenses, depreciation of the assets, etc.)

Financial Decisions Financial decisions are taken under financial management, and directly deal with raising and investing of funds (investment decisions), and distribution of profit earned among the stakeholders (dividend decisions). Financial decisions are of three types – I. Investment decisions II. Financing decisions III. Dividend decisions

I. INVESTMENT DECISIONS The decisions which involve the choice how the raised funds will be invested into short-term or long-term assets. Investment decision are of two types:

• Long-term investment decisions (also know as Fixed assets decisions or Capital budgeting decisions)
• Short term investment decisions (also known as Working Capital management decisions)

Factors affecting long-term investment decisions The Investment criteria involves:

• Cash flows of the project. The cash flows which a company expects from an investment decision should be carefully analysed before taking a Capital budgeting decision. The Rate of return. The expected rate of return of the project should be taken into consideration before taking Capital budgeting decision.
• The investment criteria involved. Financial managers have to carry out a number of calculations regarding cash flows, interest rates, rate of return etc. before taking the Investment decision. Various Capital budgeting techniques are used for the purpose of evaluating investment proposals.

II. FINANCING DECISION The decisions which involve the choice how the funds will be raised from various sources and simultaneous cost analysis of these sources of funds. The sources of finance are:

• Shareholders’ or Owners’ funds: Equity Capital and Retained earnings
• Borrowed funds: Debentures, Loans and other forms of Debts.

Factors affecting financing decisions:

• Cost. Cheapest source of finance should be preferred. (Debt is generally cheaper than Equity)
• Risk. Source involving less risk should be preferred. (Equity is less risky than Debt)
• Floatation cost. If a source has high floatation cost it should be avoided (Equity has high floatation costs associated with it).
• Cash flow position. The source of funds should also depend on the Cash flow position of the firm. A company with healthy Cash flow can go for Debt as it can bear the fixed financial cost of interest on Debt.
• Fixed operating cost. A company which has high fixed operating costs (like rent, salary, etc.) already runs high business risk. If such firm goes for Debt as source, it will add on financial risk (as Debt is risky).
• Control considerations. A company having control considerations should go for Debt as a source of finance.
• State of Capital market. When the Capital market is bullish or active (investors believe that the stock prices will increase), it is a good time for issuing Equity in order to have a good response from the investors. On the other hand, if the Capital market is bearish or sluggish (investors believe that stock prices will decrease) it is better not to issue Equity. The company can opt for Debt as a source of funds.

Factors affecting Dividend decision:

• Amount of Earnings. Dividends paid by a company are dependent on the amount of earnings.
• Stability of earnings. Apart from amount of earnings, stability of the earnings is as much important for paying good dividends.
• Stability of dividend. A stable trend in payment of dividend boosts the confidence of investors and has a good impact on share prices.
• Growth opportunities. Generally, companies having high growth opportunities tend to avoid paying high dividends, so that they can invest their retained earnings.
• Cashflow position. In order to declare dividends a company should have decent amount of cash. So, a company with good Cash flow position can declare good dividend.
• Shareholders’ preference. There are two types of shareholders. One, who want a fixed dividend (Preference dividend) and the others, who are ready to bear risk and want to have high returns (Equity dividend).
• Taxation Policy. If tax on dividend is high, companies tend to pay lower dividend and vice-versa.
• Stock market reaction. Increased dividends draw positive reaction from the stock market. However, if the dividends are lowered by a company it tends to have a bad impact on the share prices as their demand goes down.
• Access to Capital market. Large credit-worthy companies have easy access to the capital market in terms of raising funds. These companies can keep less retained earnings and pay a higher dividend to strengthen the market price of their shares.
• Legal constraints. Since the payment of dividend is connected with a large number of shareholders, it should be done within the legal framework and transparency.
• Contractual constraints. Generally loan providing bodies ensure through contractual agreements that the borrowing company will be restricted in payment of dividends. This is done to provide financial protection to the lenders who may get in trouble in situation of bankruptcy of the borrower.

Financial Planning Financial planning is the process of estimating the requirement of funds by an organisation for its various needs and figuring out the sources of these funds.

Objectives of Financial Planning

• The first objective is to ensure availability of funds, as and when required.
• The second objective is to confirm that the funds raised are not in excess.

Importance of Financial Planning

• It helps in forecasting. It helps in making correct assessment of future financial situations through proper forecasting.
• It helps in preparing for business shocks. The future uncertainties of business can ruin the prospects of a business. Financial planning keeps the firm well prepared to face any business shocks.
• It helps in coordination of various business functions. All the other business functions like marketing, purchase, production, etc. can be properly coordinated as a result of of proper financial planning.
• It helps in optimum utilization of resources. Optimum utilisation of resources and efforts becomes possible through proper financial planning as the wastages and duplication of efforts are reduced.
• It acts as a link between present and future. Financial planning is like a bridge between today and tomorrow, present and future. The financial requirement of present investment decision is fulfilled by future financing decisions.
• It helps in evaluation of actual performance. The objectives of all the business units are clearly set through financial planning. That is why it is easy to do proper evaluation of actual performance by these units through financial planning.

Capital Structure It is the proportion of Debt and Equity in raising funds for doing business. In other words, it is the mixture of Owners’ funds and Borrowed funds.

Factors affecting Capital Structure

• Debt service coverage ratio: (DSCR) DCSR = \(\frac{Profit\quad after\quad tax+Depreciation+Interest+Non-cash\quad Expences}{Preference\quad Dividend+Interest+Repayment\quad Obligation}\) DSCR indicates ability of a firm to service its Debt. It is a better indicator than ICR.
• Interest coverage ratio (ICR) It is the number of times Earning Before Interest and Tax can cover the Interest on Debt taken by a firm. It indicates the firm’s ability to serve the interest on Debt taken. ICR = \(\frac{Earning\quad before\quad Intererst\quad and\quad Tax}{Interest}\)
• Cash flow position. Debt should be taken only if Cash flow position of a company is good.
• Cost of Debt. Debt can be taken if it is available at a lower interest rate.
• Cost of Equity. Cost of Equity becomes high in case Debt is taken beyond a level. This happens due to the increased burden of Debt on equity shareholders who expect higher dividend.
• Capital structure of other companies. A business firm may observe the capital structure (D/E ratio) of other companies in the same industry but should not blindly follow them. Deciding the capital structure of a company should be based upon its own strengths and weaknesses.
• Return on Investment. When the return on investment is greater than the rate of interest, a company can increase its Debt to increase its earning per share (EPS).
• Tax rate. With the increase in tax rate Debt becomes cheaper.
• Stock market conditions. When market is bullish Equity is preferable, but when market is bearish Debt is a better choice.
• Floatation costs. The costs of raising Debt and Equity are different. The high floatation costs of Equity in comparison to Debt make it a costlier source.
• Control considerations. Too much of issuing of Equity may result in loss of control of management over the company.
• Regulatory framework. In order to raise funds, the company should stay within the legal framework set by bodies like SEBI and RBI.
• Flexibility. A company has only limited sources form where it can obtain Debt. In case it exhausts all the possible sources it will lose the flexibility to arrange further Debt.
• Risk consideration. Debt is riskier though it is cheaper. A firm has to repay the principal amount as well as regular interest on it. It is bound to do so.

Fixed Capital Those assets which remain in business for more than a year constitute the Fixed capital of a business firm. The sources which finance Fixed capital are known as Long-term sources of funds. The decisions related to Fixed capital are also known as Fixed capital decisions or Capital budgeting decision.

Importance of Fixed Capital Decisions

• Long term growth. They affect the long term growth of business as return on investment comes after a long time in future.
• Large amounts of funds involved. The nature of Fixed capital decision is such (like investment in plant and machinery, etc.) that large amounts of funds need to be invested.
• Risk involved. Since Fixed capital involves huge amounts of investments with no assured quick returns, it tends to become risky.
• Irreversible decision. A company may have to incur heavy losses as reversing such decisions may lead to cancellation of the entire project.

Factors affecting requirement of Fixed Capital

• Nature of business. Manufacturing requires more Fixed capital than trading business.
• Scale of operations. A firm involving large scale business requires more Fixed capital.
• Choice of Technique. Capital intensive business requires more Fixed capital than a labour intensive business.
• Upgradation of technology. Business requiring frequent upgradations of technology requires more Fixed capital.
• Growth prospects. Companies having higher growth prospects require more investment in Fixed capital.
• Diversification. When a firm diversifies into new areas, its requirement of Fixed capital increases.
• Financing alternatives. When business firms have an alternative of taking fixed assets on lease, they do not have to purchase fixed assets.
• Level of collaboration. Fixed capital requirement of a firm becomes less if it gets into collaboration with another firm, as both the firms can share resources of each other.

Working Capital The capital needed by a business firm to meet its day to day operations is known as Working capital. Examples: Cash-in-hand, Raw materials, Prepaid expenses, Work-in-progress, Bills receivable etc. Such assets are also known as short term assets and they can be easily converted into cash within a period of one year.

Factors affecting working capital requirements

• Nature of business. Manufacturing firms have more Working capital requirements than trading firms.
• Scale of operations. Higher the scale of operations, more is the Working capital requirement.
• Business cycle. More during recovery and boom, less during recession and depression.
• Seasonal factors. Businesses that are seasonal in nature need more amount of working capital during the peak season.
• Production cycle. Products having longer production cycle need more Working capital.
• Credit allowed. More Working capital is required when credit is allowed by the business firm.
• Credit availed. Less Working capital is required when credit is availed by the business firm.
• Availability of raw material. If raw material is easily available, requirement is less, otherwise more.
• Growth prospects. Higher the chances of growth, more will be the requirement.
• Level of competition. Higher the level of competition among firms more will be their Working capital requirements.
• Inflation. When prices rise (inflation), Working capital requirement also increases.

CASE STUDIES

Question 1. Ramit is using ICR (Interest Coverage Ratio) as the indicator of the interest paying capacity of his company. However one of his old school days’ friends Shobhit tells him to use DSCR (Debt Service Coverage Ratio) as the indicator to judge it. Do you agree with his friend? Give reason for your answer. Answer: Yes, I agree with him. As it is a better indicator of company’s ability to pay fixed financial charges like interest because it completes the shortcoming in ICR. ICR is unable to show the situation of cash balance whereas in DSCR cash profits generated by the operations are compared with the total cash required for the service of the debt. ICR is the simple ratio of EBIT/Interest.

Question 2. Identify in the following cases factor affecting the choice of capital:

• Raj an has an option of taking loan from his relatives. These people have assured him to give loan at a low interest rate. So he decides to use debt as a source of financing his project. Now he goes to different relatives and friends to see if he can get a cheaper source of debt with even lower rate of interest.
• Prerak Iron Ltd. is thinking of raising finance to further its projects overseas. For this the company is observing the other companies’ raising of finance. Their deb^equity ratios are being thoroughly studied by the financial experts of the company.
• A company is trying to raise funds after consulting the experts. The owner of the company has decided to find out the banks which can grant loan under norms. He will assure that all norms are followed by the company. He has also decided to gain knowledge about the SEBI guidelines related to public issues of shares and debentures.
• The management of a company is very much concerned about the latest happenings in the stock market. They always w’ant to know whether the conditions in the stock market are bullish or bearish so that they may know the feasible time to grow money by issue of shares.
• A firm has decided not to issue equity this year. The reason they have given is the involvement of costs like printing charges, brokerage, advertising costs and underwriter’s commission. The company says all these costs will add on to become substantial.
• A company already has high fixed operation costs. If it takes loan its fixed financial costs will increase leading to an overall increase in payments. Had the situation been opposite it would have considered taking loan but now the only option is to go for equity.
• A company is thinking of taking debt to meet its finance requirements. It is thinking so because interest is a tax deductible expense. Due to the new budget by the government raising debt has become comparatively cheaper and equity is losing its attractiveness.
• Mr. Madan Sharma has a company having 10 branches throughout the country. He is thinking of opening a new branch. For this he requires a good amount of investment. He talks to his friends, banks and other sources to raise debt as a source of finance. However he prevents himself from using all possible sources of finance so that he can maintain his borrowing power.
• A leading company decides to raise fund. It decides to go for debt as the source of finance. The reason behind this choice is the possibility of losing management’s holding in the company if equity is issued. The company already has been using equity as a source of finance during last couple of years.
• A company is no more interested in raising funds in the form of debt. The amount of EBIT that the company has is decreasing in relation to the amount of interest it has to pay on the debt it has borrowed. If it borrows more of debt than this ratio EBIT/ Interest will further go down.
• Neelam has decided to consider debt as the source of raising finance. Her decision has come after considering the strong buffer of funds she already has. She has enough amount of funds to cover fixed cash payments. Her business unit has no problem in running normal business operation and it has low business risk. Further the financial risk is also low.
• A company has decided to go for trading on equity as an option. This is being done to increase the Earning per Share (EPS). Definitely the ability of the company to use debt is greater.
• Cost of debt
• Capital structure of other companies
• Regulatory framework
• Stock market conditions
• Floatation costs
• Risk consideration
• Tax rate (As with the new budget the tax rate has increased)
• Flexibility
• Interest Coverage Ratio (ICR)
• Cash flow position
• Return on Investment (RoI)

Question 3. In the previous question case study (b) of Prerak Iron Ltd. what caution do you think that the company should take? Answer: The company should not follow the capital structure of other companies in the industry in a blind manner.

Question 4. In Question No. 2 in case study (l) How Return on Investment would matter? Answer: If the Return on Investment (Rol) is lower than Cost of Debt then the company should go for Equity as the option. On the other hand if Return on Investment (Rol) is more than Cost of Debt then the company can rely more on debt. If it will increase more debt in its capital structure then the EPS in this case will increase. However in the earlier case where Rol is less than Cost of Debt the EPS will decrease with increase in the debt component in the capital structure.

Question 5. Future Business’ is in whole sale business. The manager in charge is taking care of all the operations. The branch in Delhi is earning a lot of revenue these days. It requires fixed capital investment for which it has to borrow money. What do you think is going to be the size of the investment required? Answer: The size of investment required will be low as the ‘Future Business’ is in trading business. The fixed capital requirement generally is low in trading business.

Question 6. Atul is thinking of opening a scissors manufacturing plant. He requires capital investment. He discusses the project with his father. His father after listening to his project tries to find out the fixed capital requirement for his plant. What do you think will be the fixed capital requirement for the scissors manufacturing plant of Atul? Answer: The fixed capital requirement for the plant of AtuI will be high as it is a manufacturing plant. For a manufacturing plant the fixed capital requirement is high since the purchase of plant and machinery, equipments, etc. is involved.

Question 7. Vrinda is an MBA pass out from a very good MBA college. Her father has restaurant business. Their company has 15 restaurants in Europe. As soon as Vrinda joins the business she decides to take this number to 25 by opening 10 more restaurants in the major cities of Europe. What do you think will be the fixed capital requirement here? Why? Answer: The fixed capital requirement would be high. The reason behind the high requirement of fixed capital is ‘scale of operations’. The restaurant business run by them is already being operated at a large scale with 15 restaurants in operation.

Question 8. Ravi has started a pizza base manufacturing business. The early morning schedule is very busy as the product is dispatched as soon as it is made to keep it fresh and is sent to the various pizza making restaurants or hotels. Daily fresh pizzadbase has to be delivered on the basis of estimated orders as there is no sure shot consumption pattern in the city. What do you think is going to be the working capital requirement of this business? Why? Answer: The working capital requirement of this business will be low. The reason for this low requirement is that the production cycle for Pizza base is short and as the production is made on estimated order no inventory is required which will further prevent inventory costs.

Question 9. ‘Hot Winters’ is a premium sweater making company. The sweaters are worn in many countries and they are of very high quality. For six months of the year the company is almost without work but the remaining six months it is busy in preparing almost 10 million sweaters for its customers in different parts of the world. What do you think is going to be the working capital requirement of this company? Why? Answer: The working capital requirement of this company will be high. Though the company is almost without work for six months yet for the remaining six months it produces almost 10 million sweaters thus require a huge working capital since the scale of operations is large.

Question 10. Dheeraj has opened a company. He has come from Australia to set up a business of his father here in India. He decides to meet a person who owns huge chunks of property. He decides to take a piece of land for his company on lease from him. What do you think is going to be the fixed capital requirement of his company? Why? Answer: The fixed capital requirement of Dheeraj’s company will be less. The reason for this less requirement will be a financial alternative in the form of lease that he has generated saving his funds which otherwise would have been used in purchasing the land.

Question 11. An AC manufacturing company wants to open a plant in Delhi. The owner of the company called a meeting to find the experts to fix the plant’s requirements. The recruitment process of the potential employees who will be working in the plant will be started soon. What do you think will be the working capital requirement of this company? Why? Answer: The working capital requirement of this company will be high. The reason for the high requirement of working capital will be that in a manufacturing company the requirement is high. Further the company will have to bear inventory costs as for the ACs an inventory will have to be maintained.

Question 12. There are two brothers: Shobhit and Mohit. Shobhit starts a tourist and travel agency. His idea is to take his business to great heights. Though he doesn’t have experience in this business yet he wants to give this business a try. He feels that if he gives the best quality services then his business will reach great heights. Mohit starts a thermometer manufacturing business. He too like his brother wants to take his business towards great success. He is new to this business and is busy getting to know about the technical side of the business as much as possible. He wants to make the best quality thermometers which are ultrasensitive to temperature changes and can resist shocks. Despite all these good ambitions in mind a sudden shock takes place for both the brothers. The economy shows sign of recession and within a few months is totally engulfed by it. What will happen to the working capital requirement of the two businesses described in the above case? Which of the two businesses do you think will see greater impact of this change? Answer: Shobhit is doing a trading business and Mohit a manufacturing business. Whenever recession hits an economy both trading and manufacturing businesses see fall in working capital requirements. However the manufacturing business is hit more severely by recession. It is hit early by recession and bears a greater impact so the working capital requirement of Mohit’s business will fall rapidly than that of Shobhit.

Question 13. Bharat Express’ specialises in Courier Services. Its ‘wide range of express package and parcel service’ help business firms to make sure that the goods are made le to the customers at the right place and at the right time. State with reason, whether the working capital requirements of ‘Bharat Express’ will be high or low. Answer: The working capital requirements of ‘Bharat express’ will be low as the firm operates in a service industry and need not invest in buying and maintaining inventory.

Question 14. ‘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 ‘Indian Logistics’ will be high or low. Answer: The working capital requirement will be ‘low’ as the firm is involved in a service industry which does not have to buy and maintain inventory.

Question 15. KJ Ltd. is manufacturing trucks at its manufacturing unit in Kolkata. The demand of its trucks is high as the economic growth is about 7% to 8%. The company has estimated a 20% increase in the demand of its trucks. It is planning to set up a new truck manufacturing unit. For this the company will require approximately ?2,000 crores as fixed capital and ?5G0 crores as working capital. The company has already arranged for its fixed capital. State any three factors that the finance manager of the company should keep in mind while arranging its working capital. Answer: Factors affecting the requirement of Working Capital:

• Nature of business. Nature of business is an important factor that influences the requirement of working capital. For example: Public utility services like transport concerns, electricity undertakings where much of the investment is in a fixed form, require less amount of working capital. On the other hand, trading or manufacturing concerns have to invest large amounts in raw materials, wages, etc., hence these require a large amount of working capital.
• Scale of operation. An organisation which operates on a higher scale, requires large amount of working capital as compared to the organisation which operates on a lower scale.
• Business cycle. Different phases of business cycle affect the requirement of working capital of a firm. During boom period, sales as well as production are likely to be higher, therefore more working capital is needed. During depression, sales and production are low, as a result the requirement of working capital would be lower.
• Seasonal factors. Industries, which produce and sell seasonal goods, require large working capital during off-season, as this is the period when production is carried on to prepare for the season when the products would be sold in comparison to industries with regular production and sales.
• Rapidity of turnover. Business units, which sell their products quickly, such as newspapers, retail shops, bakeries, etc., require a lesser amount of working capital.

Question 16. Raghu has started a mobile manufacturing company. The company has decided to meet the competitor’s market hold by giving liberal credit terms to their customers. They have decided to check the creditworthiness of their customers before giving them this facility. They will provide this facility to customers having credit cards.

• Predict the fixed capital requirement of Raghu’s company.
• What do you think will be the working capital requirement of his company?
• The fixed capital requirement of Raghu’s company will be high because it is a manufacturing company. Secondly a lot of technological upgradation is required for which Raghu will have to prepare for more investment in future.
• The working capital requirement of this company will be high because the labour charges will be high as it is a manufacturing business. Secondly the credit allowed by the company would increase its working capital requirement.

Question 17. Atul Oil Explorers is a high turnover oil extracting company. It has made a lot successful explorations of oil in the past. But recently the company has not been doing so well in the business. The company is trying to diversify in the textile business. The newspapers are flooded with this news. People are also considering this as a smart move by the company. What do you think will happen to the fixed capital requirement of the company because of this move? Give reason. Answer: The fixed capital requirement of the company will increase because of this decision. Diversification of operations by a company results in the increase of fixed capital requirement as more investment will be required in the fixed capital.

Question 18. MM Ltd. is manufacturing small cars at its manufacturing unit in Pune. The demand of its cars is increasing at the rate of 20% annually. It is planning to set up a new car manufacturing unit at Indore. For this the company will require approximately ?1,500 crores as fixed capital and ?400 crores as working capital. The company has already arranged for its working capital. State any three factors that the finance manager should keep in mind while arranging its fixed capital. Answer: Factors affecting the requirements of fixed capital:

• Nature of business. A trading concern needs lower investment in fixed assets as 152 44 Business Studies—Case Studies Tapan Pathak compared to a manufacturing concern since it doesn’t require to purchase plant and machinery.
• Scale of operations. A larger organisation operating at a higher scale needs bigger plant and more space and hence higher investment in fixed assets.
• Choice of technique. A capital intensive organisation requires higher investment in plant and machinery and thus requires higher fixed capital than a labour intensive organisation.
• Technology upgradation. Industries where assets quickly become obsolete require higher fixed capital in order to replace such assets.

Question 19. ‘Hamara Bank’ has over 1.5 million satisfied customers. However, recently some of them started leaving the clientele of bank. The reason behind this was that the services of the bank were extremely good, people always complained about lack of ATM facility in the bank. To overcome this problem and stop the clients go away, the bank decided to go for collaboration with ‘Tumhara Bank’. ‘Tumhara Bank’ is a new bank and is no way near to the competency of Core services of ‘Hamara Bank’ but it has exceptional ATM facilities. What do you think is going to be the impact of this collaboration on the fixed capital investment of ‘Hamara Bank’? Give reason. Answer: The result of this will lower the fixed capital requirement of ‘Hamara Bank’. As both the banks will share each other’s facilities the requirement of the banks to invest in fixed capital will come down. Like here in this case ‘Hamara Bank’ will not have to spend on any fixed capital investment for its requirement of ATM facility which will be accomplished by collaboration with ‘Tumhara Bank’.

Question 20. 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 examination 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 factor affecting fixed capital requirements of ‘Fashionate Pvt. Ltd.’ Answer: Level of Collaboration.

Question 21. 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 of 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 to choose furniture business over mobile phones Answer: Technology Upgradation.

Question 22. Ramesh is running a real estate construction company. He has to meet clients on a regular basis in order to make deals. For every decision he makes he has to be really cautious as he knows once he has made a decision he can’t go back which will mean abandoning of the project. So he evaluates every decision before he makes it. That is why he pays a lot of attention to what his clients are saying and figures out which portion of the deal is in his capacity and favour. Recently his company pumped an amount of Rs.50 crores in a project and he knows this project can affect the returns of the firms in the long run both positively as well as negatively. All this is a part of the business in which he has established himself. He knows that the funds invested are only likely to give returns in the future and impact the future prospects of his business. The chances of success in any business are more when one does a lot of research. He has to involve a considerable portion of his funds and block them in long term projects. A thorough research is required in order to grow funds at the lowest cost possible. He is a very stable minded entrepreneur.

• Which concept of management has been highlighted in the above case?
• Identify its types highlighted in the above case.
• The concept of management highlighted in the above case is ‘Importance of fixed capital investment’.
• Irreversible decisions. For every decision he makes he has to be really cautious as he knows once he has made a decision he can’t go back which will mean abandoning of the project.
• Risk involved. Recently his company pumped an amount of Rs.50 crores in a project and he knows this project can affect the returns of the firms in the long run both positively as well as negatively.
• Long-term growth. He knows that the funds invested are only likely to give returns in the future and impact the future prospects of his business.
• Large amount of funds involved. He has to involve a considerable portion of his funds and block them in long term projects.

Question 23. Identify the type of decisions:

• Ravi wants to open a restaurant and is looking for a proper place to open it. He is also thinking of the amount of funds which will be required for some of the set ups like food making and storing machineries.
• Ravindra is running a toy manufacturing company. He thinks of expanding his business. He meets his uncle and asks him for a sum of Rs. 2 crores. His uncle asks for a high interest rate. He agrees to it and promises to pay the money back within 2 years.
• A leading marketing company has decided to raise money through the stock market. It issued IPO in the market last year. The company knows there are going to be sizeable floatation costs involved in it.
• A company which has 10 branches in the city has decided to open its 11th branch. The company has taken this branch on rent. In this way the company has saved money which it would otherwise have invested in purchasing it.
• A company has decided to plough back the money in the form of retained earnings. This decision will save the company at least ‘50 crores. These funds can be used for the long term growth of the business.
• ‘Rakesh Iron Works’ has been doing a great job in the area of manufacturing iron. Within two years the company has reached among the top 3 performers of the industry. The company has made a lot of profit and decided to distribute its profits to the shareholders who stood with it during the hard times.
• Raj an Powerlooms, a leading company in its industry has decided not to issue equity shares this year as they want to keep the management control in their own hands. The company’s management already has only 60% shares in the company. So it would avoid any further dilution of its stake in the company. Company would prefer taking loan.
• A company has decided to issue debentures as it knows that it will not lead to any additional costs. These debentures will be carrying a very low rate of return for the debenture holders but will be a surety for them to get their money back. Investors who want financial safety would like to go for this option as there will be an assured definite return. ,
• Shuddhi Steel Manufacturers has been a brand but due to some HR related issues it came into limelight for bad reasons. The issue was related with non-payment of salaries of the employees but now the company wants to sort this issue out. The company has decided to pay the salary of all the employees which were not paid their emoluments since last six months. The company has done so to avoid any image spoiling to take place.
• A soft drink company has decided to run an advertisement campaign. It will hire many famous Bollywood celebrities for this purpose. The advertisement campaign could involve more than ‘150 crores. Every major newspaper is mentioning about it.
• Tarachand and Sons has decided to open a new branch in the middle of the city in order to increase its business.
• Investment decision
• Financing decision
• Investment decision (short-term investment decision/working capital)
• Dividend decision (As out of the EPS one portion will be dividend and the other retained earnings. This is decided by dividend decision).
• Dividend decision
• Investment decision (Working capital or short term investment decision)
• Investment decision (Long-term investment decision. Remember running an ad campaign is not a short term investment decision which confuses the students. It is a long-term investment decision)
• Investment decision (Long-term investment decision)

Question 24. Bharat Steel Ltd., an Indian company producing 50 million tonnes of steel annually and generating revenue of 38 billion US dollars has recently acquired the 5 second largest steel producing company, ‘German Steels.’ After this acquisition Bharat Steels Ltd. will become the World’s largest steel producer. For this acquisition Bharat Steels Ltd. had to arrange about 50,000 crores of rupees through debt and equity. State the function performed by the company for arranging the funds through debt and equity. Answer: Financing function or Financing decision. It refers to the decision about quantum of finance to be raised from various long term sources.

Question 25. ‘Trucks India Ltd.’ producing 1,00,000 trucks and generating revenue of Rs.1,000 crores annually, has recently acquired the world’s second largest truck icturing company. After this acquisition, ‘Trucks India Ltd.’ will become the world’s largest truck manufacturer. For financing the acquisition the company had to arrange about Rs.41,000 crores through debt and equity. State the function performed by the company for arranging the funds through debt and equity. Answer: Financing function or Financing decision. Financing decision refers to the decision about the quantum of finance to be raised from various long term sources.

Question 26. Identify the factors involved in the following dividend decisions:

• A company is growing by leaps and bounds. Every year it is opening new branches in the major cities of the country. There are chances that in a few years to come it will be the market leader in its industry. Newspapers appreciate the steps taken by the management. However in the field of financial decisions the company takes a defensive stand. Every year it declares less than expected dividend for the shareholders.
• The new government in accordance with its new policy has decided to levy more taxes on dividends. A company which pays good dividend every year to its shareholders has decided to keep the retained earnings high this year. This step will definitely bring the dividend down in comparison to the expectations of the shareholders.
• ‘Mitra, my neighbour’ is a real estate company. The company has always done well on the stock market indices. Recently the company has shown good profit but it is still short of cash. The company has decided to come with a lower dividend than expected. (d) One of the leading companies of the services sector has decided to keep the dividend portion of the EPS stable. The decision has been taken keeping in view the fact that the earning potential of the company has not gone up since last three years. So, the company has decided not to change the dividend per share.
• A lending company ‘A’ has decided to put some constraints on the company ‘B’ to which it has extended loan. The constraints are related to the declaring of dividends by the company ‘B’. They have signed a contract which puts restrictions on company ‘B’. So unless and until it pays back the amount taken from company ‘A’ it can’t enjoy freedom in this regard.
• A leading telecom giant always gives good dividend to its shareholders. The company is a great performer on the stock exchange. The shareholders are very confident of its good performance. It has the liberty to give high dividends as it has less dependency on retained earnings.
• A company takes care of the needs of its shareholders. Many of the shareholders are such who need a constant and stable source of income. Their dependence is met by the declaring of a stable and permanent dividend. Unlike other companies w’hich let the market decide the amount of dividend to be paid and the payment of which is based on the company’s performance the company wants to keep its shareholders satisfied majority of whom are retired persons.
• ‘Heartbeat Denim’ is the number one performing jeans manufacturing company since last 30 years. The company has several branches at different locations of the world. The revenue of the company has increased over the years. This has made this company a very stable firm. It is on the stock market since last 15 years. The shareholders of the company are extremely satisfied with its dividend policy. They never feel insecure about the dividends given as the company’s products always sell in the market and have a great demand.
• A newly formed petrochemical company is performing absolutely great. The firm has listed itself on the stock market. Due to the huge revenue earned by the organisation it has been able to give high dividend to the shareholders.
• A company has decided to improve its image in the stock market and wants the investors to pump more money in its shares. The highly ambitious organisation has planned to increase the dividends on its shares for the third successive year. The increase has also been substantial. The idea is to send great news in the market regarding the performance of the company in order to bolster its image.

Answer: The factors involved in the above mentioned dividend decisions are:

• Growth opportunities.
• Taxation policy.
• Cash flow position.
• Stability of dividends.
• Contractual constraints.
• Access to capital market.
• Shareholder’s preference.
• Stability of earnings.
• Amount of earnings.
• Stock market reaction.

Question 27. Company ‘A’ has the debt-equity ratio of 3 :1. Another Company ‘B’ has the debt-equity ratio of 2.5 : 1. Both the companies are part of an industry where the operating costs are high. Many of the companies in this industry are vulnerable to high business risk. Which one of the two companies is going to have higher chances of financial risk? Why do you think the financial risk in the above mentioned industry is going to be dangerous for the companies? Answer: The Company A is going to have higher chances of financial risk as the debt component is higher. Due to the higher debt component there will be an increase in the fixed financial costs. In case a company is unable to bear fixed financial costs the financial risk increases. If a company is unable to bear operating costs then business risk gets generated. In an industry where there is already a chance of higher business risk an additional financial risk will increase the Total risk to a dangerous level.

Question 28. In the Question No. 26(b) case where do you think taxes are charged on dividend? What is its significance with respect to the shareholders? Answer: The taxes are charged on companies in the form of dividend distribution tax whereas the dividend in the hands of the shareholders is tax free. The significance with respect to the shareholders is that they may prefer higher dividend as in present taxation policy the dividends are taxed lower.

Question 29. An organisation is busy preparing its financial blueprint for its future operations. The idea is to create satisfactory amount of money which should be there in the reach of the organisation at the right time.

• Which concept of financial management has been highlighted in the above case?
• What are the financial plans made for a year known as?
• What are the twin objectives of financial planning?
• The concept of financial management highlighted is ‘Financial Planning’.
• The financial plans made for a year are known as ‘Budgets’.
• To ensure proper availability of funds whenever the need arises.
• To ensure that there is no unnecessary raising of funds by the organisaiton.

Question 30. A company was expecting a sale increase of 20% in comparison to the last year. However, due to poor support from the economic situations around the increase turned out to be only 10%. The company however had prepared itself for this situation. It knew how to change its expenses in financial case the sales increase goes down in comparison to the expectations.

• Identify the concept of financial management which is highlighted in thaabove case.
• What should have been the action taken by the company if the situation had been different like increase in revenue by 30%.
• The concept of financial management highlighted in the above case is ‘financial planning’.
• The company would keep different items of expenditure in the case of 30% as it would be having more cash in hand. It could start new projects and involve more man power in its new projects. High revenue may help streamline operations in a better manner. The company definitely is going to have more freedom in deciding future courses of action.

Question 31. A company ‘White White Sheets’ is a successful bed sheet selling company. It sells Rs.1 crore worth sheets to a corporate customer. The company gives a period of 2 months to the client to pay for the sheets. The company send an invoice to the customer and the inventory account gets reduced by Rs.1 crore. The account receivable is increased by Rs.1 crore. When its corporate client pays within the period of 2 months the cash is increased by Rs.1 crore and the account receivable is reduced by Rs.1 crore.

• In the above financial transaction the essential ingredients of which concept of ‘financial management’ have been highlighted?
• What is the other term used for long term investment decision?
• Which concept of financial management is related to selection of the best financing or investment alternative?
• In the above case the essential ingredients of ‘sound working capital management’ have been highlighted. They are Accounts receivables, Cash and Inventory.
• The other term used for long term investment is ‘Capital Budgeting Decision’.
• The concept of financial management related is ‘financial decisions’.

Question 32. In the following cases identify the type of financial decision. Also identify the factors affecting the decisions:

• A company has decided to issue equity but it is concerned about the control management will lose. So after a lot of brainstorming the board of directors decide to take loan from a bank and debt from other sources.
• Keeping the concern of raising funds alive a company decides to go for debenture as the final choice. The people who will be purchasing the debentures would be assured a definite return after a definite period of time. The company’s credibility is good so they should not worry about the A company issues equity shares but the expenses involved are quite a lot. The organisation has to be aware about the printing charges, advertisement related expenses, underwriter’s commission and brokerage asked by the middle men.
•  ‘Dheeraj Plants’, a manufacturing company, thinks of starting a project in South America. The company knows that the project will be a successful venture in the years to come. It tries to figure out the revenue generated by the project and the expenses which will be involved in it.
• Suyash tries to evaluate two projects. The projects have equal level of risk. According to this parameter he finds both projects at par. However, when it corhes to knowing the rate of return of the two projects he finds that Project A will yield a rate of return of 10% and Project B will yield a rate of return of 12%. So he decides to go ahead with the project B.
• Shobhit wants to start a movie hall so he decides to evaluate the feasibility of starting the project. He finds that at place A the movie hall will cost ?20 crore and at place B it will cost ?30 crore. He decides to go for the first option—Project A.
• Type of financial decision: Financing decision Factor affecting: Control considerations
• Type of financial decision: Financing decision Factor affecting: Cost
• Type of financial decision: Financing decision Factor affecting: Floatation cost
• Type of financial decision: Investment decision Factor affecting: Cash flows of the project
• Type of financial decision: Investment decision Factor affecting: Rate of return
• Type of financial decision: Investment decision Factor affecting: Amount of investment

Question 33. ‘Abhishek Ltd.’ is manufacturing cotton clothes. It has been consistently earning good profits for many years. This year too, it has been able to generate ^ profits. There is availability of enough cash in the company and good prospects for growth in future. It is a well managed organisation and believes in quality, equal employment opportunities and good remuneration practices. It has many shareholders who prefer to receive a regular income form their investments. It has taken a loan of Rs.50 lakhs from I.C.I.C.I 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 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 any four such factors. Answer: Factors affecting divided decision:

• ‘Consistently earning good profits’. It relates to the stability of earnings of the company as a company having stable income is always in a better position to pay higher dividend. Companies having inconsistent and unstable earnings do not prefer declaring high rate of dividend.
• ‘There is availability of enough cash in the company’. The above line reflects the cash flow position of the business which is another major factor influencing the dividend decision. In order to declare higher rate of dividend the company should have enough cash. A company remaining short of cash finds it difficult to pay dividend.
• ‘It has many shareholders who prefer to receive a regular income’. Shareholders’ preference is highlighted in the above statement. The management of the company should keep in mind the preferences of shareholders while they declare dividend. Some shareholders prefer to receive a regular income in the from of dividend.
• ‘It has taken a loan of Rs.50 lakhs from I.C.I.C.I Bank and is bound by certain restrictions on the payment of dividend’. The above statement highlights contractual constraints due to which the company is bound by certain restrictions on the payment of dividend. If a company has taken loan, the lender may impose few restrictions on the declaration of dividend in future. The dividend policy of the firm should not violate the terms and conditions of the loan agreement.

Question 34. Raghav is trying to co-ordinate the functioning of various departments like sales and production. He has been trying to do this with the help of a concept of financial management. He quite often calls people of both departments and tells them to work within means. He has even prescribed a budget for it. During the time, when he is doing a lot of analysis he connects the decision of present with the outcomes of future. This can especially he seen in two of the prominent decisions. One is the investment and the other is the financing decision- so the interlinking of these two decisions is assumed by him. When the year ends it is easy for him to take some strong decisions. This happens because he is able to evaluate the performance of various departments in terms of revenue generated and the expenses incurred. No business is risk proof. However, he knows that at least business shocks which a business can suffer can be minimised thus laying foundation for a better future. His involvement in the work is definitely appreciable.

• Identify the types of this concept highlighted in the above case.
• The concept of financial management which is highlighted in the above case is ‘Importance of financial planning’.
• It helps in coordinating various business functions like purchase, production and sales. Raghav is trying to coordinate the functioning of various departments like sales and production.
• It helps in linking, the present with the future. During the time when he is doing a lot of analysis he connects the decision of present with the outcomes of future.
• It helps in linking the investment decision with the financing decision. One is the investment and the other is the financing decision- so the interlinking of these two decisions is assumed by him.
• It helps in the evaluation of actual performance easier. This happens because he is able to evaluate the performance of various departments in terms of revenue generated and the expenses incurred.
• It helps in avoiding business shocks and thus prepares the company for future. However, he knows that at least business shocks which a business can suffer can be minimised thus laying foundation for a better future.

Question 35. ‘Yiyo Ltd.’ is a company manufacturing textiles. It has a share capital of Rs.60 lakhs. The earning per share in the previous year was Rs.0.50. For diversification, the company requires additional capital of ?40 lakhs. The company raised funds by issuing 10% debentures for the same. During the current year the company earned a profit of Rs.8 lakhs on capital employed. It paid tax @ 40%. (a) State whether the shareholders gained or lost, in respect of earning per share on diversification. Show your calculations clearly. (b) Also, state any three factors that favour the issue of debentures by the company as part of its capital structure. Answer:

• Managerial control. The company has already issued a share capital of ?60 lakhs. Further use of equity can completely dilute the control into the hands of the shareholders. Hence to have a certain degree of say in management the company issued debentures.
•  Tax deductibility. Interest paid by the company to its debenture holders is tax deductible. The company is paying 40% tax. Therefore it is better for the company to issue debentures. High tax rate makes debt relatively cheaper.
• Cost consideration. Raising capital through debentures is cheaper as compared to equity shares. Raising funds through debt involves low floatation costs. Moreover interest paid on debentures is a deductible expense. The interest is deducted from firm’s earnings and then the net amount is used for calculating tax liabilities. Hence more debt in the capital structure means low cost of overall capital.

Question 36. ‘Sarah Ltd.’ is a company manufacturing cotton yarn. It has been consistently earning good profits for many years. This year too, it has been able to generate enough profits. There is availability of enough cash in the company and good prospects for growth in future. It is a well managed organisation 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 loan of 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 any four such factors. Answer:

• ‘It has been consistently earning good profits for many years’. It relates to the stability of earnings of the company as a company having stable income is always in a better position to pay higher dividend. Companies having inconsistent and unstable earnings prefer not to declare a high rate of dividend.
•   ‘There is availability of enough cash in the company’. The above line reflects the cash flow position of the business which is another major factor influencing the dividend decision. In order to declare higher rate of dividend, the company should have enough cash. A company remaining short of cash finds it difficult to pay dividend.
• ‘It has many shareholders who prefer to receive a regular income from their investments’. Shareholder’s preference is highlighted in the above statement. The management of the company should keep in mind the preferences of shareholders while they declare dividend. Some shareholders prefer to receive a regular income in the from of dividend.
•   ‘It has taken a loan of 40 lakhs from IDBI and is bound by certain restrictions on the payment of dividend’. The above statement highlights contractual constraints due to which the company is bound by certain restrictions on the payment of dividend. If a company has taken loan, the lender may impose few restrictions on the declaration of dividend in future. The dividend policy of the firm should not violate the terms and conditions of the loan agreement.

Question 37. Somnath Ltd. is engaged in the business of export of garments. In the past, the performance of the company had been upto the expectations. In line with the latest technology, the company decided to upgrade its machinery. For this, the Finance Manager, Dalmia estimated the amount of funds required and the timings. This will help the company in linking the investment and the financing decisions on a continuous basis. Dalmia therefore, began with the preparation of a sales forecast for the next four years. 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. Identify the financial concept discussed in the above para. Also state the objectives to be achieved by the use of financial concept, so identified. Answer: Financial planning concept has been discussed in the above para. Following are the two objectives of Financial planning:

• To ensure availability of funds when required. Financial planning ensures that sufficient funds are available with the enterprise as and when required. For this purpose proper estimation of funds are carried out for different purposes like for the purchase of long-term assets or for meeting day-to-day expenses of business.
• To see that the firm does not raise resources unnecessarily. Financial planning makes sure that an enterprise is adequately funded. It also ensures that firms do not raise funds unnecessarily. It aims at the best possible use of financial resources.

Business Studies Case Studies Business Studies Commerce

Maths NCERT Solutions

SCIENCE NCERT SOLUTIONS

CBSE Class 12 Case Studies In Business Studies – Financial Management

FINANCIAL MANAGEMENT Financial Management: Definition Financial Management is concerned with optimal procurement as well as usage of finance.

Objective The prime objective of financial management is to maximise shareholder’s wealth by maximising the market price of a company’s shares.

Financial Decisions Involved in Financial Management

• Investment Decision
• Financing Decision
• Dividend Decision

Role of Financial Management

• To determine the capital requirements of business, both long-term and short-term.
• To determine the capital structure of the company and determine the sources from where required capital will be raised keeping in view the risk and return matrix.
• To decide about the allocation of funds into profitable avenues, keeping in view their safety as well.
• To decide about the appropriation of profits.
• To ensure efficient management of cash in order to ensure both liquidity and profitability.
• To exercise overall financial controls in order to promote safety, profitability and conservation of funds.

INVESTMENT DECISION

• It 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.

Types of Investment Decision

• It refers to the amount of capital required to meet day- to-day running of business.
• It relates to decisions about cash, inventory and receivables.
• It affects both liquidity and profitability of business.
• It refers to the amount of capital required for investment in fixed assets or long term projects which will yield return and influence the earning capacity of business over a period of time.
• It affects the amount of assets, competitiveness and profitability of business.
• The expected cash flows from the proposed project should be carefully analysed.
• The expected rate of return should be carefully studied in terms of risk associated from the proposed project.
• Different types of ratio analysis should be done to evaluate the feasibility of the proposed project as compared to similar projects in the same industry.

FINANCING DECISION Financing Decision: Definition Financing decision relates to determining the amount of finance to be raised from different sources of finance.This decision determines the overall cost of capital and the financial risk of the enterprise. Types of Sources of Raising Finance

• Equity shares
• Preference shares
• Retained earnings
• Loan from bank or financial institutions
• Public deposit

Considerations Involved in the Issue of Debt

• Interest on borrowed funds has to be paid regardless of whether or not a business has made a profit. Likewise, borrowed funds have to be repaid ata fixed time.
• There is some amount of financial risk in debt financing.
• The cost of debt is less than equity as the degree of risk assumed by the investors is less and the amount of interest paid by the company is tax deductible.

Factors Affecting Financing Decision

• The source of finance which involves the least cost should be chosen.
• The risk involved in raising debt capital is higher than equity.
• The sources involving high flotation cost require special consideration.
• If the cash flow position of a business is good, it should opt for debt else equity.
• If the fixed operating cost ofa business is low, it should opt for debt else equity.
• The issue of equity capital dilutes the control of existing shareholders over business whereas financing through debt does not lead to any such effect
• If there is boom in capital market it is easy for the company to raise equity capital, else it may opt for debt.

Considerations Involved in the Issue of Equity

• Shareholders do not expect any commitment regarding the payment of returns or repayment of capital.
• The floatation cost on raising equity capital is high.
• The shareholders expect higher returns in return for assuming higher risks.

DIVIDEND DECISION Dividend Decision relates to disposal of profit by deciding the proportion of profit which is to be distributed among shareholders and the proportion of profit which is to be retained in the business for meeting the investment requirements.

Factors Affecting Dividend Decision

• If the earnings of the company are high, dividends are paid at a higher rate.
• If the earnings of a company are stable, it is likely to pay higher dividends.
• A company is more likely to maintain a stable dividend rate over a period of time,unless there is a significant change in its earnings.
• A company planning to pursue a growth opportunity is likely to pay lower dividends. The dividends are paid in cash, therefore if the cash flow of the company is good, it is likely to pay higher dividends.
• If the shareholders prefer regular income in form of dividends, the company is likely to maintain a dividend payout rate.
• If the tax rate is high, the company is likely to pay less dividend.
• If a company wants positive reactions at stock market, It Is likely to pay higher dividends.
• A large company can access funds easily from capital market as per its requirements, therefore, it is likely to retain lesser profits and is likely to pay higher dividends.
• The legal constraint should be considered at the time of dividend payment by a company.
• The contractual constraints may also affect the dividend payment by a company.

FINANCIAL PLANNING Financial Planning: Definition The process of estimating the funds requirement of a business and specifying the sources of funds is called financial planning. It basically involves preparation of a financial blueprint of an organisation’s future operations.

Twin Objectives of Financial Planning

• To ensure availability of funds as per the requirements of business.
• To see that the enterprise does not raise resources needlessly.

Importance of Financial Planning

• It ensures smooth running of a business enterprise by ensuring availability of funds at the right time.
• It helps in anticipating future requirements of funds and evading business shocks and surprises.
• It facilitates co-ordination among various departments of an enterprise, like marketing and production functions, through well-defined policies and procedures.
• It increases the efficiency of operations by curbing wastage of funds, duplication of efforts, and gaps in planning. .
• It helps to establish a link between the present and the future.
• It provides a continuous link between investment and financing decisions.
• It facilitates easy performance as evaluation standards are set in clear, specific and measurable terms.

CAPITAL STRUCTURE Capital Structure: Definition It refers to the mix between owners and borrowed funds.

Financial Risk: Definition It refers to a situation when a company is unable to meet its fixed financial charges like payment of interest on debt capital.

Trading on Equity: Definition It refers to the increase in the earnings per share by employing the sources of finance carrying fixed financial charges like debentures (interest is paid at a fixed rate) or preference shares (dividend is paid at fixed rate).

Financial Leverage: Definition The proportion of debt in the overall capital is called financial leverage. It is computed as D/E or D/D+E, where D is the Debt and E is the Equity.

FIXED CAPITAL Fixed Capital: Definition It refers to investment in long-term assets.

Importance of Management of Fixed Capital

• It affects the growth and profitability of busmess m future.
• It involves huge investment outlay in terms of investment in land, building, machinery etc.
• Its influences the overall level of business risk of the organisation.
• If these decisions are reversed they may lead to major losses.

WORKING CAPITAL Working Capital: Definition The funds needed to meet the day-today operations of the business is called working capital.

Factors Affecting the Choice of Capital Structure

13. Regulatory framework: The business will choose the option where it can easily fulfill the norms of the concerned regulator like a bank or SEBI. 14. Capital structure of other companies: The business must know what the industry norms are, whether they are following them or deviating from them and adequate justification must be there.

Factors Affecting the Working Capital Requirements of a Business Enterprise

LATEST CBSE QUESTIONS

Question 1. What is meant by ‘financial management’ ? (CBSE, Delhi 2017) Answer: Financial Management is concerned with optimal procurement as well as usage of finance.

Question 2. Somnath Ltd. is engaged in the business of export of garments. In the past, the performance of the company had been upto the expectations. In line with the latest technology, the company decided to upgrade its machinery. For this, the Finance Manager, Dalmia estimated the amount of funds required and the timings. This will help the company in linking the investment and the financing decisions on a continuous basis. Dalmia therefore, began with the preparation of a sales forecast for the next four years. Fie 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. (CBSE, Delhi 2017) Identify the financial concept discussed in the above para. Also state the objectives to be achieved by the use of financial concept, so identified. Answer: Financial planning is the financial concept discussed in the above paragraph. The process of estimating the fund requirements of a business and specifying the sources of funds is called financial planning. It relates to the preparation of a financial blueprint of an organisation’s future operations. The objectives to be achieved by the use of financial concept are stated below:

• To ensure availability of funds whenever required which involves estimation of the funds required, the time at which these funds are to be made available and the sources of these funds.
• To see that the firm does not raise resources unnecessarily as excess funding is almost as bad as inadequate funding. Financial planning ensures that enough funds are available at right time.

Question 3. Explain briefly any four factors which affect the choice of capital structure of a company. (CBSE, Delhi 2017) Answer: The four factors which affect the choice of capital structure of a company are described below:

• Risk: Financial risk refers to a situation when a company is unable to meet its fixed financial charges. 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.
• Flexibility: Too much dependence on debt reduces the firm’s ability to raise debt during unexpected situations. Therefore, it should maintain flexibility by not using debt to its full potential.
• Interest Coverage ratio (ICR): The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation. This may be calculated as follows: ICR = EBIT/Interest. If the ratio is higher, lower is the risk of company failing to meet its interest payment obligations hence debt may be issued or vice versa. But besides interest payment related repayment obligations should also be considered.
• Cash flow position: The issue of debt involves a fixed commitment in the form of payment of interest and repayment of capital. Therefore if the cash flow position of the company is weak it cannot meet the fixed obligations involved in issue of debt it is likely to issue equity or vice versa.

Question 4. Explain briefly any four factors that affect the working capital requirement of a company. (CBSE, Delhi 2017) Answer: The four factors that affect the working capital requirements of a company are explained below:

• Credit availed: In case the suppliers from whom the firm procures the raw material needed for production or finished goods follow a liberal credit policy, the business can be operated on minimum working capital or vice versa.
• Credit allowed: The credit terms may vary from firm to firm. However, if the level of competition is high or credit worthiness of its clients is good the firm is likely to follow a liberal credit policy and grant credit to its clients it results in higher amount of debtors, increasing the requirement of working capital or vice versa.
• Scale of operations: The amount of working capital required by a business varies directly in proportion to its scale of business. For organisations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.
• Growth prospects: The business firms who wish to take advantage of a forthcoming business opportunity or plan to expand its operations will require higher amount of working capital so that is able to meet higher production and sales target whenever required or vice versa .

Question 5. Explain briefly any four factors that affect the fixed capital requirements of a company. (CBSE, Delhi 2017) Answer: The four factors that affect the fixed capital requirements of a company are explained below:

• Nature of business: The kind of activities a business is engaged in has an important bearing on its fixed capital requirements. On one hand a trading concern does not require to purchase plant and machinery etc. and needs lower investment in fixed assets. Whereas on the other hand a manufacturing organisation is likely to invest heavily in fixed assets like land, building, machinery and needs more fixed capital.
• Scale of operations: The amount of fixed capital required by a business varies directly in proportion to its scale of businessA larger organisation operating at a higher scale needs bigger plant, more space etc. and therefore, requires higher investment in fixed assets when compared with the small organisation.
• Diversification: If a business enterprise plans to diversify into new product lines, its requirement of fixed capital will increase as compared to an organisation which does not have any such plans.
• Growth prospects: If a business enterprise plans to expand its current business operations in the anticipation of higher demand, its requirement of fixed capital will be more as compared to an organisation which doesn’t plan to persue any such plans.

Question 6. What is meant by ‘Capital Structure’ ? (CBSE, OD 2017) Answer: Capital structure refers to the mix between owned funds and borrowed funds.

Question 7. Ramnath Ltd. is dealing in import of organic food items in bulk. The company sells the items in smaller quantities in attractive packages. Performance of the company has been up to the expectations in the past. Keeping up with the latest packaging technology, the company decided to upgrade its machinery. For this, the Finance Manager of the company, Mr. Vikrant Dhull, estimated the amount of funds required and the timings. This will help the company in linking the investment and the financing decisions on a continuous basis. Therefore, Mr. Vikrant Dhull began with the preparation of a sales forecast for the next four years. 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. For the remaining funds he is trying to find out alternative sources. Identify the financial concept discussed in the above paragraph. Also, state any two points of importance of the financial concept, so identified. (CBSE, OD 2017) Answer:

• Financial planning is the financial concept discussed in the above paragraph. The process of estimating the fund requirements of a business and specifying the sources of funds is called financial planning. It relates to the preparation of a financial blueprint of an organisation’s future operations.
• It helps in anticipating future requirements of a funds and evading business shocks and surprises .

Question 8. When is financial leverage favourable? (CBSE, Sample Paper 2017) Answer: Financial leverage affects the profitability of a business and it is said to be favourable when return on investment ( ROI) is higher than cost of Debt.

Question 9. “A business that doesn’t grow dies”, says Mr. Shah, the owner of Shah Marble Ltd. with glorious 36 months of its grand success having a capital base of RS.80 crores. Within a short span of time, the company could generate cash flow which not only covered fixed cash payment obligations but also create sufficient buffer. The company is on the growth path and a new breed of consumers is eager to buy the Italian marble sold by Shah Marble Ltd. To meet the increasing demand, Mr. Shah decided to expand his business by acquiring a mine. This required an investment of RS.120 crores. To seek advice in this matter, he called his financial advisor Mr. Seth who advised him about the judicious mix of equity (40%) and Debt (60%). Mr. Seth 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. Seth, Mr. Shah decided to raise funds from a financial institution.

• Identify and explain the concept of Financial Management as advised by Mr. Seth in the above situation.
• State the four factors affecting the concept as identified in part (1) above which have been discussed between Mr. Shah and Mr. Seth. (CBSE,Sample Paper 2017)
• Capital structure is the concept of Financial Management as advised by Mr. Seth in the above situation. Capital structure refers to the mix between owners funds and borrowed funds.
• Cashflow position: The issue of debt capital involves a fixed burden on the company in the form of payment of interest and repayment of capital. Therefore if the cash flow position of a company is good it may issue debt else equity to raise the required amount of capital.
• Risk Consideration: Financial risk refers to a situation when a company is unable to meet its fixed financial charges. 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.
• Tax rate: Considering the fact that amount of interest paid is a deductible expense, cost of debt is affected by the tax rate. If for example a firm is borrowing @ 10% and the tax rate is 30%, the after tax cost of debt is only 7%. Therefore, when the tax rate is higher it makes debt relatively cheaper and increases its attraction vis-a-vis equity.
• Control: The issue of debentures doesn’t affect the control of the equity shareholders over the business as the debenture holders do not have the right to participate in the management of the business.

Question 10. 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 had been 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 weak. She wanted to undertake modernisation 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 ? 50 lakh would be required for undertaking the modernisation and expansion programme. He also informed her that the 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 modernisation 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. (CBSE, Sample Paper 2016)
• Shalini should not choose debt capital for financing the modernisation and expansion of her food processing business because the fixed operating cost of the company is high. It cannot take the additional burden of fixed commitments in terms of payment of interest and repayment of capital by issuing debt.

Question 11. Radhika and Vani who are young fashion designers, left their job vyith 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 the entrance examination 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 the 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 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 factor affecting the fixed capital requirements of Fashionate Pvt. Ltd. (CBSE, Delhi 2016) Answer: The factor affecting the fixed capital requirement of Fashionable Pvt. Ltd. is the level of collaboration. This kind of arrangement of using the resources jointly helps to reduce the fixed capital requirements of the business firms.

Question 12. Kay Ltd. is a company manufacturing textiles. It has a share capital of ? 60 lakhs. In the previous year, its earning per share was ? 0.50. For diversification, the company requires an additional capital of ? 40 lakhs. The company raised funds by issuing 10% debentures for the same. During the year, the company earned a profit of ? 8 lakhs on the capital employed. It paid tax @ 40%.

• State whether the shareholders gained or lost, in respect of earning per share on diversification. Show your calculations clearly.
• Also state any three factors that favour the issue of debentures by the company as part of its capital structure. (CBSE, OD 2016)

OR Vivo Ltd. is a company manufacturing textiles. It has a share capital of Rs. 60 lakhs. The earning per share in the previous year was Rs. 0.50. For diversification, the company requires an additional capital of Rs. 40 lakhs. The company raised funds by issuing 10% debentures for the same. During the current year, the company earned a profit of Rs. 8 lakhs on the capital employed. It paid tax @ 40%.

• State whether the shareholders gained a lost, in respect of earning per share on diversification. Show your calculations clearly.
• Also, state any three factors that favour the issue of debentures by the company as part of its capital structure. (CBSE, Delhi 2016)

*0.50 x 6,00,000 = 3,00,000 Consequently EBT/EBIT in situation 1 = Rs. 5,00,000 Thus, on diversification, the earning per share fell down from Rs. 0.50 to Rs. 0.40.

• Tax deductibility: Debt is considered to be a relatively cheaper source of finance as the amount of interest paid on debt is treated as a tax deductible expense.
• Flotation cost: The money spent by the company on raising capital through debentures is less than that spent on equity.

Question 13. 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 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 the furniture business over mobile phones. (CBSE, OD 2016) Answer: The factor affecting the fixed capital requirements which made Rizul Bhattacharya choose the furniture business over mobile phones is technological upgradation.

Question 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. Discuss any five factors which will help him in taking this decision. (CBSE, Sample Paper, 2015) Answer: The five factors which will help Ankit, in taking the dividend decision are described below:

• Earnings: Since the dividends are paid out of current and past earnings, there is a direct relationship between the amount of earnings of the company and the rate at which it declares dividend. If the earnings of the company are high, it may declare a higher dividend or vice-versa.
• Cash flow position: Since the dividends are paid in cash, if the cash flow position of the company is good it may declare higher dividend or vice-versa.
• Access to capital market: If the company enjoys an easy access to capital market because of its credit worthiness. It does not feel the need to depend entirely on retained earnings to meet its financial needs. Hence, it may declare higher dividend or vice-versa.
• Growth prospects: If the company has any forthcoming investment opportunities, it may like to retain profits to finance its expansion projects. This is because retained profits is considered to be the cheapest source of finance as it doesn’t involve any explicit costs. Hence, it may declare lower dividend or vice-versa.
• Preferences of the shareholders: The companies paying stable dividends are always preferred by small investors primarily if they want regular income in the form of ‘stable returns’ from their investments. Large shareholders may be willing to forgo their present dividend in pursuit of higher profits in future. Therefore, the preferences of the shareholders must be taken into consideration.

Question 15. ‘Abhishek Ltd’ is manufacturing cotton clothes. 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 organisation 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. 50 lakhs from ICICI 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 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 any four such factors. (CBSE, 2015) Answer: The five factors which Ankit has to consider before taking dividend decisions are:

• Growth Opportunities: Financial needs of a firm are directly related to the investment opportunities available to it. If a firm has abundant profitable investment opportunities, it will adopt a policy of distributing lower dividends. It would like to retain a large part of its earnings because it can reinvest them at a higher rate.
• Stability of Dividends: Investors always prefer a stable dividend policy. They expect to get a fixed amount as dividends which should increase gradually over the years.
• Legal Restrictions: A firm’s dividend policy has to be formulated within the legal provisions and restrictions of the Indian Companies Act.
• Restrictions in Loan Agreements: Lenders, mostly financial institutions, put certain restrictions on the payment of dividends to safeguard their interests.
• Liquidity: The cash position is a significant factor in determining the size of dividends. Higher the cash and overall liquidity position of a firm, higher will be its ability to pay dividends.

Question 16. 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 anser. (CBSE, Sample Paper 2014-15) Answer: The working capital requirements of Amit will be relatively less as he is running an advertising agency, wherein there is no need to maintain inventory.

Question 17. Yogesh, a businessman, is engaged in the purchase and sale of ice-creams. Identify his working capital requirements by giving reasons to support your answer. Now, he is keen to start his own ice-cream factory. Explain any two factors that will affect his fixed capital requirements. (CBSE, OD 2012) Answer:

• The working capital requirements of Yogesh will be less as he is engaged in trading business.
• Level of collaboration: If Yogesh gets an opportunity to set up his factory in collaboration with another enterprise, his fixed capital requirements will reduce considerably else his fixed capital requirements will be more.
• Financial alternatives available: If Yogesh is able to get the place to start the factory and machinery on lease, his fixed capital requirements will reduce considerably. Whereas if he decides to purchase them, his fixed capital requirements will be more.

Question 18. Amar is doing his transport business in Delhi. His buses are generally used for tourists going to Jaipur and Agra. Identify the working capital requirements of Amar. Give reasons to support your answer. Further, Amar wants to expand and diversify his transport business. Explain any two factors that will affect his fixed capital requirements. (CBSE, OD, 2012) Answer:

• The working capital requirements of Amar will be relatively less as he is engaged in prtividing transport services wherein there is no need to maintain inventory.
• Diversification: If a business enterprise plans to diversify into new product lines, its requirement of fixed capital will increase.
• Growth prospects: If a business enterprise plans to expand its current business operations in the anticipation of higher demand, consequently, more fixed capital will be needed by it.

Question 19. Manish is engaged in the business of manufacturing garments. Generally, he used to sell his garments in Delhi. Identify the working capital requirements of Manish giving reason in support of your answer. Further, Manish wants to expand and diversify his garments business. Explain any two factors that will affect his fixed capital requirements. (CBSE, Delhi 2012) Answer:

• The working capital requirements of Manish will be relatively more as he is engaged in the business of manufacturing garments. This is because the length of production cycle is longer i.e. it takes time to convert raw material into finished goods.
• Scale of Operations: The amount of fixed capital required by a business enterprise is directly proportionate to its scale of operations. Therefore, if Manish plans to do business on a large scale, his fixed capital requirements will be more or vice versa.
• Technological Upgradation: If Manish plans to use machines of latest technology in manufacturing garments, his fixed capital requirements will be more as replacement of obsolete machines will require huge financial outlay.

Question 20. Harish is engaged in the warehousing business and his warehouses are generally used by businessmen to store fruits. Identify the working capital requirements of Harish giving reasons in support of your answer. Further, Harish wants to expand and diversify his warehousing business. Explain any two factors that will affect his fixed capital requirements. (CBSE, Delhi 2012) Answer:

• The working capital requirements of Harish will be relatively less as he is engaged in providing warehousing services wherein there is no need to maintain inventory.
• Scale of Operations: The amount of fixed capital required by a business enterprise is directly proportionate to its scale of operations. Therefore, if Harish plans to do business on a large scale his fixed capital requirements will be more or vice versa.

ADDITIONAL QUESTIONS

Question 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 is 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 and explain the type of financial decision taken by Arun.
• 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
• Availability of raw material: As there is easy availability of Sandalwood which is used as the base material for production, the working capital requirements of his business will be less as there is no need to stock the raw materials.
• Production cycle: The production cycle is shorter and less time is required to manu¬facture incense sticks. Thus, the working capital requirements of his business will be low.
• Credit availed: Due to the fact that the suppliers of other types of raw material needed for production follow a liberal credit policy, the business can be operated on minimum working capital.

Question 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 line with the growing demand for packaged food it now plans to introduce Ready- To-Eat Foods. Therefore, the company has planned to undertake investments of nearly Rs. 450 crores for its new line of business. As per the current financial report, the interest coverage ratio of the company and return on investment is higher. Moreover, the corporate tax rate is high. In context of the above case:

• 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?
• Interest coverage ratio: The interest coverage ratio of the company is high so it can easily meet its fixed commitment of payment of interest and repayment of capital.
• Tax rate: The tax rate is high which makes debt relatively cheaper as the amount of interest paid on debt is treated as a tax deductible expense.
• The shareholders of the company are likely to gain from the issue 6f debt by the company because the return on investment is higher. It helpS a company to take advantage of trading on equity to increase the earnings per share.

Question 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: .

• 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 year by stating any two reasons in support of your answer.
• Earnings: The earnings of the company have been high. Since the dividends are paid out of current and past earnings, there is a direct relationship between the amount of earnings of the company and the rate at which it declares dividend .
• Cashflow position: The cash flow position of the company must have been good as in order to pay high dividends, more cash is required.
• Access to capital market: Because of its credit worthiness, the company enjoyed an easy access to capital market. Therefore, it did not feel the need to depend entirely on retained earnings to meet its financial needs. Hence, it declared higher dividends in past.
• The cash flow position of the company is not good 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.

Question 4. Bhuvan inherited a very large area of agricultural land in Haryana after the death of his grandfather. He plans to sell this piece of land and use the money to set up a small scale paper factory to manufacture all kinds of stationary items from recycled paper. Being an amateur in business, he decides to consult his friend Subhash who works in a financial consultancy firm. Subhash helps him to prepare a blue print of his future business operations on the basis of sales forecast in next five years. Based on these estimates, he helps Bhuvan to assess the fixed and working capital requirements of business. In context of the above case:

• 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 (1).
• Financial planning is the type of financial service that Subhash has offered to Bhuvan.
• 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 functions, through well-defined policies and procedures.
• It increases the efficiency of operations by curbing wastage of funds, duplication of efforts, and gaps in planning.

Question 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:

• 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.
• Capital market conditions: The state of capital market is bullish, so people are likely to invest more in equity.
• Fixed operating cost: The fixed operating cost of company is high so it cannot take the further burden fixed commitment in terms of payment of interest and repayment of capital by issuing debt.
• Cashflow position: The cash flow position of the company is weak so it cannot meet the fixed obligations involved in issue of debt.
• Risk: The proportion of debt in its capital structure is already high so it cannot issue further debt, thereby endangering the solvency of the company.

Question 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.
• 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.
• It’s true that,” With an increase in the investment in fixed assets, there is a commen¬surate increase in the working capital requirement.” Like in the above case, Wooden Peripheral Pvt. Ltd. is planning to invest in new showrooms. Consequently, its requirement of working capital will increase as 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 in Mumbai on lease so it will have to pay rentals.

Question 7. ‘Apparels’ is India’s second largest manufacturer of branded Lifestyle apparel. The company now plans to diversify into personal care segment by launching perfumes, hair care and skin are products. Moreover, it is planning to open ten exclusive retail outlets in various cities across the country in next two years. In context of the above case:

• Identify the two factors affecting the fixed capital needs of the company by quoting lines from the paragraph.
• Why is the management of fixed capital considered to be an important for a business?
• It affects the growth and profitability of business in future.
• It influences the overall level of business risk of the organisation.
• If these decisions are reversed, they may lead to major losses.

Question 8. After persuing a course in event management, Kajal and her brother Kamal promoted an event management company under the name Khushi Entertainment Private Limited. They strive together as dedicated and dynamic professionals managing different kinds of formal and informal events across all major cities in India and abroad. They design the event idea and co-ordinate the different aspects of the event to make it a grand success. As a policy, they take fifty percent of the payment as advance from the client before the start of an event and receive the balance charges after the successful completion of the event. In context of the above case:

• Comment upon the working capital needs of the company keeping in mind its nature of business.
• Identify the other factor mentioned in the paragraph which is likely to affect the working capital requirement of their business.
• The working capital requirements of Khushi Entertainment Private Limited will be relatively less as they are engaged in providing event management services, wherein there is no need to maintain inventory
• The other factor mentioned in the paragraph which is likely to affect the working capital requirement of their business is ‘Credit availed.’ Since as a policy, they take fifty percent of the payment as advance from the client before the start of an event, their requirement of working capital is reduced.

Question 9. 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 computerisation 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:

• How is the decision to undertake computerisation 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 computerisation 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 upgradation.
• The company may use retained earnings and take loans from financial institutions to implement this plan.

Question 10. 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 years, 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:

• 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: “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.”
• Financing decision: “It had then floated an initial public offer of equity shares in order to raise the desired capital.”
• Dividend decision: “Over the years, the sales and profits of the company have increased tremendously and it has been declaring higher dividend.”
• Yes, the financial management team of the company has been able to achieve its prime objective i.e. wealth maximisation of the shareholders by maximising the market price of the shares of the company.

Question 11. After completing his education in travel and tourism, Arjun started Travel Angels Pvt. Ltd. along with his twin brother Bheem. Their company seeks to provide travel solutions to its clients like ticket booking for airways, railways and road ways, hotel booking, insurance etc. Although the business is doing well both of them have realised that they are not good in managing finance, and feel confused and frustrated sometimes due to financial crises that may suddenly arise. In order to avoid such situations in the future, they hire Nakul and Sehdev as financial managers, who have done a degree certification course in financial management. In context of the above

• Give the meaning of financial management.
• Outline the role of Nakul and Sehdev as the financial management team of the Travel Angels Pvt. Ltd. by giving any four suitable points.
• Financial Management is concerned with optimal procurement as well as usage of finance.
• To determine the capital requirements of business both long-term and short term.
• To exercise overall financial control in order to promote s’afety, profitability and conservation of funds.

Question 12. 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 30% 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:

• 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: The company has been able to declare high dividend because its earnings are stable. “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.

Question 13. 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:

• 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.
• Cash inflows: The expected cash inflows from the proposed projects should be carefully analysed and the project indicating higher cash inflows should be selected.
• Rate of return: The expected rate of return should be carefully studied in terms of risk associated from the proposed project. If two projects are likely to offer the same rate of return, the project involving lesser risk should be selected.

Question 14. Khoobsurat Pvt. Ltd. is the largest hair salon chain in the Delhi, with over a franchise of 200 salons. The company is now planning to set up a manufacturing unit in Faribadad for production of various kinds of beauty products under its own brand name. In context of the above case:

• Comment upon the fixed capital needs of the company.
• How will the requirement of fixed capital of the company change when it implements its plan to set up a manufacturing unit?
• The fixed capital needs of the company are low as its salons have been promoted in the form of franchises.
• The requirement of fixed capital of the company will increase when it implements its plan to set up a manufacturing unit because it will have to make investments in buying land, building, machinery etc.

Question 15. Well-being Ltd. is a company engaged in production of organic foods. Presently, it sells its products through indirect channels of distribution. But, considering the sudden surge in the demand for organic products, the company is now inclined to start its online portal for direct marketing. The financial managers of the company are 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 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.

Case Studies in Business Studies Business Studies Case Studies Business Studies Commerce

GRASIM Pivot Point Calculator

• New QB365-SLMS
• NEET Materials
• JEE Materials
• Banking first yr Materials
• TNPSC Materials
• DIPLOMA COURSE Materials
• 5th Standard Materials
• 1st Standard - CVBHSS Materials
• 2nd Standard - CVBHSS Materials
• 3rd Standard - CVBHSS Materials
• 4th Standard - CVBHSS Materials
• 5th Standard - CVBHSS Materials
• 12th Standard Materials
• 11th Standard Materials
• 10th Standard Materials
• 9th Standard Materials
• 8th Standard Materials
• 7th Standard Materials
• 6th Standard Materials
• 12th Standard CBSE Materials
• 11th Standard CBSE Materials
• 10th Standard CBSE Materials
• 9th Standard CBSE Materials
• 8th Standard CBSE Materials
• 7th Standard CBSE Materials
• 6th Standard CBSE Materials
• Tamilnadu Stateboard
• Scholarship Exams
• Scholarships

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.

*****************************************

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

Related 12th Standard CBSE Business Studies Materials

12th standard cbse syllabus & materials, cbse 12th physics wave optics chapter case study question with answers, cbse 12th physics ray optics and optical instruments chapter case study question with answers, cbse 12th physics nuclei chapter case study question with answers, cbse 12th physics moving charges and magnetism chapter case study question with answers, cbse 12th physics electromagnetic induction chapter case study question with answers, cbse 12th physics atoms chapter case study question with answers, 12th physics alternating current chapter case study question with answers cbse, 12th maths vector algebra chapter case study question with answers cbse, 12th maths three dimensional geometry chapter case study question with answers cbse, 12th maths probability chapter case study question with answers cbse, 12th maths linear programming chapter case study question with answers cbse, 12th maths differential equations chapter case study question with answers cbse, 12th maths continuity and differentiability chapter case study question with answers cbse, 12th maths application of integrals chapter case study question with answers cbse, 12th chemistry the d and f block elements chapter case study question with answers cbse.

Class VI to XII

Tn state board / cbse, 3000+ q&a's per subject, score high marks.

12th Standard CBSE Study Materials

12th Standard CBSE Subjects

CBSE NCERT Solutions

NCERT and CBSE Solutions for free

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

Related Posts

The Age of Industrialisation Class 10 Social Science Notes and Questions

Biotechnology Principles and Processes Class 12 Biology Notes And Questions

Role of Programming in C Language Class 11 Computer Science Notes and Questions

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 .  

Top Courses for Commerce

FAQs on Case Studies - Financial Management - Business Studies (BST) Class 12 - Commerce

mock tests for examination

Past year papers, study material, semester notes, viva questions, case studies - financial management | business studies (bst) class 12 - commerce, previous year questions with solutions, video lectures, extra questions, shortcuts and tricks, sample paper, important questions, practice quizzes, objective type questions.

Case Studies - Financial Management Free PDF Download

Importance of case studies - financial management, case studies - financial management notes, case studies - financial management commerce questions, study case studies - financial management on the app.

Welcome Back

Create your account for free.

Forgot Password

Unattempted tests, change country, practice & revise.

Financial Management Class 12 Notes & Mind Map: NCERT Business Studies

• Download file

Class 12 Business Studies Chapter 9, focusing on Financial Management, is a critical area of study for students interested in the world of business and finance. This chapter delves into the core principles of managing an organization's finances, emphasizing the importance of financial planning, decision-making, and control. The Financial Management class 12 notes are an invaluable resource, providing comprehensive insights into the various aspects of financial management. These notes are designed to help students understand complex financial concepts and processes, making them more accessible and easier to grasp.

For students who prefer visual learning tools, the Financial Management class 12 mind map is a great aid. This mind map visually organizes and presents the key elements of financial management, including investment decisions, financing decisions, and dividend decisions, thereby facilitating better understanding and retention of the information. The Financial Management class 12th notes go beyond theoretical knowledge, offering practical insights and examples that illustrate the real-world application of financial management principles.

The Financial Management notes for class 12 are meticulously curated to cover all the essential topics of the chapter. These notes include discussions on the objectives of financial management, its importance, and the tools used for effective financial management. They are an excellent resource for exam preparation, ensuring students are well-equipped to tackle both theoretical and practical questions.

In addition, the Financial Management class 12 extra questions provide students with the opportunity to test their understanding and apply their knowledge to various scenarios. These questions are crucial for enhancing analytical skills and preparing students for higher-level studies in business and finance.

The Notes on Financial Management class 12 are available in various formats, including PDFs, which are ideal for students who prefer digital learning materials. Easy to access and convenient for study, these PDF notes are perfect for quick revisions and comprehensive study sessions.

In summary, Class 12 Business Studies Chapter 9 offers students a deep dive into the world of financial management. The range of study materials available, including detailed notes, mind maps, extra questions, and PDFs, cater to different learning styles and needs, ensuring that students can effectively grasp the key concepts of financial management and apply them in their academic pursuits and future careers.

Introduction to Financial Management:

Financial Management is a critical aspect of any organization, focusing on the planning, organizing, directing, and controlling of financial activities. It involves managing the procurement and allocation of an organization's finances, ensuring optimal utilization of resources, and maintaining a balance between risk and profitability. Financial management encompasses a broad range of activities, from capital budgeting and investment analysis to financial forecasting and managing cash flow.

Objectives of Financial Management:

The primary objectives of financial management include ensuring a regular and adequate supply of funds, ensuring optimum fund utilization, maximizing the value of the firm, minimizing capital costs, and maintaining a balance between risk and profitability. These objectives aim to provide economic stability, enable growth and expansion, and maximize shareholder wealth.

Financial Planning:

Financial Planning in management involves formulating strategies regarding the financial activities of an organization. It includes determining capital requirements, framing financial policies in terms of procurement, investment, and management of funds. Financial planning ensures that adequate funds are available at the right time to meet the needs of the business.

Importance of Financial Planning:

The importance of financial planning lies in its ability to provide a framework for financial decision-making. It helps in predicting financial needs, avoiding crises of liquidity, improving profitability, and providing a basis for financial control. Effective financial planning leads to the efficient management of resources and ensures business growth and sustainability.

Factors Affecting Capital Structure:

Several factors affect a company's capital structure, including the cost of capital, financial flexibility, risk, business risk, growth and stability of sales, cash flow position, nature and size of a firm, control, timing, and government policy. These factors influence a firm’s decision on how much debt and equity should be used to finance its operations and growth. The choice of capital structure impacts both the risk and value of the firm.

• Financial management class 12 notes
• All CBSE notes
• All BUSINESS STUDIES notes
• All 12 COMMERCE notes

You may like these also

NCERT Solutions for Class 7 Chapter 1 - The Tiny Teacher: Your Key to Scoring High

चिट्ठियों में यूरोप: NCERT Solutions for Class 8 Hindi Chapter 3

NCERT Fractions Class 6 MCQ, Nots, Mind Map & More

A Comprehensive Guide to Heat Class 7 Printable Notes, MCQs and Answers

Teaching resources, test generator, worksheet generator, elearning for students, practice question paper, mock test series, happy parenting, elearning for child, worksheet for child, mock test series for child, witknowlearn, privacy policy, terms and condition, refund/cancellation policy.

Or login with Google

Notification

Upgrade to better learning opportunities.