3 Marks Question - Business Studies STD 12 Commerce Questions - Vidyadip

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Question 13 Marks

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.

Answer

Financial Planning Financial planning is essentially preparation of a financial blueprint of an organisation’s future operations. The objective of financial planning is to ensure that enough funds are available at right time. Financial planning aims at smooth operations by focusing on fund requirements and their availability in the light of financial decisions.
Financial Planning Importance of Financial planning:

It helps the company to prepare for the future by forecasting what may happen in the future under different business situations.
It helps in avoiding business shocks and surprises.
It helps in co-ordinating various business functions by providing clear policies and procedures.
It helps in reducing waste, duplication of efforts, gaps in planning and confusion.
It links the present with the future.
It provides a link between investment and financing decisions.
It serves as a control technique as it makes evaluation of actual performance easier.

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Question 23 Marks

What is meant by ‘Financial Planning’? State any two points of its importance.

Answer

The process of estimating the fund requirements of a business and specifying the sources of funds is called financial planning.Financial planning is the preparation of a financial blueprint of an organisation’s future operations.Importance of financial planning:

If helps in co-ordinating various business functions e.g., sales and production functions, by providing clear policies and procedures.
It tries to forecast what may happen in future under different business situations. By doing so, it helps the firms to face the eventual situation in a better way. In other words, it makes the firm better prepared to face the future.

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Question 33 Marks

Explain the importance of ‘Financial Planning’.

Answer

Financial planning is important because:

Forecast future: It tries to forecast what may happen in future under different business situations. By doing so, it helps the firms to face the eventual situation in a better way. In other words, it makes the firm better prepared to face the future. For example, a growth of 20% in sales is predicted. However, it may happen that the growth rate eventually turns out to be 10% or 30%. Many items of expenses shall be different in these three situations. By preparing a blueprint of these three situations the management may decide what must be done in each of these situations. This preparation of alternative financial plans to meet different situations is clearly of immense help in running the business smoothly.
Encourage coordination: It helps in co-ordinating various business functions e.g., sales and production functions, by providing clear policies and procedures.
Optimum utilization of resources: Detailed plans of action prepared under financial planning reduce waste, duplication of efforts, and gaps in planning.

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Question 43 Marks

''Sound Financial Management is the key to the prosperity of business''. Explain.

Answer

Financial Management is concerned with optimal procurement as well as usage of finance. For optimal procurement, different available sources of finance are identified and compared in terms of their costs and associated risks.
Financial Management aims at reducing the cost of funds procured, keeping the risk undercontrol and achieving effective deployment of such funds.
Financial management also aims at ensuring availability of enough funds whenever required as well as avoiding idle finance.

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Question 53 Marks

Explain in brief any three causes of ‘Under-capitalisation’.

Answer

Causes of Undercapitalization:

Acquisition of Assets during Recession: Assets might have been acquired at low costs during necessary conditions in the market. And now higher incomes are being earned by their use.
Under-estimation of Requirements: There may be under-estimation of capital requirements of the company by the promoters. This may lead to capitalisation which is insufficient to conduct its operations.
Conservative Dividend Policy: The management may follow a conservative dividend policy leading to higher rate of ploughing back of profits. This would increase the earning capacity of the company.
Efficient Management: The management of a company may be highly efficient. It may issue the minimum share capital and may meet the additional financial requirements through borrowings at lower rates of interest.
Creation of Secret Reserves: A company may have large secret reserves due to which its profitability is higher.

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Question 63 Marks

Microgarments Ltd. is dealing in export of garments. The performance of the company has been upto the expectations in the past. Keeping up with the latest technology, the company decided to upgrade their machinery. For this, the Finance Manager, David, estimated the quantitative requirements of funds and their timings. This will help him in linking the investment and the financing decisions on a continuous basis.
So, he began with the preparation of a sales forecast for the next four years. He also collected all possible data about the profit estimates in the coming years. By doing this he wanted to be sure about the availability of funds within the business. For the remaining funds he is trying to find out the viable sources from outside.
Identify the financial concept discussed in the above para. Also, state the objectives to be fulfilled by the financial concept, so identified.

Answer

Concept- Financial Planning:The objective of financial planning is to ensure that enough funds are available at right time. Financial planning aims at smooth operations by focusing on fund requirements and their availability in the light of financial decisions.
Objectives of financial planning are:

To ensure availability of funds whenever these are required: This include a proper estimation of the funds required for different purposes such as for the purchase of long-term assets or to meet dayto- day expenses of business etc. Apart from this, there is a need to estimate the time at which these funds are to be made available. Financial planning also tries to specify possible sources of these funds.
To see that the firm does not raise resources unnecessarily: Excess funding is almost as bad as inadequate funding. Even if there is some surplus money, good financial planning would put it to the best possible use so that the financial resources are not left idle and don’t unnecessarily add to the cost.

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Question 73 Marks

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

Concept- Financial Planning:The objective of financial planning is to ensure that enough funds are available at right time. Financial planning aims at smooth operations by focusing on fund requirements and their availability in the light of financial decisions.
Objectives of financial planning:
To ensure availability of funds whenever these are required: This include a proper estimation of the funds required for different purposes such as for the purchase of long-term assets or to meet day-to-day expenses of business etc.
To see that the firm does not raise resources unnecessarily: Excess funding is almost as bad as inadequate funding. Even if thereis some surplus money, good financial planning would put it to the best possible use so that the financial resources are not left idle and don’t unnecessarily add to the cost.

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Question 83 Marks

What is meant by ‘Financial Management’? State the primary objective of financial management.

Answer

Financial Management means management of flow of funds and involves decisions relating to procurement of funds, investment of funds and distribution of earnings to the owners.Alternate Answer
Financial Management means planning, organising, directing and controlling the financial activities of an organisation.
Primary objective of Financial Management:The primary objective of financial management is to maximise shareholders wealth.

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Question 93 Marks

Explain the objective of Financial Planning.

Answer

The objective of Financial Planning is to ensure availability of sufficient funds at reasonable cost.

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Question 103 Marks

State the objective of Financial Management.

Answer

Wealth maximisation is the primary objective of financial management which means maximising the market value of investment in the shares of the company.It is possible only by:

Ensuring availability of sufficient funds at reasonable cost.
Ensuring effective utilisation of funds.
Ensuring safety of funds by creating reserves, re-investment of profits, etc.

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Question 113 Marks

The Return on Investment (ROI) of a company ranges between 10-12% for the past three years. To finance its future fixed capital needs, it has the following options for borrowing debt:
Option ‘A’: Rate of interest 9%
Option ‘B': Rate of interest 13%
Which source of debt, ‘Option A’ or ‘Option B’, is better? Give reason in support of your answer. Also state the concept being used in taking the decision.

Answer

Option A is better than Option B for the company to finance its future fixed capital needs.
Reason: In Option A, Rate of return on investment (10-12%) > Rate of interest on borrowings (9%)
Concept used: The concept being used in taking the decision is Trading on Equity. Trading on equity refers to the use of fixed cost sources of finance such as preference shares, debentures and long term loans in the capital structure so as to increase the return on equity shares.

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Question 123 Marks

Give the meaning of ‘Informal Organisation’. State it’s any three advantages.

Answer

Informal organisation is a network of personal and social relations which emerges spontaneously from within the formal organisation as people associate with one another beyond their officially defined roles. It has no written rules, is fluid in form and scope and does not have fixed lines of communication.
Advantages of informal organisation:

It leads to faster spread of information as well a quick feedback.
It fulfills the social needs of the members.
It contributes towards fulfillment of organisational objectives by compensating for inadequacies in the formal organisation.

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Question 133 Marks

What is meant by ‘Delegation’? State any three points which highlight the importance of delegation.

Answer

‘Delegation is the entrustment of responsibility and authority to another and the creation of accountability for performance’.
Importance of delegation of authority:

It helps in effective management as the managers get more time to concentrate on important matters.
It helps in development of employees as the employees get more opportunities to utilize their talent.
It helps to motivate employees as the employees feel encouraged and try to improve their performance further.
It facilitates growth by providing a ready workforce to take up leading positions in new ventures.
It establishes a management hierarchy through clear superior subordinate relationships.
It helps in better co-ordination by avoiding overlapping of duties.

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Question 143 Marks

Explain the objectives of Financial Planning.

Answer

Objectives of financial planning:

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.

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Question 153 Marks

Steelone Enterprises is manufacturing high quality steel utensils. The demand for steel utensils is rising as people are getting aware that plastic is not good for health. This has led to increase in production of steel utensils. To encourage sales, Steelone Enterprises declared a liberal credit policy which allows three months credit to its wholesale buyers.
In the light of the above, identify the two factors affecting working capital requirements of Steelone Enterprises. State with reason, whether the factors as identified above, will result in high or low working capital requirement.

Answer

The factors affecting working capital requirement referred here are:

Scale of operations: As enterprise increases its scale operation, the quantum of inventories and debtors also increases. Such organisation need large amount of working capital. As Steelon Enterprise is also increasing its production working capital requirement will increase.
Credit allowed: A liberal credit policy results in higher amount of debtors which increases the working capital requirement. Steelon Enterprise also require high working capital as it allows three months credit to its wholesale buyers.

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Question 163 Marks

Explain the importance of 'Financial Planning'.

Answer

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

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Question 173 Marks

"Share Capital is better than debt capital." In the favour of this statement explain one factor which affects the capital structure.

Answer

The 'cash flow position' is one of the important factors which affects the capital structure decision. As per this factor, while making a choice of the capital structure the future cash flow position should be kept in mind. Debt capital should be used only if the cash flow position is really good because a lot of cash is needed in order to make payment of interest and refund of capital. Hence, on this basis it can be said that share capial is better than debt capital.

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Question 183 Marks

What is ‘Financial Risk?’ Why does it arise?

Answer

Financial risk refers to a situation when a company is not able to meet its fixed financial charges such as interest payment, preference dividend and repayment obligations. In other words, it refers to the probability that the company would not be able to meet its fixed financial obligations. It arises when the proportion of debt in the capital structure increases. This is because it is obligatory for the company to pay the interest charges on debt along with the principle amount. Thus, higher the debt, higher will be its payment obligations and thereby higher would be the chances of default on payment. Hence, higher use of debt leads to higher financial risk for the company.

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Question 193 Marks

When is the dividend decision treated as a residual decision?

Answer

A company's net earnings are divided into two parts, i.e., retained earnings and dividends. If the company has profitable investment opportunities, it would like to retain the earnings and reinvest rather than distribute them as dividends. To finance investment projects, the company has two alternatives either to raise external equity or to internally finance from the retained earnings available. Retained earnings are preferred as a source as they do not involve floatation costs and legal formalities. Thus, the company will pay dividends only when it cannot profitably reinvest the earnings. In this case, the dividend decision is treated as a residual or passive decision.

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Question 203 Marks

What do you understand by the term 'trading on equity'?
OR
Though Angel Pharma is Eaking huge Proflts every year on a regular basis, it is not able to provide sufftcient dividend to its shareholders. As a result, EPS remains ldentify and explain the concept that can help to resolve the problem.

Answer

Trading on equity means the use of fixed cost sources of finance such as preference shares, debentures and long-term loans in the capital structure, so as to increase the return on equity shales. This is also known as financial leverage. It is advisable to use trading on equity when the rate of Return on Investment is more than the rate of interest payable on debentures and loans.

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Question 213 Marks

'Investment criteria is one of the factors, which affect capital budgeting decision'. Comment.

Answer

Capital budgeting decision involves committing the finance on a long-term basis. This decision is very crucial since, it affects the earning capacity in the long-run. po b The decision to invest in a particular project diss involves a number of calculations regarding amount of investment, rate of return, cash flow, etc. These calculations are necessary to evaluate the project for their selection.

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Question 223 Marks

How 'Capital Structure of Other Companies' affects the capital structure decision?

Answer

Capital structure is influenced by the industry to which a company is related. All companies related to a given industry produce almost similar products, their costs of production are similar, they depend on identical technology, they have similar profitability, hence the pattern of their capital structure is almost similar. Because of this fact, there are different debt-equity ratios prevalent in different industries. Hence, at the time of raising funds a company must take into consideration that the debt-equity ratio prevalent in the related industry.

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Question 233 Marks

How does 'Risk Consideration' affect the Capital Structure Decision?

Answer

There are two types of risks in business:

Operating Risk or Business Risk: This refers to the risk of inability to discharge permanent operating costs (e.g., rent of the building, payment of salary, insurance instalment, etc).
Financial Risk: This refers to the risk of inability to pay fixed financial payments (e.g., payment of interest, preference dividend, return of the debt capital, etc.) as promised by the company. The total risk of business depends on both these types of risks. If the operating risk in business is less, the financial risk can be faced which means that more debt capital can be utilised. On the contrary, if the operating risk is high, the financial risk likely to be created after the greater use of debt capital, should be avoided.

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Question 243 Marks

Financial management is concerned with inflow and outflow of money. Do you agree? If yes, How?

Answer

Yes, financial management is concerned with inflow and outflow of money as it is concerned with taking decisions regarding optimal procurement and utilisation of funds. For the effective procurement of funds, different available sources of finance are identified and compared in terms of cost and risk associated with them. Procurement of funds is done for both long-term needs as well as short-term needs. For long-term financing needs, the funds can be sourced through debt and equity. Short-term financing involves management of working capital. Now, the funds so procured have to be invested in a manner that the returns are higher than the cost of funds. The outflow of money is through purchase of fixed assets, current assets, working capital needs, distribution of dividends, etc.

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Question 253 Marks

Discuss the need and importance of working capital.
OR
Why is an adequate amount of working capital required in an enterprise?

Answer

Adequate working capital is essential for smooth and efficient working of every busind enterprise. Adequate working capital provides the following advantages to a business enterprise.

A firm with adequate working capital car meet its liabilities promptly. Prompt payment helps to raise the credit-standin or reputation of the enterprise.
Adequacy of working capital enables the firm to take advantage of any favourable business opportunity, e.g. to purchase ray materials at a discount or to execute a special order.
Financial soundness of business boosts the morale of employees.
Lack of adequate working capital may result in interruptions in operations and underutilisation of plant capacity.
Adequate working capital permits timely and regular payment of cash dividends. This helps to maintain cordial relations with shareholders.

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Question 263 Marks

How much working capital will be required for the manufacturing of the following products.

Bread.
Furniture on orders.
Automobiles.
Sugar.

Answer

Bread: It will require less working capital, as it is sold for cash and there is no need to maintain inventory.
Furniture on orders: No inventory has to be maintained, and also advance is sometimes taken, thus requiring less working capital.
Automobiles: Huge working capital is required, as the production cycle is long and huge inventory has to be maintained.
Sugar: Due to long operating cycle and seasonal nature of the product, huge stock is maintained. Thus, it requires large working capital.

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Question 273 Marks

State any three advantages of debenture issue as a source of finance.

Answer

The advantages of issuing debentures as a source of finance are:

The interest paid on debentures is lower than the dividend paid on preference or equity capital. Therefore, the cost is, lower.
The interest on debenture is a tax deductible expense.
Since debenture holders are not entitled to vote, there is no risk of loss of control.

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Question 283 Marks

Define a ‘Current Assets'? Give four examples of such assets.

Answer

Current asset of a firm refers to those assets which can be converted into cash or cash equivalents in a short period of time, i.e. less than one year. Such assets are used to facilitate the day to day business operations. As they can be easily converted into cash or cash equivalents, these assets provide liquidity to the company. Firms acquire such assets to meet its various payment obligations. However, such assets provide very little return and are thereby, less profitable. Current assets can be financed through short-term as well as long term sources.Some of the examples of current assets are short term investment, debtors, stocks and cash equivalents.

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Question 293 Marks

Indian equity markets are going through a phase of boom. There is a huge growth potential for innovative technologies. This has resulted in lots of new ventures vying for a market share and old enterprises trying to keep up with the pace with which changes are taking place in the economy. This technological innovation has helped even smaller businesses to compete on a global scale.
Identify and explain the three factors highlighted above which affect the working capital requirements of such enterprises.

Answer

The three factors affecting working capital requirements of an enterprise highlighted above are:

Business cycle: The different phases of business cycle affects the requirement of working capital. At the boom time, the sales and production of the business are more and so is the requirement of working capital. At the time of depression, sales as well as production are less and hence working capital requirement is small.
Growth prospects: If the growth prospects of a business concern is high, then its working capital requirement will be more so that it is able to meet higher production and sales targets whenever required
Level of competition: Higher competition in the market forces a firm to keep larger stock of finished goods to meet urgent orders of customers. Further, to be competitive, there may be a need of giving liberal credit to the customers. This increases the need of working capital requirement.

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Question 303 Marks

Explain the 'Earnings Before Interest and Taxes - EBIT'.

Answer

EBIT is that profit of the business from which the payment of interest and tax remains to be deducted. It is also known as the operating profit of business. This is an index of the profit earning capacity of the business. For example, the EBIT in case of two companies is rupees eight crore and ten crores respectively while their EAIT (Earning After Interest and Taxes) is five crore and four crores respectively. Here, it can be said that on the basis of EBIT the second company has a more profit earning capacity.

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Question 313 Marks

The Return on Investment (RoI) of a company ranges between 10-12% for the past three years. To finance its future fixed capital needs, it has the following options for borrowing debt.

Option ‘A’ Rate of interest 9%
Option 'B' Rate of interest 13%

Which source of debt, 'Option A' or 'Option B', is better? Give reason in support of your answer. Also state the concept being used in taking the decision.

Answer

The company should use 'option A' as in this case the Return on Investment (10-12%) will be more than the Cost of Debt (9%).
The concept being used in the above case is Trading on Equity.
The use of debt alongwith equity increases Earnings Per Share (EPS). This use of fixed financial charge, i.e. interest, increases the profit earned by shareholders. This concept is known as trading on equity.
If the company opts for Option A, it will lead to favourable trading on equity as in this case Rol > COD, where
Rol - Return on Investment (10-12%)
COD - Cost of Debt (97).

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Question 323 Marks

How does the control of existing shareholders get affected? How this situation can be avoided?

Answer

If funds are raised by issuing equity shares, then the number of company’s shareholders will increase and it directly affects the control of existing shareholders. In other words, now the number of owners (shareholders) controlling the company increases. This situation will not be acceptable to the existing shareholders. On the contrary, when funds are raised through debt capital, there is no effect on the control of the company because the debenture holders have no control over the affairs of the company. Thus, for those who support this principle debt capital is the best.

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Question 333 Marks

What is meant by financial management? State any two financial decisions taken by a financial manager.

Answer

Financial management refers to that part of management which is concerned with the efficient planning and controlling of financial affairs of an enterprise.
Financial Functions: Following are the main decisions which are involved in financial management:

Investment Decision: It refers to the selection of assets in which funds will be invested by the business. In other words, these decisions are concerned with the effective utilisation of funds in one activity or other.
Financing Decision: It refers to the determination as to how the total funds required by the business will be obtained from various long-term sources.

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Question 343 Marks

Which process prepares a blue print of an organisation's future preparations relating to finance? Give any two reasons why this process is needed?

Answer

Financial Planning. The two reasons are:

It tries to forecast what way may happen in the future under different business situations. In other words, it makes the firm better prepared to face the future.
It helps in avoiding business shocks and surprise and helps the company in preparing for the future.

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Question 353 Marks

Manak Chand and Co., dealing in copper and other metals, has earned a profit of ₹ 1,200 crores. Manak Chand and Co. is a renowned name in the market and investors like to invest in the company. Company has explored its potential fully and is on the top, thus, it has no plans for growth or expansion in the next few years. Also, earnings of the company are consistent and stable over the years. Tax on dividends is also levied at a low rate by the government on the company. Guide the company on the decision of distribution of dividend to shareholders.

Answer

The company should declare higher dividends due to the given reasons:

As company has no growth/ expansion plans in next few years.
Earnings of the company are stable.
Company can afford to give higher dividends due to lower rate of taxes on dividend.

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Question 363 Marks

If total funds are ₹ 30 lakh, interest rate is 10% per annum, tax rate is 30% and earning before interest and tax is ₹ 4 lakh, then
In situation I: If 3,00,000 shares @ ₹ 10 per share are there and no debentures are there, then earning per share is ₹ 0.93.
In situation II: If 1,00,000 shares @ ₹ 10 per share and 2,00,000 debentures @ ₹ 10 per debenture are there, then earning per share is ₹ 1.40.
What is this situation called?

Answer

Trading on Equity or Financial Leverage.

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Question 373 Marks

Discuss about working capital affecting both the liquidity as well as profitability of a business.

Answer

Working capital of a business refers to the excess of current assets (such as cash in hand, debtors, stock, etc.) over current liabilities. Working capital affects both the liquidity as well as profitability of a business. As the amount of working capital increases, the liquidity of the business increases. However, since current assets offer low return, with the increase in working capital the profitability of the business falls. For example, an increase in the inventory of the business increases its liquidity but since the stock is kept idle, the profitability falls. On the other hand, low working capital, hinders the day to day operations of the business. Thus, the working capital should be such that a balance is maintained between the profitability and liquidity.

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Question 383 Marks

Explain the role of 'Operating Efficiency' in determining the amount of working capital.

Answer

Operating efficiency means completing the various business operations efficiently. Operating efficiency of every organisation happens to be different.
Some such examples are:

Converting raw material into finished goods at the earliest.
Selling the finished goods quickly, and
Quickly getting payments from the debtors. A company which has a better operating efficiency has to invest less in stock and the debtors. Therefore, it requires less working capital, while the case is different in respect of companies with less operating efficiency.

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Question 393 Marks

Bakers Mart is catering to corporate clients. It is facing a lot of competition. What impact will this have on its working capital requirements? Also, explain three other factors which could affect its working capital requirements.

Answer

Working capital requirements would be high as higher inventories may have to be stocked to meet orders from customers or liberal credit terms may have to be given to customers to face the competition.Other Factors affecting the working capital requirement are:

Nature of business: Manufacturing firm requires high amount of working capital as compared to a trading organisation, to convert raw materials into finished goods.
Scale of operations: Large amount of working capital is required by firms operating on a large scale of operations in terms of debtors, inventory etc.
Business cycle: During boom period, when sales are high, higher amount of working capital is required as compared lo depression period.

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Question 403 Marks

What is the main objectives of financial management? Briefly explain.

Answer

The paramount objective of the financial management is maximising the shareholders’ wealth. That is, the basic objective of financial management for a company is to opt for those financial decisions that prove gainful from the point of view of the shareholders. The share holders are said to gain when the market value of their shares rise. The market value of shares increase when the benefits from a financial decision exceed the cost involved in taking them. In other words, a financial decision raises the market value of share if it results in some value addition. Thus, financial decisions should be taken such that some value addition takes place and ultimately the price of the equity share increases. When a financial decision is able to fulfil the primary objective of wealth maximisation, other objectives such as proper utilisation of funds, maintenance of liquidity etc. are automatically fulfilled.

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Question 413 Marks

State the objective of financial management.

Answer

The Primary (main) aim of financial management is to maximise shareholder's wealth which is referred to as the wealth maximisation concept. Wealth maximisation of shareholders is possible when:

Market price of equity share increases and it increases when benefits from a decision exceed the cost involved.
Increase in dividend of shareholders.

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Question 423 Marks

Define 'Current Assets' and give four examples.

Answer

It refers to the assets which are expected to get converted into cash or cash equivalents within a period of one year. Following are the examples of current assets:

Cash in hand/ cash at bank.
Marketable securities.
Bills Receivable.
Debtors.

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Question 433 Marks

How 'Capital market conditions' are important in the capital structure decision?

Answer

Capital market conditions refer to upward or downward trends in capital market. Both these conditions have their influence on the selection of sources of finance. When the market is dull, investors are mostly afraid of investing in share capital due to high risk. On the contrary, when conditions in capital market are cheerful, they treat investment in share capital as the best choice to reap profits. Companies should, therefore, make selection of capital sources keeping in view the conditions prevailing in capital market.

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Question 443 Marks

How does the control of existing shareholders get affected? How this situation can be avoided?

Answer

If funds are raised by issuing equity shares, then the number of company’s shareholders will increase and it directly affects the control of existing shareholders. In other words, now the number of owners (shareholders) controlling the company increases. This situation will not be acceptable to the existing shareholders. On the contrary, when funds are raised through debt capital, there is no effect on the control of the company because the debenture holders have no control over the affairs of the company. Thus, for those who support this principle debt capital is the best.

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Question 453 Marks

When can a capital structure be considered optimum and what kind of capital structure is best for a firm?

Answer

Capital structure refers to the composition of debt and equity. A capital structure is said to be optimum when the proportion of debt and equity is such that, it results in increase in the wealth of shareholders. If the capital structure results in increasing or maximising the wealth of shareholders, then it is considered best for a firm.

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Question 463 Marks

Explain the term 'Financial Planning'.

Answer

To predetermine what is to be done in future is called planning. A financial manager has to formulate plans regarding future financial requirement, its procurement and utilisation. Financial planning, therefore, refers to predetermining of financial activities so that the objectives of the organisation could be achieved. In short, it includes financial objectives, financial policies and financial procedures.

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Question 473 Marks

Explain the objectives of financial planning.

Answer

Following are the objectives of financial planning:

To Ensure Timely Availability of Finance: The first objective of financial planning is to make finance available in time. Under it, the long-term and shortterm financial needs are anticipated and then the sources of availability of finance are located.
To Ensure Proper Balance of Finance: It is always ensured that the balance of cash should neither be in excess nor short. The balance of cash in both these situations is harmful. In short, it can be said that the objective of the financial planning is to make finance available in appropriate quantity and make it available well in time.

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Question 483 Marks

Explain briefly the Investment Decisions.

Answer

Investment Decision: It refers to the selection of assets in which funds will be invested by the business. Assets which are obtained by the business are of two types, i.e., long-term assets and short-term assets. On this basis, investment decision is also divided into two parts:

Long-term Investment Decision: This is referred to as the Capital Budgeting Decision. It relates to the investment in long-term assets. For example, buying a new machine.
Short-term Investment Decision: This is referred to as the Working Capital Management. It relates to the investment in short-term assets, such as, cash, stock, debtors, etc.

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Question 493 Marks

How is shareholders'wealth maximization linked with the market price of the shares of the company?
OR
Why does a financial manager consider wealth maximisation as the foremost objective?

Answer

The main and foremost objective of financial management is to maximise the wealth of equity shareholders. The financial manager of a company takes this decision because the shareholders are the owners of the company. Financial decisions taken will determine the manner in which the funds are invested. The return earned on investment will determine the value and price of the shares. The market price of the shares will increase if the benefit from the decision has exceeded its cost. Secondly, the objective of increase in value of equity shares automatically fulfils many other objectives like, increasing the profitability, maintaining liquidity, effective utilisation of funds and providing for growth of the company.

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Question 503 Marks

Discuss in brief the importance of financial management.

Answer

Financial management determines the financial health of a business. It helps in raising funds at a minimum cost.
It is concerned with optimal procurement as well as usage of funds. It aims to reduce the cost of funds, keep the risks under control and achieve effective deployment of funds. Financial management plays a vital role in an organisation.

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3 Marks Question - Business Studies STD 12 Commerce Questions - Vidyadip