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

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

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

CBSE Class 12 Business Studies Syllabus 2023-2024

CBSE Class 12 Business Studies Sample Paper 2023-2024

CBSE Class 12 Business Studies MCQs 2023-2024

NCERT Solutions for Class 12 Business Studies Chapter Financial Management are:

Very Short Answer Type

1. What is meant by capital structure?

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

2. State the two objectives of financial planning.

Answer. Two objectives of financial planning are:

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

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

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

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

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

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

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

Short Answer Type

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

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

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

Answer. The assets that are convertible into cash after one year are called current assets. Four examples of such assets:

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

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

Answer. The main objectives of financial management are:

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

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

Answer. Three broad financial decisions of financial management are:

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

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

Answer.

We know,

ROI = Return/Investment

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

= 8%

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

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

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

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

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

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

Answer.

a) Financial planning is discussed in the above paragraph. The preparation of a financial blueprint for an organisation’s future operations is called financial planning. Objectives of financial planning are:

To ensure that enough funds are available at the right time
It focuses on smooth operations by focusing on fund requirements and their availability in the light of financial decisions
It forecasts all the items which are likely to undergo changes
To ensure availability of funds whenever required
To see that the firm does not raise resources unnecessarily

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

Long Answer Type

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

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

Five important determinants of working capital requirement are:

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

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

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

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

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

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

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

4. Explain the factors affecting dividend decision?

Answer. The factors affecting dividend decisions are as follows: