NCERT Solutions Class 12 Business Studies Chapter 9 Financial Management

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management Objective Type Questions

Question. The cheapest source of finance is:

1. Debenture.
2. Equity share capital.
3. Preference share.
4. Retained earnings.

Answer: (d) Retained earnings.

Question. A decision to acquire a new and modern plant to upgrade an old one is a

1. financing decision.
2. working capital decision.
3. investment decision.
4. None of the above.

Answer:  (c) investment decision.

Question. Other things remaining the same, an increase in the tax rate on corporate profit will

1. make the debt relatively cheaper.
2. make the debt relatively the dearer.
3. have no impact on the cost of debt.
4. we can't say.

Answer:  (a) make the debt relatively cheaper.

Question. Companies with a higher growth potential are likely to

1. pay lower dividends.
2. pay higher dividends.
3. dividends are not affected.
4. none of the above.

Answer:  (a) pay lower dividends.

Question. Financial leverage is called favourable if

1. Return on investment is lower than the cost of debt.
2. ROI is higher than the cost of debt.
3. Debt is easily available.
4. If the degree of existing financial leverage is low.

Answer:  (b) ROI is higher than the cost of debt.

Question. Higher debt-equity ratio results in

1. lower financial risk.
2. higher degree of operating risk.
3. higher degree of financial risk.
4. higher EPS.

Answer:  (c) higher degree of financial risk.

Question. Higher working capital usually results in

1. higher current ratio, higher risk and higher profits.
2. lower current ratio, higher risk and profits.
3. higher equity, lower risk and lower profits.
4. lower equity, lower risk and higher profits.

Answer:  (a) higher current ratio, higher risk and higher profits.

Question. Current assets are those assets which get converted into cash

1. within six months.
2. within one year.
3. between one year and three years.
4. between three and five years.

Answer:  (b) within one year.

Question. Financial planning arrives at

1. minimising the external borrowing by resorting to equity issues.
2. entering that the firm always have significantly more fund than required so that there is no paucity of funds.
3. ensuring that the firm faces neither a shortage nor a glut of unusable funds.
4. doing only what is possible with the funds that the firms has at its disposal.

Answer:  (c) ensuring that the firm faces neither a shortage nor a glut of unusable funds.

Question. Higher dividend per share is associated with:

1. High earnings, high cash flows, unstable earnings and higher growth opportunities.
2. High earnings, high cash flows, stable earnings and high growth opportunities.
3. High earnings, high cash flows, stable earnings and lower growth opportunities.
4. High earnings, low cash flows, stable earnings and lower growth opportunities.

Answer:  (d) High earnings, low cash flows, stable earnings and lower growth opportunities.

Question. A fixed asset should be financed through:

1. a long term liability.
2. a short term liability.
3. a medium term liability.
4. a mix of long and short term liabilities.

Answer:  (a) a long-term liability.

Question. Current assets of a business firm should be financed through:

1. Current liability only.
2. Long term liability only.
3. Fixed liabilities only.
4. Both types (i.e., long and short term liabilities).

Answer:  (a) Current liability only.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management Short Answer Type Questions

Question. What is meant by capital structure?
Answer: Capital structure refers to the mix between owners and borrowed funds. Owner’s funds consist of equity share capital, Preference share capital, Reserves & surplus. Borrowed funds consist of Debentures, Loans, Deposits, etc. A company needs to decide upon the optimum mix of these sources, which refers to the capital structure.

Question. Discuss the two objectives of financial planning.
Answer: ​​​​​​​The twin objectives of financial planning are:

1. To ensure availability of funds whenever these are required: This includes 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.
2. To see that the firm does not raise resources unnecessarily: Excess fund 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.

Question. What is ‘Financial Risk?’ Why does it rise?
Answer: ​​​​​​​Proportion of debt in the total capital determines the overall financial risk. Financial risk is the situation that the company will not be able to meet its fixed financial charges. With higher degree of debt in the overall capital, i.e. high Debt Equity ratio, the overall cost of capital declines and profitability (EPS) increases. However, due to higher repayment and interest payment obligations, the financial risk increases.

Question. Define ‘Current Assets.’ Give four examples of such assets.
Answer: ​​​​​​​ Current assets are the assets that can be readily converted into cash within 12 months. Debtors, B/R, stock, short term investments, etc. are some of the current assets. These assets shall be financed through current liabilities.

Question. Financial management is based on three broad financial decisions. What are these?
Answer:  Three broad financial decisions are:

1. Investment Decision: The financial manager is required to study, analyse and evaluate various investment proposals and take decisions in the interest of the enterprise. These decisions, respectively, affect the liquidity and profitability of an enterprise.
2. Financing decision: Financing decision involves determining the quantum of finance to be raised from various sources. It involves the identification of various available sources from were funds can be raised. The firm has to decide the proportion of funds to be raised from the various sources, depending on the risk and returns involved.
3. Dividend decision: Financial management is also concerned with the appropriation of profits. The company has to meet various obligations out of its profit.

Question. What are the main objectives of financial management? Briefly explain.
Answer: ​​​​​​​The primary objective of financial management is to maximise shareholder’s wealth. To achieve the wealth maximisation objective, management needs to achieve the following specific objectives:

1. Ensure availability of sufficient funds at reasonable cost and reasonable risk.
2. Effective utilisation of funds, to ensure returns are more than cost of funds.
3. Ensuring safety of funds by creating reserves, reinvesting profits, etc.
4. Avoiding idle finance, else it will unnecessarily add to cost of finance.

Question. How does working capital affect both the liquidity as well as profitability of a business?
Answer: ​​​​​​​ Working capital is the excess of current assets over current liabilities. It affects both liquidity as well as profitability of a business. Increase in working capital increases the liquidity of the business. But current assets have low returns so this decreases the profitability of the business.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management Long Answer Type Questions

Question. What is working capital? How is it calculated? Discuss five important determinants of working capital requirement.
Answer: Working capital is the excess of current assets over current liabilities. It is calculated by deducting current liabilities from current assets. If current assets are equal to current liabilities, it means that current assets are totally financed by current liabilities. If current assets are greater than current liabilities, then the excess is surely financed by non-current liabilities or long-term loans and share capital. Every business organisation needs to invest in current assets for the smooth functioning of day to day operations.

The important determinants of working capital requirement are:

1. Nature of the business: In case of cash nature of business, inventories and book debts are lesser, so small working capital will be sufficient. On the other hand, trading and manufacturing business enterprises have larger stock and book debts, so their net working capital is higher.
2. Technology and production cycle: In case of longer span of production cycle, higher working capital will be required. The quantum of working capital may be reduced by taking advance payment for goods, cash sales and improvement in production technology, etc. At the same time, use of modern technology, machines and equipments makes the production process faster. Conversion of raw material into finished goods becomes quicker. Labour cost is reduced. As such working capital requirement becomes lesser.
3. Trade/business cycle fluctuations: The operation of trade cycle results in boom, recession, depression and recovery in the economy. In boom situations, demand for goods increases resulting in the increase of price, production and expansion of business activities. It will require larger amount of working capital to meet the demand and for the modernisation of plant.

In case of depression and recession, business activities slow down, demand goes on a decline, low level of inventory is required, and debtors are also reduced. As such lesser working capital is required.

1. Credit policy: Credit policy has dual effect on the quantum of capital. Firstly the credit terms allowed by firm to other firms and secondly the credit terms allowed by other firms to the firm. More credit sales will require more working capital and in the same way in case of cash sales, lesser working capital will be sufficient.

On the other hand, in case of liberal terms from the suppliers i.e. credit sales for longer duration or payment after sales, lesser working capital will be required and vice-versa.

1. Growth prospects: Higher growth prospects is related to higher production and thus requires more amount of working capital.

Question. ”Capital structure decision is essentially optimisation of risk-return relationship.” Comment.
Answer: Capital structure is the combination of differ financial sources used by a company for raising funds. It means the ratio of debts to equity and the ratio of debt to total capitalisation. Funds can be either owner’s funds or borrowed funds. Owners funds are in the form of shares, retained earnings, etc. Borrowed funds constitute loans, debentures and bonds. Both the sources have risk and cost associated with them. Cost of debt is less as interest paid is a tax deductible expense but this puts an additional liability on the company to pay interest irrespective of profit or loss. But higher return can be achieved through debt at lower cost. Raising funds through equity is costlier as it involves payment of dividend and also voting rights are provided to shareholders that affect the decision making of the organisation. Capitalisation is the sum total of debt and equity. The cost of procuring funds should be less. While borrowing funds, it should be kept in mind that the cost of servicing of debts would be reasonably low.

Question. “A capital budgeting decision is capable of changing the financial fortunes of a business.” Do you agree? Give reasons for your answer.
Answer: The financial manager is required to study, analyse and evaluate various investment proposals and take decisions in the interest of the enterprise. Decisions for investments for a short term (regarding working capital) are called Working Capital decisions and those for long term (regarding investment in fixed assets/ branch) are called Capital Budgeting decisions. These decisions, respectively, affect the liquidity and profitability of an enterprise. These decisions are very crucial for any business since they affect its earning capacity over the long run. The size of assets, the profitability and competitiveness are all affected by the capital budgeting decisions. Moreover, these decisions normally involve huge amounts of investment and are irreversible except at a huge cost. A bad capital budgeting decision normally has the capacity to severely damage the financial fortune of a selected or rejected. If there is only one project then its viability in terms of the rate of return viz., investment and its comparability with the industry’s average is seen.

Question. Explain the factors affecting the dividend decision.
Answer: Factors affecting the dividend decision are:

1. Shareholder’s preference: Preference of shareholders should be kept in mind while deciding the dividend distribution or retention of profits. If shareholders in general desire that at least a certain amount is to be paid as dividend the companies are likely to declare the same. There are always some shareholders who depend upon a regular income from their investments.
2. Taxation Policy: A dividend distribution tax is charged on companies, but dividend is tax free in hands of shareholders. Companies may pay lower dividends if tax rate is high & vice-versa, whereas, shareholders may prefer higher dividends.
3. Earnings: Dividends are paid out of current and past earning. Therefore, earnings are a major determinant of the decision about dividend.
4. Stability of Earnings: Other things remaining the same, a company having stable earning is in a position to declare higher dividends.
5. Growth Opportunities: Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment.
6. Access to Capital Market: Large and reputed companies generally have easy access to the capital market and therefore may depend less on retained earning to finance their growth. These companies tend to pay higher dividends than the smaller companies.
7. Stock Market Reaction: Investors, in general, view an increase in dividend as a good news and stock prices react positively to it. Similarly, a decrease in dividend may have a negative impact on the share prices in the stock market.

Question. Explain the term ‘Trading on equity.’ Why, When and how it can be used by the company?
Answer: Trading on equity refers to the use of more debt along with equity shares in the capital structure with a view to increase earnings per share. This is possible only if the return on investment is greater than rate of interest on debt. Trading on equity refers to the additional profits that equity shares earn because of high degree of financial leverage, i.e., funds raised by issuing more debts. Difference between return on investment and rate of interest on debt increases, earning per share increases.

Let us understand through a practical example:

XYZ Ltd. requires ` 4,00,000 for a project. He has two options:

• Raise entire amount by issue of equity shares, or

• Raise ` 1,50,000 through issue of equity shares and ` 2,50,000 by issue of 10% debentures.

Also consider that tax rate is 30%. The EPS in different options will be:

Particulars	Option (a)	Option (b)
Earnings before interest and tax	1,00,000	1,00,000
Less: Interest	-	25,000
Earnings before tax	1,00,000	75,000
Less: Tax @ 30%	30,000	22,500
Earnings after tax	70,000	52,500
Divide: No. of shareholders	40,000	15,000
Earnings per share	1.75	3.5

Option (b) has better EPS as it has the advantage of trading on equity. But this can be used only when the return on investment is higher than the rate of interest on debt.

Case Problem: ‘S’ Limited 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. It is planning to set up a new steel plant to cash on the increased demand it is facing. It is estimated that it will require about ` 5000 crores to set up and about ` 500 crores of working capital to start the new plant.

Questions

Question. What is the role and objectives of financial management for this company?
Answer: Financial management is required to ascertain:

1. Amount of fixed assets: Capital budgeting means taking investment decisions regarding the purchase of fixed assets. These decisions are very crucial for any business since they affect its earning capacity over the long run.
2. Composition of funds used: Composition is the mix of short term and long term sources of finance used by the company.
3. Debt equity proportion in the capital structure: Capital structure is the composition between owners' funds and outsiders' long-term funds. It tells how much amount has been invested by the owner of the business and how much amount has been borrowed from outside.
4. Composition of current assets: Current assets are called gross working capital. Current assets include cash, debtors, stock and short-term investments.

The primary objective of financial management is to maximise shareholder’s wealth. To achieve the wealth maximisation objective, management needs to achieve the following specific objectives:

1. Ensure availability of sufficient funds at reasonable cost and reasonable risk.
2. Effective utilisation of funds, to ensure returns are more than cost of funds.
3. Ensuring safety of funds by creating reserves, reinvesting profits, etc.
4. Avoiding idle finance, else it will unnecessarily add to cost of finance.

Question. What is the importance of having a financial plan for this company? Give an imaginary plan  to support your answer.
Answer:

1. Financial planning will help the company to raise adequate funds. This will solve the problem of overcapitalization.
2. It will help to minimise wastage of time, efforts and money.
3. It will help the company to forecast more accurately.

Question. What are the factors, which will affect capital structure of this company?
Answer: Factors that affect capital structure of the company are:

1. Cash Flow Position: Size of projected cash flows must be considered before issuing debt. It must be kept in mind that a company has cash payment obligations.
2. Interest Coverage Ratio (ICR): The higher the ratio, lower is the risk of company failing to meet its interest payment obligations
3. Return on Investment (ROI): If the ROI of the company is higher, it can choose to use trading on equity to increase its EPS.
4. Risk Consideration: Use of debt increases the financial risk of a business. Financial risk refers to a position when a company is unable to meet its fixed financial charges namely interest payment preference dividend and repayment obligations.

Question. Keeping in mind that it is a highly capital intensive sector what factors will affect the fixed and working capital. Give reasons with regard to both in support of your answer
Answer: Factors affecting fixed capital requirement are:

1. Nature of Business: The type of business has a bearing upon the fixed capital requirement. A trading concern needs lower investment in fixed assets compared with a manufacturing organisation.
2. Scale of Operations: A large organisation operating at a higher scale needs bigger plant, more space etc. and therefore, requires higher investment in fixed assets when compared with the smaller organisation.
3. Choice of Technique: Some organisations are capital intensive whereas others are labour intensive. A capital intensive organisation requires higher investment in plant and machinery compared to others.
4. Technology Up gradation: In certain industries, which employ higher technology, the assets become obsolete sooner. Consequently, their replacements become due faster, requiring higher capital requirement.
5. Growth prospects: If an organisation has growth plans, it requires higher investment in fixed assets and consequently higher fixed capital, compared to organisations which do not have immediate expansion prospects.

Factors affecting working capital requirement are:

1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a lower amount of working capital compared to a manufacturing organisation.
2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high.
3. Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, higher amount of working capital is required.
4. Production Cycle: Production cycle is the time span between the receipt of raw material and their conversion into finished good Duration and the length of production cycle, affects the amount of funds required for raw materials and expenses.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management Objective Type Questions

Question. Acquiring a new fixed asset is an example of which type of investment decision:
(a) A long-term investment decision
(b) A short-term investment decision
(c) Both (a) and (b)
(d) None of these 
Answer: A

Question. DSCR stands for :
(a) Debt Service Coverage Ratio
(b) Debt Service Coverage Risk
(c) Debt Structure Coverage Ratio
(d) None of these 
Answer: A

Question. ICR = ........................................
(a) EBIT/interest
(b) EBIT × Interest
(c) EBIT – Interest
(d) Interest/EBIT
Answer: A

Question. Fixed capital is financed through
(a) equity shares
(b) preference shares
(c) debentures
(d) all of the above
Answer: D

Question. Which of the following financial decision is about the quantum of finance to be raised from various long-term sources.
(a) Investment
(b) Dividend
(c) Financing
(d) All of the above 
Answer: C

Question. Which of the following factor affects capital budgeting decisions
(a) Cash flows of the project
(b) Risk
(c) Stability of Earnings
(d) Cash Flow Position 
Answer: A

Question. Net working capital may be defined as the
(a) excess of current assets over current liabilities.
(b) excess of current liabilities over current assets
(c) both (a) and (b)
(d) none of these 
Answer: A

Question. ______________is the time span between the receipt of raw material and their conversion into finished goods.
(a) Production cycle
(b) Business cycle
(c) Both (a) and (b)
(d) None of these 
Answer:A

Question. Which of the following statement is true for financial management :
(a) Aims at ensuring availability of enough funds whenever required
(b) Aims at reducing the cost of funds procured
(c) Is concerned with optimal procurement as well as usage of finance.
(d) All of the above 
Answer: D

Question. Primary objective of Financial Management :
(a) Maximisation of market shure
(b) Maximisation of shareholders' wealth
(c) Service of consumers
(d) None of these 
Answer: B

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management One Word Answer Type Questions :

Question. Which component of capital structure determines the overall financial risk ?
Answer: Debt.

Question. Himanshu Ltd. wants to take decision regarding the utilisation of funds to maximize the shareholders' wealth. What special type of management should it use ? 
Answer: Financial Management.

Question. 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 phone. 
Answer: Technology Upgradation. 

Question. ‘Best Bulbs Pvt. Ltd., is manufacturing good quality LED bulbs and catering to local market. The current production of the company is 800 bulbs a day. Sumit, the marketing manager of the company, surveyed the market and decided to supply the bulbs to five-star-hotels also. He anticipated the higher demand in future and decided to buy a sophisticated machine to further improve the quality and quantity of the bulbs produced. Identify the factor affecting fixed capital requirements of the company. 
Answer: Growth prospects.

Question. Aarohan Ltd., an automobile manufacturer, was diversifying into manufacturing two-wheelers. They knew that India is on a growth path and a new breed of consumer is eager for a first vehicle. The market responded very well to the new product. The company did not have to allow credit, as it had advance orders from four to six months with deposits paid. Also, due to efficiency in managing their operations as soon as a vehicle was off the assembly line, it was out to the dealers. Give any one reason discussed above which helped the firm in managing its working capital efficiently. 
Answer: Factors affecting working capital requirements :
(i) Credit Allowed.
(ii) Operating Efficiency.

Question. 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’.
Answer: Less.

Question. VXL Ltd. is a company dealing in dairy products. It procures these products from Rajasthan and sells them to various parts of Delhi. A month before ‘Merio Ltd.’ a Haryana based company entered Delhi market with a similar range of products. State the impact of entry of Haryana based ‘Merio Ltd.’ on the working capital requirements of VXL Ltd. A 
Answer: Increase in working capital requirements.

Question. Name the financial decision which will help a businessman in opening a new branch of its business.
Answer: Investment decision.

Question. Avik is the finance manager of Mars Ltd. In the current year, the company earned high profits. However, Avik thinks that it is better to declare smaller dividend as he is unsure about the earning potential of the company in the coming years. Avik’s choice of dividend decision is based on which of the factor that affect it?
Answer: Stability of Dividend.

Question. Name the aspect of financial management that provides a link between investment and financing decisions. 
Answer: Financial Planning.

Question. ‘Truks India Ltd.’ producing 1,00,000 trucks and generating revenue of 1,000 crore annually, has recently acquired the world’s second largest truck manufacturing company. After this acquisition, ‘Truks India Ltd.’ will become the world’s largest truck manufacturer. For financing the acquisition, the company had to arrange about ₹ 41,000 crores through debt and equity. State the function performed by the company for arranging the funds through debt and equity.
Answer: Finance function/Financing decision.

Question. For optimal procurement of funds, a finance manager identifies different available sources and compares those items in terms of cost and associated risks. Identify the concept highlighted in the above lines. 
Answer: Financial Management.

Question. Satvik is the finance manager of Mars Ltd. He is facing difficulty in deciding the amount of profit earned by the company that should be distributed as dividend to the shareholders. In the current year, the company earned high profit. However, Satvik thinks that it is better to declare higher dividend as he is sure about the earning potential of the company in the coming years. Name the factor that affected Satvik’s choice regarding dividend decision. 
Answer: Stability of dividend.

Question. Name the aspect of financial management that enables to foresee the fund requirements both in terms of ‘the quantum’ and ‘the timings’. 
Answer: Financial planning.

Question. 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.

NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management Short Answer Type Questions

Question. ‘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 of ₹ 80 crore. 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 ₹ 120 crore. 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. (i) 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
(i) above which have been discussed between Mr. Shah and Mr. Seth.
Answer:
(i) Capital structure.
(ii) (a) Cash flow position
(b) Floatation cost
(c) Risk consideration
(d) Tax rate
(e) Control.

Question. Pinnacle Ltd. deals in the sale of stationery and office furniture. They source the finished products from reputed brands who give them four to six months credit. Seeing the demand for electronic items, they are also planning to market these items by opening outlets throughout India. For this, they have decided to join hands with a Japanese electronic goods manufacturer. Identify and state any two factors that would affect the fixed capital requirement of Pinnacle Ltd. as discussed above. 
Answer: Two factors that would affect the fixed capital requirement of Pinnacle Ltd. are :
(i) Diversification It will increase the fixed capital requirements as the investment in fixed capital will increase.
(ii) Level of Collaboration Collaboration reduces the level of investment in fixed assets.

Question. ‘Wealth Maximisation’ is the primary objective of financial management. Explain. 
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 :
(i) Ensuring availability of sufficient funds at reasonable cost.
(ii) Ensuring effective utilisation of funds.
(iii) Ensuring safety of funds by creating reserves, reinvestment of profits, etc.

Question. Explain the factors that affect capital budgeting decision. 
Answer: Factors that affect capital budgeting decision are :
(i) Cash flows of the project : Every project is expected to generate a series of cash receipts and payments over a long period of time. A project which is likely to give higher and stable cash inflows is preferred over the others.
(ii) Rate of Return : A risk return trade-off is done to measure the feasibility of a project. A project with less risk and higher returns is preferable over other projects.
(iii) Investment Criteria : Various capital budgeting techniques like Net Present Value, payback period are used to assess the viability of a project. It includes a number of calculations like amount of investment, interest rates, etc.

Question. Miracle Ltd. deals in the sale of stationery and office furniture. They source the finished products from reputed brands who give them four to six months credit. Because of increase in the demand for electronic items, they are planning to sell these items also. For this, they have decided to join hands with a Japanese electronic goods manufacturer, to open sales outlets throughout India. State any three factors affecting working capital requirement of Miracle Ltd., other than the factors discussed above.
Answer: Factors which affect the requirements of working capital are :
(i) Business cycle as in case of boom, larger working capital is required as the sales and production are more.
(ii) Seasonal factors as peak season requires higher working capital than lean season due to higher level of activity.
(iii) Production Cycle as working capital requirement is higher in firms with longer processing cycle.
(iv) Credit allowed to customers results in higher amount of debtors, increasing the working capital requirement.
(v) Operating efficiency as firms managing their raw materials efficiently require lesser working capital.
(vi) Free and continuous availability of raw materials enables the firms to keep lesser stock and hence work with smaller working capital.
(vii) Higher Growth prospects will require larger amounts of working capital so that the firm is able to meet higher production and sales targets 
(viii) Level of competition as higher competition requires larger stocks to meet urgent orders from customers and thus higher working capital.
(ix) Inflation increases the working capital requirements as larger amount of money is required to maintain a constant volume of production and sales.