CBSE Class 12 Business Studies Financial Management VBQs

Mcq Questions for Ncert Class 12 Business Studies Directing

Question. _____________ is the time span between acquisition of goods and realisation of sale proceeds.
(a) Working capital
(b) Payback Period
(c) Operating Cycle
(d) Account Receivables Period

Answer : C

Question. Gross working capital represents the total investment in ___________ assets.
(a) Current
(b) Fixed
(c) Tangible
(d) Intangible

Answer : A

Question. The primary objective financial management is………………………………
(a) to maximize the return
(b) to minimize the risk
(c) to maximize the wealth of owners
(d) to maximize profit

Answer : C

Question. _____________ involves increasing the proportion of debt and preference shares in total capital.
(a) Trading on equity
(b) Capital Budgeting
(c) Financing decision
(d) Financial Analysis

Answer : A

Question. Which of the following is not an importance of financial planning?
(a) It helps in avoiding business shocks and surprises.
(b) If helps in co-coordinating various business functions.
(c) If helps to reduce waste, duplication of efforts and gaps in planning.
(d) It tries to delink the present with the future.

Answer : D

Question. Ensuring………….. availability of funds at the right time is an objective of financial planning
(a) Enough
(b) Excess
(c) Least
(d) Maximum

Answer : A

Question. ___________ is concerned with optimum procurement as well as usage of finance.
(a) Financial Analysis
(b) Financial Planning
(c) Financial Management
(d) Budgeting

Answer : C

Question. A company is likely to declare higher dividends if
(a) Tax rates are high
(b) Tax rates are relatively lower
(c) Tax rate has no effect on dividend declaration
(d) None of the above

Answer : B

Question. ABC Ltd. has Debt Equity ratio of 3:1 whereas XYZ Ltd. has Debt Equity ratio of 1:1. Name the advantage ABC Ltd will have over XYZ Ltd, when the rate of interest is lower than the rate of return on investment of the company.
(a) Trading on equity
(b) Low risk
(c) Low cost of equity
(d) Greater flexibility

Answer : A

Question. Financial management mainly focuses on:
(a) Efficient management of every business
(b) Brand dimension
(c) Arrangement of funds
(d) All elements of acquiring and using means of financial resources for financial activities

Answer : D

Question. Under which of the following situations a company is not likely to issue equity capital?
(a) When the debt service coverage ratio is high.
(b) When the interest coverage ratio is high.
(c) When the cost of debt capital is low. 
(d) All of the above   

Answer : D

Question. Name the decision which affects both the profitability and the financial risk.
(a) Financial planning decision
(b) Capital budgeting decision
(c) Capital structure decision
(d) All of the above

Answer : C

Question. Investment can be defined as
(a) Person’s dedication to purchasing a house or flat
(b) Use of capital on assets to receive returns
(c) Usage of money on a production process of products and services
(d) Net additions made to the nation’s capital stocks

Answer : B

Question. A decision to acquire a new & modern plant to upgrade an old one is known as__________ decision.
(a) Financing decision
(b) Working capital decision
(c) Investment decision
(d)Dividend decision.

Answer : C

Question. Which of the following factors affect financial decision?
(a) Cost
(b) Risk
(c) Cash flow position
(d) All of the above

Answer : D

Fill in the blanks :

Question. The decision in financial management which affects the growth, profitability and risk of the business is called _____.

Answer : Capital budgeting decision (long-term investment decision)

Question. The primary aim of financial management is _______________.

Answer : To maximise shareholders wealth.

Question. Capital budgeting decisions need to be taken with utmost care because _______.

Answer : these decisions involve huge amount of investment and are irreversible except at a huge loss.

Question. While taking investment decision, if there is only one project, its viability is assessed ______.

Answer : in terms of the rate of return of the project

Question. The primary aim of financial management is shareholders wealth maximisation, which means __________________

Answer : Maximisation of the market value of equity shares of the company.

Question. The source of finance carrying two fixed obligations, viz., interest and redemption is _____.

Answer : Debt

Question. As a part of its capital structure, ‘Venus Ltd.’ had `50 lakhs as Equity Share Capital and a loan of `20 lakhs from Neon Bank. On earning a good profit, Venus Ltd decided to give dividend to the Equity Shareholders but were surprised when the Neon Bank imposed restrictions on the payment of dividend.
The factor affecting dividend decision which allows Neon Bank to impose restrictions on the payment of dividend by ‘Venus Ltd.’ is ____________________ .

Answer : Contractual constraints.

Question. The decision involved in expenditures on advertising campaign or research and development programme is called _____.

Answer : Investment or Capital budgeting decision

Question. The financial decision which will help a businessman in opening a new branch of its business is called ______.

Answer : Capital Budgeting decision/Investment decision

Question. Financial management is concerned with the solution of three major issues relating to the financial operations of a firm, namely decisions.

Answer : Investment; Financing; Dividend.

Question. What is the effect of increased use of debt on the overall cost of capital?

Answer : Increased use of debt is likely to lower the overall cost of capital/funds of the firm.

Question. The decision in financial management which should be taken keeping in view the overall objective of maximising shareholders’ wealth is _______.

Answer : Dividend decision

Question. There are different techniques to evaluate investment proposals which are known as _______________. These techniques are applied to each proposal before selecting a particular project.

Answer : Capital Budgeting techniques

Question. _______________ relates to how the firm’s funds are invested in different assets.

Answer : Investment decision.

Question. Capital Budgeting Decisions are very crucial for any business since _________________.

Answer : Since they affect its earning capacity in the long run.

Important Questions for Ncert Class 12 Business Studies Directing

Very Short Answer Type Question :

Question. Name the source of finance carrying two fixed obligations viz., interest and redemption.

Answer : Debentures

Question. How is Return on Investment computed?
Answer : Return on Investment= Earnings before Interest and tax/ Total investment

Question. A decision is taken to distribute certain parts of the profit to shareholders after paying tax. What is this decision called?
Answer : dividend decision 

Question. A company wants to establish a new unit in which a machinery worth Rs.10 lakhs is involved. Identify the type of decision involved in financial management.
Answer : Investment decision

Question. Identify the decision taken in financial management which affects the liquidity as well as the profitability of business.
Answer : Capital budgeting decision

Question. Incase of inflation, does an enterprise need more or less of the working capital?
Answer : More working capital

Question. A decision is taken to raise money for long term capital needs of the business from certain sources. What is this decision called ?
Answer : Financing decision 

Short Answer Type Question :

Question. What is the main objective of financial management? Explain briefly.
Answer : Primary aim of financial management is to maximise shareholder’s wealth, which is referred to as the wealth maximisation concept. The wealth of owners is reflected in the market value of shares, wealth maximisation means the maximisation of market price of shares. According to the wealth maximisation objective, financial management must select those decisions which result in value addition, that is to say the benefits from a decision exceed the cost involved. Such value addition I increase the market

Question. What is meant by Capital Budgeting? State any three factors which affect the Capital Budgeting decision.
Answer : A long-term investment decision is also called a capital budgeting decision. It involves committing the finance on a long-term basis, e.g. making investment in a new machine to replace an existing one or acquiring a new fixed asset or opening a new branch. Factors affecting capital budgeting/long-term investment decisions are:
(i) Cash flow of the project Whenever a company is investing huge funds in an investment proposal, it expects some regular amount of cash to meet day-to-day requirements. The amount of cash flow of an investment proposal will be assessed properly before investing in the proposal.
(ii) Return on investment The most important criteria to decide the investment proposal is rate of return it will bring back for company, e.g. if project A is bringing 10% return and project B is bringing 15% return then, a businessman would prefer project B.
(iii) Risk involved With every investment proposal, some degree of risk is also involved. The company must try to calculate the risk involved in every proposal and .should prefer the
investment proposal with moderate degree of risk only.

Question. What is the role and objectives of financial management for this company?
Answer : Role of Financial Management Financial management is concerned with the proper management of funds. It involves:
(i) Managerial decisions relating to procurement of long term and short-term funds.
(ii) Keeping the risk associated with respect to procured funds under control.
(iii) Utilisation of funds in the most productive and effective manner
(iv) Fixed debt equity ratio in capital.

Question. Discuss the two objectives of Financial Planning.
Answer : Financial Planning strives to achieve the following two objectives
(i) 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.
(ii) To See That the Firm Does Not Raise Resources Unnecessarily Excess funding is almost as bad as inadequate funding. Efficient financial planning ensures that funds are not raised unnecessarily in order to avoid unnecessary addition of cost.

Question. To avoid the problem of shortage and surplus of funds what is required in financial management? Name the concept and explain its any three points of importance.
Answer : Financial Planning. Sound financial planning is essential for success of any business enterprise. It is important because-
(i) it facilitates collection ;of optimum funds.
(ii) It helps in fixing the most appropriate capital structure .
(iii) It helps in investing finance in right projects.

Question. You are the finance manager of a newly established company. The directors of the company have asked you to plan the capital structure of the company. State any four factors that you would consider while planning the capital structure.
Answer : Following factors would be considered for the purpose –
(i) Cash Flow Position
(ii) Interest Coverage Ratio
(iii) Return on Investment
(iv) Cost of debt
(v) Tax rate

Question. Why is Financial Planning done?
Answer : It is done to achieve following two objectives –
(i) To ensure availability of funds whenever these are required.
(ii) To see that firm does not raise resources unnecessarily.

Question. The directors of a manufacturing company are thinking of issuing Rs. 20 lacs additional debentures for expansion of their production capacity. This will lead to an increase in debt-equity ratio from 2:1 to 3:1. What are the risks involved in it?
Answer : The increase in debt-equity ratio from 2:1to 3:1 is subject to following risks-
(a) Interest on debt has to be paid even when the company is not making sufficient profits.
(b) The debebtureholders have charge over the assets of the company so there is threat of solvency.

Question. How Stock market conditions affect the capital struceture specially when company is planning to raise additonal capital?
Answer : There are two main conditions of stock market i.e., Boom condition and Recession condition.
During recession market is slow and investors also hesitate to take risk so at this time it is advisable to issue borrowed funds as they are less risky and ensure fixed repayment and regular interest. But during boom period, business flourishes and investors also take risk and prefer to invest in equity shares to earn more in the form of dividend.

Question. Length of Production cycle affects the working capital requirements of an organization. Explain how?
Answer : Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Duration and length of production cycle affects the amount of funds required of R/M and expenses. Consequently the working capital requirement is higher in firms with longer processing cycle and lower in firms with shorter processing cycle.

Question. State why the working capital needs for a service industry are different from that of a manufacturing industry.
Answer : Nature of business determines the working capital needs . Service industries which usually do not have to maintain inventory require less working capital whereas manufacturing industries have to maintain inventory in the form of R/M to finished goods there require more working capital.

Question. ‘Primary objective of financial management is to maximize the wealth of shareholders’. Explain.
Answer : maximization of shareholders wealth depends upon the market price of shares. Market price of equity share increase if the benefits from a decision exceeds the cost involvcd.

Question. How is Interest Coverage Ratio computed? What does it indicate?
Answer : Interest Coverage Ratio= Earnings before interest and tax/Interest
Higher ICR means companies can have more of borrowed fund securities whereas lower ICR means less borrowed fund securities.

Question. State the factors which affect the capital structure of a company.
Answer : (i) Cash flow ability
(ii) control
(iii) Floatation cost
(iv) Flexibility
(v) Market condition

Question. A businessman who wants to start a manufacturing cocern, approaches you tosuggest him whether the following manufacturing cocern would require large or small working capital:
(a) Bread,
(b) Coolers,
(c) motor Car.
Answer : (a) Bread – Requirement of working capital will be less because it has quick cash turnover.
(b) Coolers – Require of working capital will be more because it is a seasonal product.
(c) Motor car – Working capital requirement will be more.

Question. ‘Style India’ is India’s second largest manufacturer of branded Lifestyle Clothes. The company now plans to diversify into personal care segment by launching hair care and skin care 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:
1. Identify the two factors affecting the fixed capital needs of the company by quoting lines from the paragraph.
2. Why is the management of fixed capital considered to be an important for a business?
Answer : 1. The factors affecting the fixed capital needs of the company are as follows:
♦ 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.
2. The management of fixed capital is considered important because:
♦ It affects the growth and profitability of business in future.
♦ It involves huge investment outlay in terms of investment in land, building, machinery etc.
♦ It influences the overall level of business risk of the organization.
♦ If these decisions are reversed, they may lead to major losses.

Question. Financial management is based on three broad financial decisions. What are these?
Answer : Financial management is concerned with the solution of three major issues relating to the financial operations of a firm corresponding to the three questions of investment, financing and dividend decision. In a financial context, it means the selection of best financing alternative or best investment alternative. The finance function therefore, is concerned with three broad decision which are as follows:-
(i) Investment Decision
The investment decision relates to how the firm’s funds are invested in different assets.
(ii) Financing Decision
This decision is about the quantum of finance to be raised from various long term sources and short term sources. It involves identification of various available sources of finance.
(iii) Dividend Decision
This decision relates to distribution of dividend. Dividend is that portion of profit which is distributed to shareholders the decision involved here is how much of the profit earned by
company is to be distributed to the shareholders and how much of it should be retained in the business for meeting investment requirements.

Long Answer Type Question :

Question. 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.
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. Capital structure decision is essentially optimization of risk-return relationship. Comment.
Answer : i. Capital structure decision is related to proportion of debt (risk) and equity (return).
ii. Debt is cheaper but is more risky for a business because payment of interest and the return of principal is obligatory for the business. Any default in meeting these commitments may force the business to go into liquidation. There is no such compulsion in case of equity, which is therefore, considered riskless for the business.
iii. Debt component in the total capital generates higher return for equity shareholders as interest payable on debt is deductible from earning before tax payment. iv. Thus, capital structure decision affects risk as well as return. So, it is true capital structure decision is essentially optimization of risk-return relationship.

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 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.
1. Identify and explain the concept of Financial Management as advised by Mr. Seth in the above situation.
2. State the four factors affecting the concept as identified in part (1) above which have been discussed between Mr. Shah and Mr. Seth.
Answer : 1. 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.
2. The four factors affecting capital structure which have been discussed between Mr. Shah and Mr. Seth are explained below:
♦ Cash flow 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. ‘Tie a knot’ is a popular online matrimonial website. 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.
Answer : 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:
♦ 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.
♦ Cash flow 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. Explain the importance of having a financial plan for this company.
Answer : Importance of financial plan for the company
(i) Financial Planning ensures provision of adequate funds to meet working capital requirements.
(ii) It brings about a balance between in flow and out flow of funds and ensures liquidity throughout the year.
(iii) It solves the problems of shortage and surplus of funds and ensures proper and optimum utilisation of available resources.
(iv) It ensures increased profitability through cost benefit analysis and by avoiding wasteful operations.
(v) It seeks to eliminate waste of funds and provides better financial control.
(vi) It seeks to avail the benefits of trading on equity

Question. Booms 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:
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.
Answer: 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.