Kerala Plus Two Business Studies Chapter Wise Questions and Answers Chapter 9 Financial Management
Plus Two Business Studies Financial Management One Mark Questions and Answers
Question 1.
………………. is the objective of modern financial management.
Answer:
Wealth maximisation
Question 2.
A decision to acquire a new and modern plant to upgrade an old one is a ……………..
(a) financing decision
(b) working capital decision
(c) investment decision
(d) dividend decision
Answer:
(c) investment decision
Question 3.
The decision to maximise the return of equity shareholders by introducing more debt capital in the total capital structure. Identify the concept.
(a) Financial leverage
(b) Undercapitalisation
(c) Over capitalisation
(d) Fair capitalisation
Answer:
(a) Financial leverage
Question 4.
Use of fixed interest bearing source of funds to enhance the return of equity shareholders is called ………………
(a) Trading on profit
(b) Trading on equity
(c) Trading on assets
(d) Trading on liability
Answer:
(b) Trading on equity
Question 5.
Identify the term referred here. Use of debt capital along with equity capital with total capital of a company.
Answer:
Trading on equity
Question 6.
The cheapest source of finance is …………….
(a) Debenture
(b) Equity share
(c) Preference share
(d) Retained earning.
Answer:
(d) Retained earning
Question 7.
Current assets are those assets which get converted into cash ……………….
(a) within six month
(b) within one year
(c) between one and three year
(d) between three and five year
Answer:
(b) within one year
Question 8.
Amount invested in Fixed assets is known as ………………………
(a) Working capitalisation
(b) Circulating capital
(c) Fixed capital
(d) None of these
Answer:
(c) Fixed capital
Question 9.
Gross Working capital means ……………
Answer:
Total current assets
Question 10.
………………………….. is the excess of current asset over current liabilities.
Answer:
Working Capital
Question 11.
Jasim one of your classmates, confused with the two different concept of working capital. Help him.
Answer:
- Gross working capital
- Networking capital
Question 12.
Generally, in trading concerns there is a time gap between sales of goods and their actual realisation of cash. Write down the term used to describe the time gap.
Answer:
Operating cycle of working capital/ Working capital cycle
Question 13.
Decision of allocation of funds to long term assets is ………………
Answer:
Capital budgeting
Question 14.
………………….. is the reward of shareholders for investment made by them.
Answer:
Dividend
Question 15.
Which among the following is not a factor affecting dividend decision?
(a) Nature of industry
(b) Taxation policy
(c) Competition
(d) Legal restrictions
Answer:
(c) Competition
Question 16.
A finance manager of a firm has to take many decisions, which can be put under three main categories. Besides dividend decisions, what are the other two categores?
Answer:
- Investment decision
- Financing decision
Question 17.
Which among the following is not a finance function? (Investment decision, Compensation decision, Dividend decision, Financing decision)
Answer:
Compensation devision
Question 18.
Complete the diagram.
Answer:
- Financing decision
- Investment decision
- Dividend decision
Question 19.
Choose any two factors which affect the working capital. <0>6)sn$aKO)3<e>.
(a) Tax policy
(b) Credit policy
(c) Pcocurement of fixed assets
(d) Dividend policy
(e) Seasonal factors
(f) Investment ratio
Answer:
(b) Credit policy
(e) Seasonal factors
Question 20.
Ensuring the availability of fund from different sources is called …………….
Answer:
Financial planning
Plus Two Business Studies Financial Management Two Mark Questions and Answers
Question 1.
Moli, the finance manager of Chikk Ltd, has to take the following decisions in connection with expansion of appropriate heads. What decisions are they?
- Amount to be spent on current assets.
- Sharing profits to shareholder.
- Raising funds through issue of debenture.
- Determining the proportion of owned fund and borrowed fund.
Answer:
- Investment decision
- Dividend decision
- Finance decision
- Finance decision
Question 2.
When is a capital structure said to be optimum?
Answer:
A capital structure is said to be optimum when the proportion of debt and equity is such that it results in an increase in the value of the shares.
Plus Two Business Studies Financial Management Three Mark Questions and Answers
Question 1.
The primary objective of financial management is to maximise shareholders wealth. Explain.
Answer:
The primary aim of financial management is to maximise shareholder’s wealth, which is referred to as the wealth maximisation concept . It means maximisation of the market value of equity shares.
The shareholders are the owners of the company. So it is the responsibility of the company to pay reasonable dividend and also to maximize the value of its shares. All financial decisions aim at ensuring that each decision is efficient to increase the market price of shares.
Question 2.
Explain the term ‘Trading on Equity or Capital gearing’
Answer:
Factors Affecting Capital Structure:
1. Trading on Equity (Financial Leverage):
It refers to the use of fixed income securities such as debentures and preference capital in the capital structure so as to increase the return of equity shareholders.
2. Stability of Earnings:
If the company is earning regular and reasonable income, the management can rely on preference shares or debentures. Otherwise issue of equity shares is recommended.
3. Cost of Debt:
A firm’s ability to borrow at lower rate, increases its capacity to employ higher debt.
4. Interest Coverage Ratio (ICR):
The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation. Higher the ratio, better is the position of the firm to raise debt.
5. Desire for control:
If the management has a desire to control the business, it will prefer preference shares and debentures in capital structure because they have no voting rights.
6. Flexibility:
Capital structure should be capable of being adjusted according to the needs of changing conditions.
7. Capital Market Conditions:
In depression, debentures are considered good. In a booming situation, issue of shares will be more preferable.
8. Period of Finance:
If funds are required for short period, borrowing from bank should be preferred. If funds are required for longer period company can issue shares and debentures.
9. Taxation Policy:
interest on loan and debentures is deductible item under the Income Tax Act whereas dividend is not deductible. In order to take advantage of this provision, companies may issue debentures.
10. Legal Requirements:
The structure of capital of a company is also influenced by the statutory requirements. For example, Banking Regulation Act, Indian Companies Act, SEBI, etc.
Question 3.
Distinguish between fixed capital and working capital.
Fixed Capital:
- Investment made in fixed assets
- Uses long term sources of capital fund
- Increase the efficiency and effectiveness of an organisation
Working Capital:
- Investment made in current assets
- Uses short term sources of capital fund
- Sustain the efficiency and effectiveness of an organisation
Plus Two Business Studies Financial Management Four Mark Questions and Answers
Question 1.
In a classroom debate Arun argued that “profit as a criteria for judging the financial performance is suitable only for sole proprietorship concerns”.
- Do you agree with the views of Arun? Justify your answer.
- Suggest operationally feasible criteria for assessing the financial performance of a company form of organisation.
Answer:
- Yes. I agree with the views of Arun because the main objective of sole proprietorship concerns are profit maximization. In sole proprietorship, only a single person invests capital and the whole profit is enjoyed by himself.
- The feasible criteria for assessing the financial performance of a company is wealth maximization.
Question 2.
Match the following
| A | B |
| Financial planning | Earnings of equity shareholders |
| Capital structure | Under capitalisation |
| Financial leverage | Optimum utilization of resources |
| Bonus shares | Mix of long term sources |
Answer:
| A | B |
| Financial planning | Optimum utilization of resources |
| Capital structure | Mix of long term sources |
| Financial leverage | Under capitalisation |
| Bonus shares | Earnings of equity shareholders |
Question 3.
Mr. Vishnu is appointed financial manager of a company. As a commerce student can you state the primary duties of Vishnu as the financial manager? You have to identify the finance functions of the company.
Answer:
Finance Functions:
The finance function is concerned with three broad decisions which are:
1. Finance Decision:
It relates to the amount of finance to be raised from various long term sources. The main sources of funds for a firm are shareholders’ funds (equity capital and the retained earnings) and borrowed funds (debentures or other forms of debt). A firm needs to have a judicious mix of both debt and equity in making financing decisions.
2. Investment Decision:
The investment decision relates to how the firm’s funds are invested in different assets. Investment decision can be long-term or short term. A long-term investment decision is also called a Capital budgeting decision.
Short-term investment decisions (also called working capital decisions) are concerned with the decisions about the levels of cash, inventory and receivables.
3. Dividend Decision:
Dividend is that portion of profit which is distributed to shareholders. The decision involved here is 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.
Question 4.
Clearly state the role of a financial manager in a business.
Answer:
Role of finance manager in a business:
- The finance manager determines size and com-position of fixed assets in the business.
- The finance manager determines the quantum of current assets as well as working capital.
- He must also determine the long term and short term financing to be used.
- The finance manager determines break up of long term finances into debt and equity.
Plus Two Business Studies Financial Management Five Mark Questions and Answers
Question 1.
Every manager has to take three major decisions while performing the finance function. Explain them.
Answer:
Mr. Vishnu is appointed financial manager of a company. As a commerce student can you state the primary duties of Vishnu as the financial manager? You have to identify the finance functions of the company.
Answer:
Finance Functions:
The finance function is concerned with three broad decisions which are:
1. Finance Decision:
It relates to the amount of finance to be raised from various long term sources. The main sources of funds for a firm are shareholders’ funds (equity capital and the retained earnings) and borrowed funds (debentures or other forms of debt). A firm needs to have a judicious mix of both debt and equity in making financing decisions.
2. Investment Decision:
The investment decision relates to how the firm’s funds are invested in different assets. Investment decision can be long-term or short term. A long-term investment decision is also called a Capital budgeting decision.
Short-term investment decisions (also called working capital decisions) are concerned with the decisions about the levels of cash, inventory and receivables.
3. Dividend Decision:
Dividend is that portion of profit which is distributed to shareholders. The decision involved here is 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.
Question2.
Kurian Jose, the financial manager in Aravinda Ltd. has to take the following decision in connection with expansion of business:
- Amount to be spent on fixed assets
- Sources of finance
- Sharing of profit to shareholders
- Ratio of debt and equity
- Retain profit for expansion
- Amount to be provided for working capital.
Categorise these finance functions into appropriate heads.
Answer:
- Investment decision
- Financing decision
- Dividend decision
- Financing decision
- Dividend decision
- Investment decision
Question 3.
Explain the term Financial Planning.
Answer:
Financial Planning:
The process of estimating the fund requirement of a business and specifying the sources of funds is called financial planning. It ensures that enough funds are available at right time.
The twin objectives of financial planning are:
- To ensure availability of fund at the right time and its possible sources.
- To see that firm does not raise fund unnecessarily.
Question 4.
Explain briefly the importance of financial planning.
Answer:
Importance of Financial Planning
- It ensures adequate funds from various sources.
- It reduces the uncertainty about the availability of funds.
- It integrates financial policies and procedures.
- It helps the management to eliminate waste of funds and reduce cost.
- It helps to achieve a balance between the inflow and outflow of funds and ensure liquidity.
- It serves as the basis of financial control
- It helps to reduce cost of financing to the minimum.
- It helps to ensure stability and profitability of business.
- It makes the firm better prepared to face the future.
Question 5.
Capital structure means the mix or composition of long term sources of funds. As a financial expert, what are the factors you would consider while determining it?
Answer:
Capital Structure:
Capital structure refers to the mix between owners funds and borrowed funds. Owners fund consists of equity share capital, preference share capital and reserves and surpluses or retained earnings. Borrowed funds can be in the form of loans, debentures, public deposits, etc.
A capital structure will be said to be optimal when the proportion of debt and equity is such that it results in an increase in the value of the equity share.
Factors Affecting Capital Structure:
1. Trading on Equity (Financial Leverage):
It refers to the use of fixed income securities such as debentures and preference capital in the capital structure so as to increase the return of equity shareholders.
2. Stability of Earnings:
If the company is earning regular and reasonable income, the management can rely on preference shares or debentures. Otherwise issue of equity shares is recommended.
3. Cost of Debt:
A firm’s ability to borrow at lower rate, increases its capacity to employ higher debt.
4. Interest Coverage Ratio (ICR):
The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation. Higher the ratio, better is the position of the firm to raise debt.
5. Desire for control:
If the management has a desire to control the business, it will prefer preference shares and debentures in capital structure because they have no voting rights.
6. Flexibility:
Capital structure should be capable of being adjusted according to the needs of changing conditions.
7. Capital Market Conditions:
In depression, debentures are considered good. In a booming situation, issue of shares will be more preferable.
Question 6.
‘No business can run successfully without adequate working capital’. By considering this fact:
- Narrate the significance of adequacy of working capital.
- The important factors influencing working capital.
Answer:
1. Working Capital:
Working capital is that portion of capital required for investing in current assets for meeting day to day working of an organization. Current assets can be converted into cash within a period of one year. They provide liquidity to the business.
2. Working capital is of two types:
- Gross working capital = Total of current asset
- Networking capital = Current assets – Current Liabilities
Factors affecting Working Capital:
1. Nature of Business:
A trading organisation usually needs a smaller amount of working capital as compared to a manufacturing organisation.
2. Scale of Operations:
A large scale organisation requires large amount of working capital as compared to the organisations which operate on a lower scale.
3. Business Cycle:
In the boom period larger amount of working capital is needed to meet the demand. In case of depression, demand for goods declines so less working capital is required.
4. Seasonal Factors:
During peak season demand of a product will be high and thus high working capital will be required as compared to the lean season.
5. 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 cycle and lower in firms with shorter processing cycle.
6. Credit Policy:
A liberal credit policy results in higher amount of debtors, increasing the requirement of working capital.
7. Operating Efficiency:
If cash, debtors and inventory are efficiently managed, working capital requirement can be reduced.
8. Availability of Raw Materials:
If the raw materials are easily available in the market and there is no shortage, huge amount need not be blocked in inventories, so it needs less working capital.
Plus Two Business Studies Financial Management Eight Mark Questions and Answers
Question 1.
Zee Ltd. is a well established company engaged in the production of cosmetics. They propose to undertake an expansion programme for product diversification, such as toys and perfumes.
- Being a business consultant, explain to them various steps involved in formulating plans relating to the financial aspects of this new project.
- Also state the importance of financial planning.
Answer:
1. Financial Planning:
The process of estimating the fund requirement of a business and specifying the sources of funds is called financial planning. It ensures that enough funds are available at right time.
The twin objectives of financial planning are:
- To ensure availability of fund at the right time and its possible sources.
- To see that firm does not raise fund unnecessarily.
2. Importance of Financial Planning
- It ensures adequate funds from various sources.
- It reduces the uncertainty about the availability of funds.
- It integrates financial policies and procedures.
- It helps the management to eliminate waste of funds and reduce cost.
- It helps to achieve a balance between the inflow and outflow of funds and ensure liquidity.
- It serves as the basis of financial control
- It helps to reduce cost of financing to the minimum.
- It helps to ensure stability and profitability of business.
- It makes the firm better prepared to face the future.
Question 2.
You are the finance manager of a new company. The management of the company asked you to suggest a suitable capital structure. What are the factors you will take into account while designing the company’s capital structure.
Answer:
Capital Structure:
Capital structure refers to the mix between owners funds and borrowed funds. Owners fund consists of equity share capital, preference share capital and reserves and surpluses or retained earnings. Borrowed funds can be in the form of loans, debentures, public deposits, etc.
A capital structure will be said to be optimal when . the proportion of debt and equity is such that it results in an increase in the value of the equity share.
Factors Affecting Capital Structure:
1. Trading on Equity (Financial Leverage):
It refers to the use of fixed income securities such as debentures and preference capital in the capital structure so as to increase the return of equity shareholders.
2. Stability of Earnings:
If the company is earning regular and reasonable income, the management can rely on preference shares or debentures. Otherwise issue of equity shares is recommended.
3. Cost of Debt:
A firm’s ability to borrow at lower rate, increases its capacity to employ higher debt.
4. Interest Coverage Ratio (ICR):
The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation. Higher the ratio, better is the position of the firm to raise debt.
5. Desire for control:
If the management has a desire to control the business, it will prefer preference shares and debentures in capital structure because they have no voting rights.
6. Flexibility:
Capital structure should be capable of being adjusted according to the needs of changing conditions.
7. Capital Market Conditions:
In depression, debentures are considered good. In a booming situation, issue of shares will be more preferable.
8. Period of Finance:
If funds are required for short period, borrowing from bank should be preferred. If funds are required for longer period company can issue shares and debentures.
9. Taxation Policy:
interest on loan and debentures is deductible item under the Income Tax Act whereas dividend is not deductible. In order to take advantage of this provision, companies may issue debentures.
10. Legal Requirements:
The structure of capital of a company is also influenced by the statutory requirements. For example, Banking Regulation Act, Indian Companies Act, SEBI, etc.
Question 3.
Sree Lakshmi Ltd. is a newly promoted company. While taking the investment decision, the financial manager of the company allotted the investment outlay of Rs. 25 crore in Land & Buildings, Furniture, and copyrights.
- Identify the type of capital referred to this context.
- Explain the factors influencing the investment in these assets.
Answer:
1. Fixed Capital:
Fixed capital refers to the capital needed for the the acquisition of fixed assets to be used for a longer period.
2. Factors affecting Fixed Capital
1. Nature of Business:
A trading concern needs lower investment in fixed assets compared with a manufacturing organization.
2. Scale of Operations:
An organisation operating on large scale require more fixed capital as compared to an organisation operating on small scale.
3. Choice of Technique:
A capital-intensive organisation requires more amount of fixed capital than labour intensive organisations.
4. Technology Upgradation:
Organisations using assets which become obsolete faster require more fixed capital as compared to other organisations.
5. Growth Prospects:
Higher growth of an organisation generally requires higher investment in fixed assets.
6. Diversification:
The firms dealing in number of products (Diversification) requires more investment in fixed capital.
7. Use of Fixed Assets:
Companies acquiring fixed assets on hire purchase or lease system require lesser amount as against cash purchases.
Question 4.
- What do you mean by Financial Planning?
- List down the importance of financial planning.
Answer:
1. Financial Planning:
The process of estimating the fund requirement of a business and specifying the sources of funds is called financial planning. It ensures that enough funds are available at right time.
The twin objectives of financial planning are:
- To ensure availability of fund at the right time and its possible sources.
- To see that firm does not raise fund unnecessarily.
2. Importance of Financial Planning:
- It ensures adequate funds from various sources.
- It reduces the uncertainty about the availability of funds.
- It integrates the financial policies and procedures.
- It helps the management to eliminate waste of funds and reduce cost.
- It helps to achieve a balance between the inflow and outflow of funds and ensure liquidity.
- It serves as the basis of financial control
- It helps to reduce cost of financing to the minimum.
- It helps to ensure stability and profitability of business.
- It makes the firm better prepared to face the future.