Sure Shot Questions: Financial Management | Business Studies (BST) Class 12 - Commerce PDF Download

Based on a careful analysis of the previous years' questions and trends, we've put together a list of questions that are most likely to appear in the Class 12 Business Studies Board exams. These predictions aren’t just guesses—they’re based on how often these questions show up and how CBSE usually frames its papers.

Q1: Why does 'Reliable Transport Services Ltd.' have low working capital requirements?
Ans: 'Reliable Transport Services Ltd.' has low working capital requirements because it specializes in transporting perishable goods like fruits and vegetables, which have a short shelf life. This nature of business eliminates the need to maintain large inventories, as goods are delivered promptly to avoid spoilage. For example, the company does not store significant stock, reducing the funds tied up in raw materials or finished goods, thereby minimizing the working capital needed for daily operations.

Q2: How do floatation costs influence a company’s capital structure?
Ans: Floatation costs, which are expenses incurred when raising funds through issuing securities like equity or debt, significantly affect a company’s capital structure. Typically, the floatation cost for issuing debt is lower than that for equity, as debt issuance involves fewer procedural complexities and lower underwriting fees. Consequently, companies may prefer a higher debt ratio in their capital structure to minimize these costs. For instance, issuing bonds might cost less than issuing new shares, which require extensive marketing and regulatory compliance, leading firms to favor debt financing to optimize their capital structure.

Q3: What is meant by financial management?
Ans: Financial management refers to the strategic planning, organizing, directing, and controlling of a company’s financial resources to meet its financial needs and achieve its overall objectives. It involves making decisions about raising funds, allocating them efficiently, and ensuring their optimal utilization to maximize profitability and shareholder value. For example, a financial manager might decide how much to invest in new machinery or how to distribute profits between dividends and reinvestment, ensuring the company’s financial stability and growth.

Q4: Name the two broad financial decisions, besides investment, in the finance function.
Ans: Besides the investment decision, the finance function involves: 

1. Financing Decision: This decision focuses on determining the optimal mix of funds to be raised from various sources, such as equity, debt, or retained earnings, to meet the company’s needs at the lowest cost. 

2. Dividend Decision: This involves deciding how much of the company’s profits should be distributed as dividends to shareholders and how much should be retained for reinvestment, balancing shareholder satisfaction with future growth needs.

Q5: How does diversification affect the fixed capital requirements of a textile company starting a steel manufacturing plant?
Ans: Diversification into a steel manufacturing plant significantly increases the fixed capital requirements of a textile company. The steel industry requires substantial investment in fixed assets like heavy machinery, furnaces, and plant infrastructure, which are capital-intensive compared to textile operations. For example, setting up a steel plant involves purchasing specialized equipment, unlike the relatively lower fixed capital needs of textile production. This shift to a new industry with different operational demands escalates the need for long-term funds to support the expanded business activities.

Q6: Why did Rizul Bhattacharya choose a furniture business over mobile phone manufacturing, considering fixed capital requirements?
Ans: Rizul Bhattacharya chose a furniture business over mobile phone manufacturing due to the factor of "Technology Upgradation." Mobile phone manufacturing requires frequent and substantial investments in fixed capital to keep up with rapid technological advancements, as products quickly become obsolete. In contrast, furniture production involves relatively stable technology, requiring less frequent upgrades and lower fixed capital investment. For instance, mobile phone production demands advanced machinery for new features, whereas furniture manufacturing relies on consistent equipment, reducing long-term capital needs.

Q7: Which financial decision affects the size of assets, profitability, and competitiveness?
Ans: The investment decision, also known as capital budgeting, impacts the size of assets, profitability, and competitiveness. This decision involves allocating funds to long-term assets, such as machinery or infrastructure, which directly increases the asset base. By choosing projects with high returns, it enhances profitability, and strategic investments in advanced technology or facilities improve competitiveness. For example, investing in automated production equipment can boost efficiency, reduce costs, and strengthen a company’s market position.

Q8: Why does financial risk arise in a business?
Ans: Financial risk arises due to the use of borrowed funds, such as loans or debentures, which require fixed interest payments regardless of the company’s profitability. Additionally, borrowed funds must be repaid at maturity, often with a charge on the company’s assets, increasing the risk of default. For example, if a company takes a loan to expand but faces a sales decline, it must still pay interest, straining its finances. This obligation creates financial risk, as failure to meet these commitments can lead to insolvency or asset seizure.

Q9: How does the production cycle impact working capital requirements?
Ans: The production cycle affects working capital requirements by determining how long funds are tied up in raw materials and semi-finished goods. A longer production cycle, such as in heavy machinery manufacturing, requires more working capital to maintain inventories and cover operational costs during the extended production period. Conversely, a shorter production cycle, like in fast-moving consumer goods, ties up less capital, as products are completed and sold quickly. For instance, a bakery with a daily production cycle needs less working capital than a shipbuilding company with months-long cycles.

Q10: State two objectives of financial management.
Ans: 

1. Profit Maximization: This objective focuses on increasing the company’s earnings per share (EPS) by optimizing financial decisions to enhance overall profitability. For example, a company may reduce costs or improve sales strategies to boost profits. 

2. Wealth Maximization: This aims to increase shareholder wealth by raising the market value of the company’s equity shares through strategic financial decisions, such as investing in high-return projects or optimizing capital structure to enhance share prices.

Q11: Identify the factor affecting fixed capital requirements for 'Fashionate Pvt. Ltd.' when they collaborate to buy a photocopier.
Ans: The factor affecting fixed capital requirements for 'Fashionate Pvt. Ltd.' is the "Level of Collaboration." By partnering with 'Neo Prints Pvt. Ltd.' to jointly purchase a photocopier, the company reduces its individual fixed capital needs, as the cost and usage of the asset are shared. This collaboration minimizes the need for separate investments in fixed assets, allowing both businesses to operate efficiently without bearing the full financial burden of purchasing equipment outright.

Q12: What is meant by 'Capital Structure'?
Ans: Capital structure refers to the mix or proportion of debt and equity used by a company to finance its operations and growth. It represents the way a company balances funds from sources like equity shares, retained earnings, and borrowed funds (e.g., debentures or loans) to achieve an optimal financial framework. For instance, a company with a capital structure of 60% equity and 40% debt aims to minimize costs while maintaining financial stability, ensuring efficient use of resources to meet long-term objectives.

Q13: Which aspect of financial management links investment and financing decisions?
Ans: Financial planning is the aspect of financial management that links investment and financing decisions. It involves creating a comprehensive blueprint for the company’s financial operations, ensuring that funds are raised from appropriate sources (financing decisions) and allocated efficiently to projects or assets (investment decisions). For example, financial planning determines how much to borrow versus using equity to fund a new factory, aligning the company’s financial strategy with its investment goals.

Q14: Which aspect of financial management helps foresee fund requirements in terms of quantity and timing?
Ans: Financial planning enables a company to foresee its fund requirements in terms of both quantity and timing. By designing a detailed financial blueprint, it ensures that the right amount of funds is available at the right time for various operations, such as purchasing equipment or meeting operational expenses. For instance, financial planning might predict the need for Rs. 50 lakhs in six months for a new project, allowing the company to arrange funds through loans or equity in advance.

Q15: State any four factors affecting the working capital requirements of a company.
Ans: 

1. Nature of Business: Service or trading businesses, like retail, require less working capital due to short operational cycles, while manufacturing firms need more to cover inventory and production costs. 

2. Scale of Operations: Large-scale operations demand higher working capital to maintain substantial inventories and manage larger debtor balances compared to small-scale firms. 

3. Business Cycle: During economic booms, increased production and sales require more working capital, whereas recessions reduce these needs due to lower demand. 

4. Seasonal Factors: Peak seasons, like festive periods, increase demand, necessitating higher working capital for inventory and staffing, unlike lean seasons with lower requirements.