Worksheet Solutions: Financial Management | Business Studies (BST) Class 12 - Commerce PDF Download

Multiple Choice Questions

Q1: What is the primary goal of financial management?
(a) Profit maximization
(b) Wealth maximization
(c) Revenue maximization
(d) Market share maximization
Ans: b

Q2: Which financial statement reflects the financial position of a company at a specific point in time?
(a) Income statement
(b) Cash flow statement
(c) Balance sheet
(d) Statement of changes in equity
Ans: c

Q3: Which financial ratio measures a company's ability to meet its short-term obligations?
(a) Return on investment (ROI)
(b) Current ratio
(c) Debt to equity ratio
(d) Gross profit margin
Ans: b

Q4: What is the purpose of financial planning in an organization?
(a) To increase expenses
(b) To reduce profits
(c) To achieve financial goals
(d) To complicate decision-making
Ans: c

Q5: Which financial instrument represents ownership in a corporation?
(a) Bonds
(b) Debentures
(c) Equity shares
(d) Preference shares
Ans: c

Very Short Answers

Q1: Define working capital.
Ans: Working capital refers to the capital required to fund a company's day-to-day operational expenses, such as raw materials, salaries, and utility bills. It is calculated as the difference between current assets and current liabilities.

Q2: Explain the concept of 'Time Value of Money'.
Ans: The 'Time Value of Money' is a financial concept that suggests the value of money changes over time. It recognizes that a sum of money today has a different value than the same sum in the future due to factors like inflation, opportunity cost, and risk.

Q3: List any five sources of short-term finance.
Ans: i. Bank overdraft
ii. Trade credit
iii. Commercial paper
iv. Factoring
v. Short-term loans

Q4: Differentiate between fixed capital and working capital. 
Ans: Fixed capital refers to the funds invested in long-term assets, such as land, buildings, and machinery. Working capital, on the other hand, represents the capital required for day-to-day operations and is the difference between current assets and current liabilities.

Q5: What is the significance of the 'Dividend Decision' in financial management?
Ans: The 'Dividend Decision' involves determining the proportion of profits distributed to shareholders as dividends and retained for reinvestment. It impacts shareholder wealth, corporate image, and the availability of funds for future projects.

Short Answers 

Q1: Discuss the importance of financial ratios in evaluating a company's performance.
Ans: Financial ratios provide insight into a company's financial health and performance. They help assess profitability, liquidity, solvency, and efficiency. For example, the return on investment (ROI) ratio indicates the company's profitability, while the current ratio reflects its short-term liquidity.

Q2: Explain the factors influencing the capital structure of a company.
Ans: The capital structure of a company is influenced by factors like financial leverage, cost of capital, risk tolerance, and market conditions. Striking a balance between debt and equity ensures optimal capital structure, impacting the firm's stability and profitability.

Q3: Elaborate on the role of financial planning in minimizing business risks.
Ans: Financial planning helps identify potential risks by analyzing financial data. It enables businesses to create contingency plans, allocate resources efficiently, and make informed decisions. Effective financial planning minimizes uncertainties, ensuring the company's resilience in challenging situations.

Q4: Discuss the steps involved in the capital budgeting process.
Ans: i. Identification of investment opportunities
ii. Estimation of cash flows
iii. Evaluation of project profitability using techniques like NPV and IRR
iv. Selection of projects based on financial viability
v. Post-implementation review and adjustment

Q5: Examine the role of financial markets in facilitating economic growth.
Ans: Financial markets provide a platform for buying and selling financial instruments. They allocate capital efficiently, enable risk management, and foster economic growth by channeling funds from savers to borrowers. The markets contribute to price discovery and liquidity, essential for a thriving economy.

Long Answers 

Q1: Discuss the objectives and importance of financial management in a business organization.
Ans: Objectives of Financial Management:
i. Profit maximization
ii. Wealth maximization
iii. Efficient allocation of resources
iv. Ensuring liquidity and solvency
v. Mitigating financial risks
Importance:
Financial management ensures optimal resource utilization, strategic decision-making, risk mitigation, and long-term sustainability. It aligns financial goals with overall business objectives, promoting stability and growth.

Q2: Explain the concept of working capital cycle and its significance for business operations.
Ans: Working Capital Cycle:
The working capital cycle represents the time taken to convert cash into raw materials, finished goods, sales, and finally, cash again. It includes the cash conversion cycle and operating cycle.
Significance:
A shorter working capital cycle enhances liquidity, reduces financing costs, and improves operational efficiency. It ensures the continuous flow of funds, supporting day-to-day business operations.

Q3: Describe the factors influencing dividend policy decisions in a company. 
Ans: Factors Affecting Dividend Policy:
i. Profitability
ii. Cash flow
iii. Retained earnings
iv. Growth prospects
v. Shareholder expectations
vi. Tax considerations
A well-defined dividend policy strikes a balance between rewarding shareholders and retaining funds for future growth, considering these factors.

Case-Based Questions

Q1: Case 1: Working Capital Management
ABC Ltd. is facing challenges in managing its working capital efficiently. Answer the following sub-questions:
Evaluate the consequences of ineffective working capital management on ABC Ltd.'s financial performance.
Ans: Ineffective working capital management can lead to liquidity issues, increased borrowing costs, and disruptions in production. It may result in missed investment opportunities and impact the overall financial health of the company.
Suggest measures that ABC Ltd. can adopt to improve its working capital management.
i. Negotiate favorable credit terms with suppliers
ii. Streamline inventory management
iii. Optimize receivables collection
iv. Explore alternative financing options
v. Implement efficient cash flow forecasting

Q2: Explain the role of financial ratios in assessing ABC Ltd.'s working capital position.
Ans: Utilize ratios like the current ratio, quick ratio, and inventory turnover to evaluate ABC Ltd.'s liquidity, efficiency, and ability to meet short-term obligations. These ratios provide insights into the effectiveness of working capital management.
Case 2: Capital Budgeting Decision
XYZ Ltd. is considering two investment projects: Project A and Project B. Answer the following sub-questions:
Evaluate the financial viability of Project A and Project B using the Net Present Value (NPV) method.
Calculate the NPV for each project by subtracting the initial investment from the present value of expected cash flows. A positive NPV indicates a financially viable project.

Q3: Discuss the importance of considering the time value of money in capital budgeting decisions.
Ans: Recognizing the time value of money is crucial in capital budgeting as it accounts for the opportunity cost of capital over time. It ensures that future cash flows are appropriately discounted to present value, aiding in accurate investment decision-making.
Recommend the project that XYZ Ltd. should undertake based on your analysis.
Compare the NPV, Internal Rate of Return (IRR), and payback period for both projects. Recommend the project with the highest NPV and IRR, and a reasonable payback period.
Case 3: Dividend Policy Dilemma
LMN Ltd. is contemplating its dividend policy. Answer the following sub-questions:
Examine the factors LMN Ltd. should consider while determining its dividend payout ratio.
Consider factors such as profitability, cash flow, growth opportunities, and shareholder expectations when determining the dividend payout ratio. Striking a balance between rewarding shareholders and retaining funds for growth is crucial.

Q4: Discuss the impact of LMN Ltd.'s dividend policy on its shareholders and overall financial health.
Ans: The dividend policy affects shareholder wealth, market perception, and the company's ability to fund future projects. A well-structured policy aligns with the company's growth strategy and enhances investor confidence.
Propose a dividend policy for LMN Ltd. based on your analysis.
Recommend a dividend policy that reflects LMN Ltd.'s financial position, growth prospects, and shareholder expectations. Consider a balanced approach that satisfies both the company's need for reinvestment and shareholders' desire for returns.