Commerce Exam > Commerce Notes > Business Studies (BST) Class 12 > Indirect, Short and Long Questions And Answers - Financial management
Indirect, Short and Long Questions And Answers - Financial management | Business Studies (BST) Class 12 - Commerce PDF Download
Indirect Questions:
1 “A capital budgeting decision is capable of changing the financial fortune of a business.” Do you agree? Why or why not?
2. Under which situation the EPS of a company falls with increased use of debt? Explain with the help of an example.
3. How does loan components or debentures in the capital structure act as lever to raise the return on equity share capital ?
4. Explain how are the shareholders are likely to gain with the loan component in capital employed with example.
5 What is meant by “Financial Leverage”? How does it affect the capital structure of a company? Explain with the help of an example of favourable financial leverage.
6. Capital structure decision is essentially optimisation of risk-return relationship. Comment
7. 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 ? What factors other than risk do you think the directors should keep in view before taking the decision ?
8. You are the finance manager of a company. The board of directors have asked you to determine the working capital requirement for the company. State the factors that you would take in consideration while determining the requirement of working capital for the company.
9. Discuss the primary objective of Financial Management.
10. “Financial Planning is not equivalent to or substitute for Financial Management” .Do you agree? Explain.
11. What do you mean by Financial Blueprint of Organisation? Discuss its importance.
12. How does working capital affect both the liquidity as well as profitability of a business ?
13. A businessman who wants to start a manufacturing concern, approaches you to suggest him whether the following manufacturing concern would require large or small working capital: (a) Bread (b) Coolers (c) Sugar (d) Motorcar (e) Furniture manufactured against specific orders (f) Locomotives.
14. Debt and Equity differ significantly in terms of cost and risk . How ?
14. Debt and Equity differ significantly in terms of cost and risk . How ?
Answer to indirect question 10
“Financial Planning is not equivalent to or substitute for Financial Management” .Do you agree? Explain.
Answers to NCERT Questions
Short Ans type (Page 265)
Q7 Discuss about working capital affecting both liquidity as well as profitability of a business
Ans. Working capital is excess of current assets over current liabilities.
More Investment in current assets helps in increasing the liquidity of business as compare to Fixed assets as these are converted in to cash or cash equivalents very quickly
Insufficient Investment in current assets make it more difficult for organisation to meet its payment obligations(decreases Liquidity)
But current assets provide little or no returns (they contribute less to profit)as compare to fixed assets
Conclusion:
Balance need to be struck between liquidity and profitability as more working capital increases liquidity but decreases profitability
Long Answer Questions
Q2 Capital Structure decision is essentially optimisation of risk-return relationship.Comment
Ans.Capital structure policy involves a trade-off between risk and return.
· Using more debt raises the riskiness of the firms because payment of interest and return of principal amount is obligatory for business. Any default in meeting these commitments may force business to go in to liquidation
· But a higher propor-tion of debt generally leads to a higher expected rate of return for equity shareholders as EPS increases because of Tading on Equity
· We know that if debt is increased beyond a point , the higher risk associated with greater debt tends to lower the share price .
Conclusion:
Therefore, the optimal capital structure is the one that strikes a balance between risk and return to achieve our ultimate goal of maximizing the price of the equity shares(Wealth maximisation)
The document Indirect, Short and Long Questions And Answers - Financial management | Business Studies (BST) Class 12 - Commerce is a part of the Commerce Course Business Studies (BST) Class 12.
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FAQs on Indirect, Short and Long Questions And Answers - Financial management - Business Studies (BST) Class 12 - Commerce
| 1. What is financial management in commerce? |  |
Ans. Financial management in commerce refers to the process of planning, organizing, directing, and controlling the financial activities of a business organization. It involves making decisions regarding the acquisition, allocation, and utilization of funds to achieve the financial goals of the company.
| 2. What are the main objectives of financial management? | |
Ans. The main objectives of financial management are:
- Maximizing the wealth of shareholders: Financial management aims to increase the value of the shareholders' investment by making profitable investment decisions and distributing dividends.
- Ensuring liquidity: Financial management ensures that the company has sufficient cash and liquid assets to meet its short-term obligations.
- Profit maximization: Financial management strives to maximize the profitability of the company by effectively managing costs and revenues.
- Minimizing risk: Financial management aims to identify and manage financial risks to protect the company from potential losses.
- Efficient utilization of funds: Financial management focuses on utilizing funds in the most efficient manner to generate maximum returns for the company.
| 3. What are the key components of financial management? | |
Ans. The key components of financial management include:
- Financial planning: This involves setting financial goals, determining the financial requirements, and developing strategies to achieve those goals.
- Financial analysis: It involves analyzing the financial statements, ratios, and other financial data to evaluate the financial performance and position of the company.
- Capital budgeting: This involves evaluating and selecting investment projects that are expected to generate long-term benefits and contribute to the growth of the company.
- Working capital management: It involves managing the company's short-term assets and liabilities to ensure smooth operations and sufficient liquidity.
- Risk management: This involves identifying, analyzing, and managing financial risks such as market risk, credit risk, and operational risk.
| 4. What are the sources of finance in financial management? | |
Ans. The sources of finance in financial management include:
- Equity financing: This involves raising funds by issuing shares of the company's stock to investors.
- Debt financing: It refers to borrowing funds from external sources such as banks, financial institutions, or issuing bonds.
- Retained earnings: This involves using the company's profits or retained earnings to finance its activities.
- Venture capital: It involves raising funds from venture capitalists or private equity investors in exchange for a share in the company's ownership.
- Trade credit: This refers to obtaining goods or services on credit from suppliers, allowing the company to delay the payment.
| 5. What are the benefits of effective financial management? | |
Ans. Effective financial management offers several benefits, including:
- Improved profitability: By making informed financial decisions, financial management can enhance the profitability of the company.
- Better cash flow management: Financial management helps in monitoring and managing cash flow effectively, ensuring that the company has sufficient funds to meet its obligations.
- Reduced financial risk: Effective financial management helps in identifying and managing financial risks, reducing the potential impact of adverse events on the company's financial stability.
- Enhanced decision-making: Financial management provides accurate and timely financial information, enabling management to make informed decisions regarding investments, financing, and resource allocation.
- Increased shareholder value: By optimizing financial resources, financial management can increase the value of the company and generate higher returns for the shareholders.
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