KENDRIYA VIDYALAYA SANGATHAN, DELHI REGION (SESSION ) BUSINESS STUDIES (054) CLASS : XII NOTES

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1 KENDRIYA VIDYALAYA SANGATHAN, DELHI REGION (SESSION ) BUSINESS STUDIES (054) CLASS : XII NOTES Please Note: (i) These Notes are strictly based on NCERT Text Book in the subject Business Studies for class XII. (ii) Text in Bold is MLL for Low Achievers. (iii) The whole text should be studied by Bright Students to create better understanding of the topic and answering Case Studies. BUSINESS FINANCE MEANING OF BUSINESS FINANCE Money required for carrying out business activities is called business finance. FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT ROLE of Financial Management Financial Management is concerned with optimal procurement as well as usage of finance. For optimal procurement, different available sources of finance are identified and compared in terms of their costs and associated risks. The finance so procured needs to be invested in a manner that the returns from the investment exceed the cost at which procurement has taken place. It also aims at ensuring availability of enough funds whenever required as well as avoiding idle finance. Financial Management aims at reducing the cost of funds procured, keeping the risk under control and achieving effective deployment of such funds. The financial statements such as Balance Sheet and Profit and Loss Account reflect a firm s financial position and its financial health. Almost all items in the financial statements of a business are affected directly or indirectly through some financial management decisions. Some prominent examples of the aspects being affected could be as under whereby, Financial Management decides: (i) The size as well as the composition of Fixed Assets of the business. (ii) The quantum of Current Assets as well as its break-up into cash, inventories and receivables. (iii) The amount of long term and short term financing to be used. (iv) (v) Break-up of long term financing into debt, equity etc. All items in the Profit and Loss Account e.g., Interest, Expense, Depreciation etc. In other words it can, thus, be stated that the financial statements of a business have been largely determined by financial management decisions taken earlier. Thus, the overall financial health of a business is determined by the quality of its financial management. Good financial management aims at mobilisation of financial resources at a lower cost and deployment of these in most lucrative activities. 1 P a g e

2 OBJECTIVE of Financial Management Primary aim of financial management is to maximise shareholder s wealth, which is referred to as the wealth maximisation concept. Shareholders Wealth= No. of Equity Shares x Market Price per Share A company funds belong to the shareholders and the manner in which they are invested and the return earned by them determines their market value or price. In all financial decisions, major or minor, the ultimate objective that guides the decisionmaker is that some value addition should take place so that the market price of equity shares is maximised. It can happen through efficient Financial (Financing, Investing and Dividend) Decision- making. Decision-making is efficient if, out of various available alternative the best is selected. FINANCIAL DECISIONS Meaning Investment Decision Factors affecting Capital Budgeting Decision It means the selection of best financing alternative or best investment alternative. Financial decision-making is concerned with three broad decisions which are as under: (i) Investment Decision (ii) Financing Decision (iii) Dividend Decision Meaning: A firm has to choose where to invest these resources, so that they are able to earn the highest possible return for their investors. The investment decision, therefore, relates to how the firm s funds are invested in different assets. Types: Investment decision can be long-term or short-term. (1) A long-term investment decision is also called a Capital Budgeting decision. It involves committing the finance on a long-term basis. For example, making investment in a new machine. These decisions are very crucial for any business since they affect its earning capacity over the long run. The size of assets, the profitability and competitiveness are all affected by the capital budgeting decisions. Moreover, these decisions normally involve huge amounts of investment and are irreversible except at a huge cost. Therefore, once made, it is often almost impossible for a business to wriggle out of such decisions. Therefore, they need to be taken with utmost care obviously. (2) Short term investment decisions (also called working capital decisions) are concerned with the decisions about the levels of cash, inventories and debtors. These decisions affect the day to day working of a business. These affect the liquidity as well as profitability of a business. Efficient cash management, inventory management and receivables management are essential ingredients of sound working capital management. There are certain factors which affect capital budgeting decisions: (a) Cash flows of the project: When a company takes an investment decision, it results in some cash flows (inflow or outflow) over a period. The amount of these cash flows should be carefully analysed before considering a capital budgeting decision. (b) The rate of return: The most important criterion is the rate of return of the project. These calculations are based on the expected returns from each proposal and the assessment of risk involved. Alternative with highest Rate of Return should be opted. (c) The investment criteria involved: There are different techniques to evaluate investment proposals which are known as capital budgeting techniques. These techniques are applied to each proposal before selecting a particular project. 2 P a g e

3 Financing Decision Meaning: This decision is about the quantum of finance to be raised from various longterm sources (short-term sources are studied in working capital management). It determines the overall cost of capital and the financial risk of the enterprise. It involves identification of various available sources. The main sources of funds for a firm are shareholders funds and borrowed funds. Shareholders funds refer to equity capital and retained earnings. Borrowed funds refer to finance raised as debentures or other forms of debt. Interest and Principal of Borrowed Funds have to be repaid at a fixed time. The risk of default on payment is known as Financial Risk. Debt is considered the cheapest of all sources, tax deductibility of interest makes it still cheaper. The fund raising exercise also costs something. This cost is called floatation cost. Factors Affecting Financing Decision Dividend Decision Factors Affecting Dividend Decision 3 P a g e The financing decisions are affected by various factors. Some of the important factors are as follows: (a) Cost: A financial manager would normally opt for a source which is the cheapest. (b) Risk: The risk associated with different sources is different. Decision should be taken accordingly. (c) Floatation Costs: Higher the floatation cost, less attractive the source. (d) Cash Flow Position of the Business: A stronger cash flow position may make debt financing more viable than funding through equity. (e) Level of Fixed Operating Costs: If a business has high level of fixed operating costs (e.g., Building rent, Insurance premium, Salaries etc.), it must opt for lower fixed financing costs. (f) Control Considerations: Issues of more equity may lead to dilution of management s control over the business. Companies afraid of a takeover bid may consequently prefer debt to equity. (g) State of Capital Markets: During the period when stock market is rising, more people are ready to invest in equity. However, depressed capital market may make issue of equity shares difficult for any company. Meaning: The decision involved here is how much of the profit earned by company (after paying tax) is to be distributed to the shareholders as dividend and how much of it should be retained in the business for meeting the investment requirements. The decision regarding dividend should be taken keeping in view the overall objective of maximising shareholder s wealth. Some of the important factors are discussed as follows: (a) Earnings: Dividends are paid out of current and past earning. Therefore, earnings is a major determinant of the decision about dividend. (b) Stability of Earnings: A company having stable earning is in a position to declare higher dividends. (c) Stability of Dividends: It has been found that the companies generally follow a policy of stabilizing dividend per share. Dividend per share is not altered if the change in earnings is small or seen to be temporary in nature. (d) Growth Opportunities: Companies having good growth opportunities retain more money out of their earnings declaring less dividend so as to finance the required investment. (e) Cash Flow Position: Availability of enough cash in the company is necessary for declaration of dividend by it. (f) Shareholder Preference: While declaring dividends, managements usually keep in mind the preferences of the shareholders in this regard. If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same.

4 (g) Taxation Policy: If tax on dividend is higher it would be better to pay less by way of dividends. As compared to this, higher dividends may be declared if tax rates are relatively lower. (h) Stock Market Reaction: Investors, in general, view an increase in dividend as a good news and stock prices react positively to it. Thus, the possible impact of dividend policy on the equity share price should be considered by the management while taking a decision about it. (i) Access to Capital Market: Small companies have low access to Capital Market resulting more dependency on retained earnings for their growth. So, they have to declare less dividend in comparison to big companies which have easy access to Capital Market. (j) Legal Constraints: Certain provisions of the Company s Act place restrictions on payouts as dividend. Such provisions must be adhered to while declaring the dividends. (k) Contractual Constraints: While granting loans to a company, sometimes the lender may impose certain restrictions on the payment of dividends in future. The companies are required to ensure that the dividends does not violate the terms of the loan agreement in this regard. FINANCIAL PLANNING Meaning Objectives Difference between Financial Management and Financial Planning Other important aspects of Financial Planning Financial planning is essentially preparation of a financial blueprint of an organisation s future operations. Financial planning strives to achieve the following twin objectives: (a) To ensure availability of funds whenever these are required: This include a proper estimation of the funds required for different purposes such as for the purchase of longterm assets or to meet day to-day expenses of business etc. Apart from this, there is a need to estimate the time at which these funds are to be made available. If adequate funds are not available the firm will not be able to honour its commitments and carry out its plans. (b) To see that the firm does not raise resources unnecessarily: Excess funding is almost as bad as inadequate funding, it will unnecessarily add to the cost and may encourage wasteful expenditure. Financial Management Financial Planning 1. Financial management aims at Financial planning on the other hand aims at choosing the best investment and financing alternatives by focusing on their costs and benefits. smooth operations by focusing on fund requirements and their availability in the light of financial decisions. 2. Its objective is to increase the shareholders wealth. Its objective is to (i) ensure availability of funds whenever these are required and; (ii) to see that the firm does not raise resources unnecessarily Financial planning includes both short-term as well as long-term planning. Long-term planning relates to long term growth and investment. It focuses on capital expenditure programmes. Short-term planning covers short-term financial plan called budget. Typically, financial planning is done for three to five years. For longer periods it becomes more difficult and less useful. Plans made for periods of one year or less are termed as budgets. Financial planning usually begins with the preparation of a sales forecast. 4 P a g e

5 Importance Financial Planning aims at enabling the company to tackle the uncertainty in respect of the availability and timing of the funds and helps in smooth functioning of an organisation. The importance of financial planning can be explained as follows: 1. It tries to forecast what may happen in future under different business situations. By doing so, it helps the firms to face the eventual situation in a better way. In other words, it makes the firm better prepared to face the future. 2. It helps in avoiding business shocks and surprises and helps the company in preparing for the future. 3. It helps in co-ordinating various business functions e.g., sales and production functions, by providing clear policies and procedures. 4. Detailed plans of action prepared under financial planning reduce waste, duplication of efforts. 5. It tries to link the present with the future. 6. It provides a link between investment and financing decisions on a continuous basis. 7. By spelling out detailed objectives for various business segments, it makes the evaluation of actual performance easier. CAPITAL STRUCTURE Meaning Other important aspects of Capital Structure Financial Risk Financial Leverage Capital structure refers to the mix between owners and borrowed funds. It can be calculated as debt-equity ratio i.e.,debt/equity. Deciding about the capital structure of a firm involves determining the relative proportion of various types of funds. 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. On the basis of ownership, the sources of business finance can be broadly classified into two categories viz., owners funds and borrowed funds. Owner s funds consist 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. Financial risk is the chance that a firm would fail to meet its payment obligations. 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. Higher use of debt increases the fixed financial charges of a business. As a result, increased use of debt increases the financial risk of a business. The proportion of debt in the overall capital is also called financial leverage. Financial leverage is computed as D/ E or D/ (D+ E) when D is the Debt and E is the Equity. As the financial leverage increases, the cost of funds declines because of increased use of cheaper debt. 5 P a g e

6 Trading on Equity Trading on Equity refers to the increase in profit earned by the equity shareholders due to the presence of fixed financial charges like interest. Debt and equity differ significantly in their cost and riskiness for the firm. Cost of debt is lower than cost of equity for a firm because lender s risk is lower than equity shareholder s risk, since lenders earn on assured return and repayment of capital and, therefore, they should require a lower rate of return. Additionally, interest paid on debt is a deductible expense for computation of tax liability whereas dividends are paid out of after-tax profits. Increased use of debt, therefore, is likely to lower the overall cost of capital of the firm. Understanding the concept of Trading on Equity with the help of an example: Name of Company Adarsh Private Limited Total Capital Employed Rs. 60,00,000 Earning before Tax Rs. 8,00,000 Tax Rate 30% Capital Structure Option I Option II Option III Equity 10 Rs. 60,00,000 Rs. 40,00,000 Rs. 20,00,000 10% Bank Loan/ Debentures NIL Rs. 20,00,000 Rs. 40,00,000 EBIT Rs. 8,00,000 Rs. 8,00,000 Rs. 8,00,000 Less: Interest Rs. 0 Rs. 2,00,000 Rs. 4,00,000 Earning after Interest Rs. 8,00,000 Rs. 6,00,000 Rs. 4,00,000 Less:Tax Rs. 2,40,000 Rs. 1,80,000 Rs. 1,20,000 Earning after Interest and Tax Rs. 5,60,000 Rs. 4,20,000 Rs. 2,80,000 Earning per Share (EPS) Rs. 5,60,000/ 6,00,000 = Rs Rs. 4,20,000/ 4,00,000 = Rs Rs. 2,80,000/ 2,00,000 = Rs Conclusion: From the above example it can be concluded that higher the debt, higher is the Earning per Share provided that the ROI is higher than the cost of Debt. The companies prefer to employ cheaper debts to enhance the earning per share. This practice is called Trading on Equity. 6 P a g e

7 Factors affecting the Choice of Capital Structure Important factors which determine the choice of capital structure are as follows: 1. Cash Flow Position of the Business: A stronger cash flow position may make debt financing more viable than funding through equity. 2. 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. This may be calculated as follows: ICR =EBIT/Interest. More debt can be raised in case of high ICR. 3. Debt Service Coverage Ratio (DSCR): A higher DSCR indicates better ability to meet cash commitments and consequently, the company s potential to increase debt component in its capital structure. 4. Return on Investment (RoI): If the RoI of the company is higher, it can choose to use trading on equity to increase its EPS 5. Cost of debt: More debt can be used if debt can be raised at a lower rate. 6. Tax Rate: Since interest is a deductible expense, cost of debt is affected by the tax rate. A higher tax rate makes debt relatively cheaper and increases its attraction vis-à-vis equity. 7. Cost of Equity: Stock owners expect a rate of return from the equity which is commensurate with the risk they are assuming. When a company increases debt, the financial risk faced by the equity holders, increases. Consequently, their desired rate of return may increase. It is for this reason that a company cannot use debt beyond a point. 8. Floatation Costs: Process of raising resources also involves some cost which is called Floatation Cost. Public issue of shares and debentures requires considerable expenditure. Getting a loan from a financial institution may not cost so much. These considerations may also affect the choice between debt and equity and hence the capital structure. 9. Risk Consideration: Financial risk refers to a position when a company is unable to meet its fixed financial charges namely interest payment, preference dividend and repayment obligations. Apart from the financial risk, every business has some operating risk (also called business risk). Business risk depends upon fixed operating costs. If a business has low Operating Risk, the capacity to use debt is higher and vice-versa. 10. Control Considerations: Issues of more equity may lead to dilution of management s control over the business. Companies afraid of a takeover bid may consequently prefer debt to equity. 11. Regulatory Framework: Every company operates within a regulatory framework provided by the law e.g., public issue of shares and debentures have to be made under SEBI guidelines. These norms also have a bearing upon the choice of the source of finance. 12. Stock Market Conditions: If the stock markets are bullish, equity shares are more easily sold even at a higher price. Use of equity is often preferred by companies in such a situation. 13. Capital Structure of other Companies: A useful guideline in the capital structure planning is the debt equity ratios of other companies in the same industry. FIXED CAPITAL Fixed Capital 7 P a g e Meaning: Fixed capital refers to investment in long-term assets. Investment in these assets would include expenditure on acquisition, expansion, modernization and their replacement. These decisions include purchase of land, building, plant and machinery, launching a new product line or investing in advanced techniques of production. Major expenditures such as those on advertising campaign or research and development programme having long term implications for the firm are also examples of capital budgeting decisions.

8 Importance of Management of Fixed Capital or Capital Budgeting Decisions Factors affecting the Requirement of Fixed Capital These decisions are called investment decisions or capital budgeting decisions and affect the growth, profitability and risk of the business in the long run. It must be financed through long-term sources of capital such as equity or preference shares, debentures, long-term loans and retained earnings of the business. The management of fixed capital or investment or capital budgeting decisions are important for the following reasons: (a) Long-term growth and effects: The funds invested in long-term assets are likely to yield returns in the future. These affect future possibilities and prospects of the business. (b) Large amount of funds involved: These decisions result in a substantial portion of capital funds being blocked in long-term projects. (c) Risk involved: Investment decisions involving fixed capital influence the overall business risk complexion of the firm. (d) Irreversible decisions: These decisions once taken, are not reversible without incurring heavy losses. Therefore, these decisions should be taken only after carefully evaluating each detail or else the adverse financial consequences may be very heavy. 1. Nature of Business: A trading concern needs lower investment in fixed assets compared with a manufacturing organisation; since it does not require to purchase plant and machinery etc. 2. Scale of Operations: A larger organisation operating at a higher scale needs bigger plant, more space etc. and therefore, requires higher investment in fixed assets when compared with the small organisation. 3. Choice of Technique: A capital-intensive organisation requires higher investment in plant and machinery as it relies less on manual labour. The requirement of fixed capital for such organisations would be higher. Labour intensive organisations on the other hand require less investment in fixed assets. Hence, their fixed capital requirement is lower. 4. Technology Upgradation: Organisations which use assets which are prone to obsolescence require higher fixed capital to purchase such assets. 5. Growth Prospects: Higher growth of an organisation generally requires higher investment in fixed assets consequently higher fixed capital. 6. Diversification: A firm may choose to diversify its operations for various reasons, With diversification, fixed capital requirements increases. 7. Financing Alternatives: Availability of leasing facilities, may reduce the funds required to be invested in fixed assets, thereby reducing the fixed capital requirements. Such a strategy is especially suitable in high risk lines of business. 8. Level of Collaboration: At times, certain business organisations share each other s facilities. For example, a bank may use another s ATM Such collaboration reduces the level of investment in fixed assets. WORKING CAPITAL MEANING Working capital may be defined as the excess of current assets over current liabilities. Some part of current assets is usually financed through short-term sources, i.e., current liabilities. The rest is financed through long-term sources and is called net working capital. Thus, NWC = CA CL i.e. Current Assets - Current Liabilities. 8 P a g e

9 FACTORS AFFECTING THE WORKING CAPITAL REQUIREMENTS Other Important Aspects regarding requirement of Working Capital 1. Nature of Business: A manufacturing concern requires more amount of working capital due to huge amount stuck in inventory. On the other hand a Trading Concern will require less working capital as there is no process of raw material. Besides, Service industries will also require very less working capital as they don t maintain any inventory. 2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital. 3. Business Cycle: In case of a boom, the sales as well as production are likely to be higher and therefore, higher amount of working capital is required or vice-versa. 4. Seasonal Factors: In peak season, because of higher level of activity, higher amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during 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 Allowed: A liberal credit policy results in higher amount of debtors, increasing the requirement of working capital. 7. Credit Availed: If the credit availed period is long, the working capital requirement is reduced. 8. Operating Efficiency: High operating efficiencies may reduce the level of raw materials, finished goods and debtors resulting in lower requirement of working capital. 9. Availability of Raw Material: If the raw materials and other required materials are available freely and continuously, lower stock levels may suffice and no need to block huge amount of working capital in stock. 10. Growth Prospects: If the growth potential of a concern is perceived to be higher, it will require higher amount of working capital so that is able to meet higher production and sales target whenever required. 11. Level of Competition: Higher level of competitiveness may necessitate higher stocks of finished goods to meet urgent orders from customers. This increases the working capital requirement. 12. Inflation: With rising prices, higher amounts are required even to maintain a constant volume of production and sales. The working capital requirement of a business thus, become higher. A firm managing its raw materials efficiently may be able to manage with a smaller balance. This is reflected in a higher inventory turnover ratio. Similarly, a better debtors turnover ratio may be achieved reducing the amount tied up in receivable. Better sales effort may reduce the average time for which finished goods inventory is held. Such efficiencies may reduce the level of raw materials, finished goods and debtors resulting in lower requirement of working capital. In addition, the time lag between the placement of order and actual receipt of the materials (also called lead time) is also relevant. Higher the lead time, higher the quantity of material to be stored and higher is the amount of working capital requirement. KENDRIYA VIDYALAYA SANGATHAN Financial management 9 P a g e

10 Multiple Choice Questions. (1) The cheapest source of finance is: (a) Debenture; (b) Equity share capital (c) Preference share capital; (d) Retained earnings (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 (3) Companies with higher growth potential are likely to : (a) Pay lower dividends ; ( b) pay higher dividends (c)dividends are not affected by growth considerations; (d) None of the above (4) Financial leverage is called favorable if: (a) Return on investment is lower than cost of debt; (b) ROI is higher than cost of debts; (c) Debts is nearly available; (d) If the degree of existing finance leverage is low (5) Current Assets are those assets which get converted into cash: (a) Within six month; (b) Within one year; (c) Between one and three years; (d) Between three and five years Very Short Answer Type Questions: Q.6- What are the two types of source of finance? Ans.6 (1) Owners funds (Equity); (2) Borrowed funds (Debt) Q.7- Name the concept which increases the return on equity shares with a change in the capital structure of a company. Ans.7- Trading on equity or Financial leverage. Q.8- Delta Cables Ltd. Earned a net profit of Rs.80 crores. Manas, the finance manager of Delta Cables Ltd. wants to decide how to appropriate these profits. Which financial decision will help him in deciding it? Ans.8- Dividend decision Q.9- Big bazaar plans to open a new branch in the festive season. Discuss the type of decision indicated in the given statement. Ans.9- Investment decision. Q.10- MarutiUdyog plans to manufacture Solar Cars in its new plant. It has an offer from Suzuki for collaboration. Will collaboration affect the requirement of fixed capital for MarutiUdyog? Ans.10- Yes, Collaboration will reduce the requirement of fixed capital for MarutiUdyog. SHORT ANSWER TYPE QUESTIONSQ.no (3 marks) and Q. no (4 marks). Q.11- Explain the objectives of Financial Planning. Ans.11- Financial planning aims to achieve the following two objectives (i) (ii) To ensure availability of funds whenever required To ensure unnecessarily finance is not raised Q.12-Explain briefly any three factors that determining the capital structure of a company. Ans.12-Factor affecting /determining capital structure are: (i) (ii) (iii) Cash flow position Interest coverage ratio Return on investment 10 P a g e

11 Q.13- What is meant by financial planning? State any two points of importance of financial planning. Ans.13-Financial planning is the process of estimating the fund requirement, specifying the sources of funds and utilizing them in an optimum manner. Importance of financial planning : (i) (ii) It helps in avoiding business shocks and surprises. Provide link between investment and financing decisions. Q.14-State the objectives of financial management. Ans.14-The most important objective is to maximize the wealth of equity shareholders. This objectives helps in achieving other objective, such as maximization of profit, optimum use of funds.etc. Q.15- Sound financial management is the key to the prosperity of business. Explain. Ans.15- Sound financial management is the key to the prosperity of business as it ensures: (i) (ii) (iii) Availability of adequate funds whenever required Procurement of funds at reasonable costs Efficient utilization of funds. Q.16- State any four factors which help in determining the working capital requirements of a company. Ans.16- Factors determining working capital are: (i) Nature of business (ii) Scale of operation (iii) Business cycle (iv) Seasonal factors Q.17- What is meant by financial management? State the financial decision taken by the financial manager. Ans.17- Financial management is concerned with management of flow of funds and involves decisions relating to procurement of funds, investment of funds in long term and short term assets and distribution of earning to the owners. Financial decision (i) Investment decisions (ii) Financing decisions (iii) Dividend decisions Q.18-Shivam is engaged in transport business and transports foods and vegetables to the different states. Stating the reason in support of your answer, identify the working capital requirement of Shivam. Shivam also wants to expand and diversify his transport business. Explain any two factors his fixed capital requirements. Ans.18- The working capital would be less as he is engaged in service industries. A service firm needs Less working capital because it sells more on cash basis and do not have to maintain inventory. Factor which will be affect his fixed capital requirements are: (any two) (i) Scale of operation (ii) Growth prospects (iii) Financial alternatives (iv) Diversification Long answers type questions (Q. no five marks,q.no six marks) Q.19-What is meant factors affecting the by Dividend Decision? State any four decisions. Ans.19- Dividend decision involves deciding the amount of profit to be distributed among shareholders and amount of profit to be retained in the business to meet investment requirements. Factors affecting dividend decision: (i) Earnings; (ii)stability of earnings; (iii) Stability of dividends; (d)growth opportunities. Q.20- How much will be the working capital requirement in manufacturing of the following items. (i) Coolers; (ii) Bread; (iii) Sugar; (iv) Furniture manufactured against orders; (v) Motor cars Ans.20-(i) Coolers : It is a seasonal product. So, it requires more working capital during peak season. (ii) Bread :It needs less working capital as product is generally sold for cash. (iii) Sugar: It will require large working capital because of long operating cycle (iv) Furniture manufactured against orders: It requires less working capital as no inventory has to be maintained (v) Motor cars: It will require large working capital due to long operating cycle. Q.21- A company wants to raise 25 lakhs through debt. Issue of debt will increase the debt equity ratio. What are the risks involved in it? Shat other factors, a company should consider before taking the decision? Ans.21- The risks involved are : (a) Interest on debt has to be paid even if company is unable to generate sufficient profits; and (ii)if debts is obtained at rate of interest higher than rate of return on investment, then it will reduce the earning per share of equity shareholders, which will adversely affect the market price of the shares. In addition to above mentioned risks, company should also consider factors affecting the choice of capital structure. 11 P a g e

12 Q.22-What is meant by financial decision? State any four factors affecting financial decision. Ans.22- Financial decision deals with determination of sources of finance, amount to be raised from each source and cost of each sources of finance. Factors affecting financial decision: (i) Cost (ii) Risk (iii) Flotation cost (iv) Cash flow position. Q.23-What is meant by Fixed capital? Describe any four factor which affect the Fixed capital requirements of a company. OR Shiva is engaged in transport business and transports foods and vegetables to the different states, identify the fixed capital requirement of shiva if he wants to expand and diversify his transport business but unable to get the assets on rent.. Stating the reason in support of your answer Ans.23- Fixed capital is the money invested in fixed assets which is to be used over a long period of time. Fixed capital is meant for meeting permanent or long term needs of the business. Factors affectingfixed capital: (i) Nature of business (ii) Scale of operation (iii) Choice of technique (iv) Technology up gradation Q.24- Define the financial planning. Discuss any four points of importance of it. or What is required to tackle the uncertainty in respect of availability & timings of funds? Name the concept involved & explain any three points of its importance Ans.24-Financial planning is the process of estimating the fund requirement, Specifying the sources of funds and fund requirement, specifying she sources of funds and utilizing them in an optimum manner. Importance of financial planning: (i) Prepare for future challenges (ii) Helps in avoiding business shocks and surprises (iii) Helps in coordination (iv) Helps to eliminate wasteful efforts (v) Helps to link present with future Q 25. The size of assets, the profitability and competitiveness are affected by one of the financial decisions. Name and state the decision Ans. Investment decision/ Capital budgeting decision. Investment decision refers to how the firm s funds are invested in different assets so as to earn the highest possible return to the investors. FINANCIAL MARKET Q1. Identify the markets which are highlighted in the following statements. (a) This market directly contributes to capital formalities (b) This market deals in instrument with maturity less than one year. ( c) It deals in medium and long term securities. (d) It is also known as stock exchange and deals in sale and purchase of previously issued securities (e) It requires less investment as value of securities is generally low. (f) Market segment of national stock exchange proving platform for fixed income securities. Ans. (a) Primary market (b) Money market ( c) Capital market (d) Secondary market (e) Capital market (f) Whole sale debt market segment. Q2. Moneymarkets do offer greater liquidity as compared to capital market instruments. Do you agree? Give reasons. Ans Yes, because money market instrument can be converted into cash within year but instruments of capital market can not be converted so easily. Q3. State the two categories into which financial markets are classified? (1) Ans Two categories into which financial markets are classified :- a) Money Market b) Capital Marke Qno 4 Why are financial markets said to perform allocative function? (1) Ans.4 Financial Market are said to perform the allocative function as they channelizes savings of individual investors to finance the needs of industry 12 P a g e

13 Q 5 The directors of a company want to modialise its plans and machinery by making a public issue of shares. They wish to approach stock exchange while the, finance manage prefers to approach a consultant for the new public issue of shares. Advice the directors whether to approach stock exchange or consultant for new public issue of shares and why Ans. I advised the directors to approach the consultant for new public issue of shares mainly because new issue of shares is not possible in a stock exchange as the company is n yet registered with the stock exchange. New issue of shares is done in primary market. They may follow one of the following ways to issue shares: i)offer through prospectus ii)offer for sale iii)private placement iv)e-ipos.qno 6 The electronic book entry form of holding and transferring securities has eliminated the values of theft and forgery. Discuss the concepts indicated in the given statement? Ans. The concept is Dematerialisation of securities. In this the physical form of securities is cancelled in the electronic form of securities is issued to the investors. Such securitie can be stored with depositors by opening a demat account with them. QNO 6. Ravi has 200 shares of reliance industries. Reliance came out with a fresh issue of shares and offered ravi to subscribe for new shares. He was given option to buy one shar every two shares held by him. Name the method of issuing financial instruments. Also state which type of market rates in this type of financial instruments? Ans. Financial instruments is RIGHTS ISSUE. It is traded in primary market. QNO 7 Brite Industries Ltd raises its share capital by allotment to some selected individuals and institutional investors. Name the method chosen by it to raise capital? Ans Private placement Qno8 A stock exchange is a place where financial assets can be converted in to cash. It helps in fixing the market value of securities &helps to know the economic growth of any country. (i)state the functions of stock exchange referred above (ii) state any two other functions of stock exchange Ans(i) provides liquidity, helps in price discovery& economic barometer (ii) Any other functions of stock exchange Qno 9 A company requires Rs 2 crore for inventory, payment of wages & for other such day to day expenses (i) (ii) Suggest which financial market company shoud approach with reasons State the instruments through which demand of cash can be met Ans (i) money market ( as the purpose is to meet short term requirements of cash(ii)commercial bill/certificate of deposits/commercial paper Q NO 10 Why are treasury Bills also called as Zero coupon Bonds? Ans. Treasury bills are also called as Zero Coupon Bonds because they do not carry any interest. They are issued at a prices less than the par value and redeemed at par value. Th difference between the par value and the issue price is considered as the interest amount. QNO 11 How does primary & secondary market promote capital formation? ANS primary market directly promote it by involving savers & investors, secondary market indirectly by giving liquidity Qno 12 Why SEBI is considered as watch dog of securities market Ans Because it performs regulatory & protective functions Qno 13. Identify the institution (a) It provides guidelines for protection to investors. (b) Institution which assists, regulates and controls trading of securities. ( c) Organisation provides storage system for electronic form of securities. (d) Depository established by Bombay Stock Exchange and the Bank of India. Ans. (a) SEBI (b) Stock exchange ( c) Depository (d) The central Depository sources limited (CDSL) Qno 14 What do you mean by bridge financing Ans Commercial paper is a source of bridge financing. Bridge financing refers to short term funds for seasonal and working capital needs. it may be used as an associated source of financing. If a company needs long term finance buy machinery it must raise these finds from the capital market. For this company must incur floatation costs brokerage commission funds used to finance such needs over called bridge financing 13 P a g e

14 Qno 15 AB LTD has sold the Rs 1c lakh equity shares of Rs 10 each at Rs 12 per share to an investment banker, who offered them to the public at Rs 15 per share Identify the markets which are highlighted in the above statements Q 16 State any four methods of floatation of new issues in the primary market. QNO 17 Sakshi Ltd. is a company manufacturing electronic goods. It has ashare capital of 120 lakhs. The earning per share in the previous year was 0.5. For diversification, the company require additional capital of 80lakhs. The company raised funds by issuing 10% debentures for the same. During the current year the company earned profit of 16 lakhs oncapital employed. It paid 40%. (a) State whether the shareholders gained or lost in respect of earningper share on diversification. Show your calculations clearly. (b) Also state any three factors that favour the issue of debentures by thecompany as pan of its capital structure. Ans. (a) Earning per share before diversification: 0.50 Calculation of Earning per share after issue of Debentures: (assuming facevalue of 100 per share) Qno 20 Q. Mission Coach Ltd. is a large and creditworthy company manufacturing coaches for Indian Railways. It now wants to export these coaches to other countries and decides to invest in new hi-techmachines. Since the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equityshares involves huge floatation cost. To meet the expenses of floatation cost, the company decides to tap the money market. (a) Name and explain the money-market instrument the company canuse for the above purpose. (b) What is the duration for which the company can get funds throughthis instrument? (c) State any other purpose for which this instrument can be used. Ans. (a) Commercial paper. It is an instrument issued by large and creditworthy companies to raiseshort term funds at lower rates of interest than the market rates. It is an unsecured, negotiable promissory note with a fixed maturity period. (b) 15 days to one year (c) It can also be used for seasonal and working capital needs. 14 P a g e

15 MARKETING MANAGEMENT Q1:-What is marketing? Explain its features? A: It refers to that process under which valuable goods/services are created, offered and by doing transaction independently, the needs are satisfied. Q2:- What do you mean by marketing management.explain the main steps involved in the process of marketing management? Ans. It refers to the management of all marketing activities. Steps involved in the process of marketing management: (a) Choosing a target market (b) Growing consumers in target market (c) Creating superior values. Q3:-Explain any four functions of marketing? Ans a) Gathering and analising market information. b) Marketing planning. c) Product designing and development. d) Packaging and labeling. e) Branding. f) Pricing of product. Q5:-Discuss the various elements of marketing mix? Ans, 1. PRODUCT MIX : It refers to the combination of all decisions relating to product. These decisions are mainly with regard to dimensions of the product, its branding, packaging, labelling, colour, design, quality, size, etc. 2. PRICE MIX : It refers to all those decisions which are concerned with the price fixation of any product or service. 3. PROMOTION MIX : It refers to informing the customers about the product, persuading them to purchase these products. 4. PLACE MIX : It refers to the combination of all decisions relating to make products available to consumers. Q6:- What do you understand by product mix? Ans. Product mix refers to all the decisions relating to the product. These decisions are meanly with regard to branding, packaging, labeling, colour, design, quality, size, after sale service and weight of the product. BRANDING : It refers to a special word, symbol, letter or the mixture of all these. LABELLING : It refers to designing the label to be put on the package. PACKAGING : It refers to the group of those activities which are related with the designing and production of the containers in which the products are packed. 15 P a g e

16 Q7. What is brand name? State any three factors of good brand name? Ans. It refers to the part of a brand which can be spoken. Factors of a good brand name: a) Simple and short. b) Easily pronounceable. c) Suggestive. d) Distinctive. Q8. Explain any three functions of packaging? Ans. a) Describe the product and specify its content. b) Identification of the product or brand. c) Grading of product. Q9. Describe the different levels of packaging? Ans, a) Primary packaging. b) Secondary packaging. c) Transportation packaging. Q10 :- Determination of the price of the product is influenced by many factors.explain any four factors? Ans. a) Cost of production. b) Demand for product. c) Price of competing firms. d) Purchasing power of the customer. Q11:- what is meant by channels of distribution? Explain the types of the channels of destructions? Ans. It refers to that path through which products reach consumers. Types of levels of channels of distribution: a) Direct channel. b) Indirect channel: i) One level channel ii) Two level channel iii) Three level channel Q12:- Define advertising. Explain the importance of advertising in marketing management? Ans. It refers to paid and non personal communication to a target market from an identified sponsor using communication channels. Importance of advertising: To manufactures: a) Enhancing consumer satisfaction and confidence. b) Helpful in increasing the demand of their product. c) Helpful in facing competition. To society: a) Helpful in generating more employment. b) Helpful in improving the standard of living. 16 P a g e

17 To consumers: a) No fear of exploitation. b) Knowledge of various products. Q13:- advertising mislead costumers and increases the cost of products? Do you agree with this statement? give reasons to support your answer? Ans. Objections to advertisements: a) Adds to cost. b) Undermines social values. c) Confuses the buyers. d) Encourages sale of inferior products. e) Some advertisements are in bad taste. Q14. Define personal selling? Ans. Personal selling refers to contracting prospective buyers of product personally. Q15 Enumerate any good qualities of a good salesman? Ans. Qualities of a good salesman: a) Physical qualities. b) Psychological qualities. c) Technical qualities. d) Good communication skills. Q16. Define public relations. Ans. Public relations refers to a variety of programmes (news, events, publications, sponsorships) to promote and protect the image of a company and its products. Q17. What is meant by Sales Promotion? Give any four techniques of sales promotion. Ans. Sales promotions are those activities which are undertaken to increase sales besides advertising personal selling and publicity. Techniques of sales promotion: a) Rebate. b) Discount. c) Refund. d) Product combination. e) Quantity gift. Q18. What are the roles of public relations? Ans. Role of Public Relations : 1. Smooth functioning of business and achievement of objectives 2. Building corporate image that affects favourably on its products. 3. Build interest in the established product and help in launching a new product Q19. Introducing a scheme of 50%+40% less by a company is an example of which sales promotion technique? Ans. Discount. 17 P a g e CONSUMER PROTECTION

18 Q1:-Mention the act which provides protection to consumers? Ans. Consumer Protection Act, Q2:-What is meant by consumer protection? Ans. Consumer protections refers to the steps taken to protect the consumer against the unfair practices of the producers and the sellers. Q3:- Give the importance of consumer protection? Ans. From the consumers point of view: a) Consumer ignorance. b) Unorganised consumers. c) Widespread exploitation of consumers. From the bussiness point of view: a) Long term interest of bussiness. b) Bussiness uses societies resources. c) Government intervention. Q4. who can file a complain in a consumer court? Ans. a) A consumer. b) Registered consumer association. c) State or central government. Q5:- Explain the rights provided to the consumers by the consumer protection act? Ans. 1. Right to Safety : It is the right to safety against such goods and services as are hazardous to health, life and property of the consumer. 2. Right to be Informed : Consumer has also the right that he should be provided all the information on the basis of which he decides to buy goods or services. Such information relate to quality, purity, potency, standard, date of manufacture, method of use, etc. of the commodity. 3. Right to Choose : Consumer has the full right to buy any good or service of his choice from among the different goods or services available in the market. 4. Right to be Heard : Consumer has the right that his complaint be heard. Under this right, the consumer can file a complaint against all those things which are prejudicial to his interest. 5. Right to Consumer Education : It refers to educate the consumer constantly with regard to their rights. In other words, consumers must be aware of the rights they enjoy against the loss they suffer on account of goods and services purchased by them. 6. Right to Healthy Environment : This right provides consumers, the protection against environmental pollution so that the quality of life is enhanced. Q6 :- Explain in brief any five responsibility of consumers to safeguard their interest? Ans. 1. Consumer must be aware of his rights while buying 18 P a g e