NCERT Questions for Class 12 Business Studies Chapter 9 – Financial Management

Important Questions with Solutions of Class 12 Business Studies Chapter 9 – Financial Management

1) List any four elements that have an impact on a company’s working capital needs.

Ans – The following elements have an impact on working capital requirements:

A. Business Aspect: A firm’s core characteristics influence how much working capital it needs. For instance, a trade company needs minimal working capital over a manufacturing company.

B. Operational Scale: Because a huge industry wants more working capital than a small organization, it will need more inventory.

C. Business Journey: Additional manufacturing operations are done when the economy is doing well, which means more working capital is needed than when it declines.

D. Seasonal Indicators: A commodity will require more working capital during busy times due to higher demand than during the dry seasons.

2) ‘Best Bulbs Private Ltd. was creating commendable quality LED bulbs and accomplishing the demands of local consumers. The ongoing firm production is estimated at 800 bulbs per day. Mr. Sumit, the marketing head/manager of the organization monitored the market dynamics and planned to send the bulbs to 5-star hotels as well. He expected extensive demand in the future and planned to purchase a highly advanced system to enhance the quality & quantity of the total bulbs created. Locate the major areas related to fixed capital demands of the firm.

Ans – The factor assuming a firm’s fixed capital demands is called ‘Growth Prospects’. Maximum output, increased sales, extensive input values, and more can be linked to a company’s growth and expansion of their organization. This forces people to incorporate highly advanced machinery devices. In the end, firms with robust growth ability need highly fixed capital, and vice versa. Extensive growth prospects might end up being massive fixed capital demands, whereas least growth prospects may end in fewer fixed capital demands.

3) Each manager must make 3 major decisions while opting for the finance operation. Give a detailed explanation of them.

Ans – A management should create 3 vital decisions. It includes,

• Monetary Decision: This includes deciding how much money should be generated, selecting from multiple short & long-term funding sources, and determining which source of funding is most suitable.
• Investment Decision: The sensible distribution of a company’s resources over various alternative offerings with the lowest cost & highest return is referred to as an investment decision.
• Dividend Decision: The choice of whether to retain earnings to monetize the company’s long-term initiatives or to pay rewards to shareholders is known as the dividend decision.

4) Mention in detail any 4 vital points that influence the working capital demand of a firm.

Ans – The factors influencing an organization’s working capital demands are depicted below.

The price value of total debt depicts the effective interest rate at which a business shares its money on its loans & bonds.

• Business Category: Compared to enterprises that make things, those that trade or offer services (the ones that have a short operational cycle) demand less working capital. Because the sales activity occurs instantly in the service and trade firm and the initial supplies are often the same as the final outputs, the working capital requirements are minimal. Meanwhile, a manufacturing business has a lengthy operational phase and requires a significant amount of working capital since raw materials must be transformed into finished items before they can be sold. Businesses that provide services or trade have low working capital demands, whereas manufacturing firms have substantial working capital needs.
• Credit reaches the company’s capacity: The total amount of debtors increases when a company has a favourable lending policy. As a result, the business needs more working cash. Conversely, a stringent lending policy reduces the requirement for working capital. A corporation that wants to have a flexible lending policy needs extensive working capital. On the other hand, minimal working capital requirements result from a rigorous lending strategy.
• The Level of Raw Material Availability: The organization doesn’t need an extensive raw material inventory if the basic supplies it needs are readily available. The firm’s working capital needs are decreased in these situations. The business must have a substantial store of raw materials on hand to ensure continuous operations when their supply is irregular or not easily accessible, which would need an ample amount of working capital. Therefore, working capital needs are low if raw materials are easily accessible. However, a large demand for working capital will arise if acquiring raw materials is challenging.
• Scope of Management: Large-scale businesses need a lot of working capital. It’s because these companies have to maintain a sizable inventory of goods and debts. Meanwhile, less working capital is needed when the business’ extent is constrained. Massive enterprises thus require a significant quantity of working capital. A limited amount of working capital is required while operating on a tight budget.

5) At a predicted price of 50 lakhs INR, the directors of a firm have made the decision to increase the pile of completed items and raw materials in order to grow their commercial functionalities. Mention the different options available to the business to elevate the funds required for the project.

Ans – The business can use the roles that follow to raise the funds required for development.

• Problem of Interests: The issue of shares is the process by which companies give out more shares to their investors. Shareholders might be either businesses or people in general. The corporation complies with the guidelines established by the Companies Act of 2013 while issuing shares. The distribution of prospectuses, the acceptance of applicants, and the giving away of stocks are the 3 essential processes in the stock issuance operation.
• Debenture Problem: The phrase “issuing debentures” describes the process by which a business issues an acknowledgment bearing its stamp acknowledging its obligation. A company providing debentures follows an identical process to offering equity. Assignment notices are distributed, applications are accepted, and an advertisement is issued.
• Bank & Financial Services Loans: Because of their enormous currency assets, banks dominate all segments of the financial markets, including credit, cash, securities, foreign exchange, and contracts. A nation’s economic progress is determined by the expansion of its commercial industry. A solid financial framework helps firms expand by providing them with access to capital.
• Retained Profits: This concept is essential to accounting. The term describes a business’s prior earnings less whatever dividends it paid earlier. The word “retained” describes the fact that the firm maintained its revenues rather than paying them out as rewards to investors.

6) Silkiya Limited is a business that produces silk fabric. For years, it has continuously generated healthy earnings. It has managed to earn an adequate amount of money for the current year as well. The business has adequate cash on hand and promising future development potential. It is a well-run company that values fair compensation, excellence, and equal job opportunities. Many of its investors would rather have a consistent dividend from their capital. As stated in the conditions of the financial contract, it is subject to various limitations on dividend payments after taking out a financial loan from the State Bank of India valuing over 60 lakhs INR. The aforementioned firm debate results in a number of elements that determine the amount of income the organization must split while deciding how much might be kept for itself.

Describe any 4 of these variables using quotes from the article mentioned above.

Ans – The alternate options available on dividends have been mentioned in the question. 

The below-choices might impact the dividend decision with their financial quotes:

• Consistent profits: The quantity of dividends that a firm will shell out is decided by its profits. More payouts can be paid to investors by a business with steady and consistent profits than by one with erratic and unequal income.
  Quotation: “It has been reliably producing substantial revenues throughout the years,” the statement reads.
• Future development Opportunities: Businesses that have higher potential for future development typically set aside a larger portion of their profits for investing in the future. They thus give out less rewards.
  Quotation: “The corporation has enough cash on hand and assures you of the chances for future expansion moving front.”
• Investor Opinions: The choices of stockholders must be considered while determining dividends. For instance, the business might declare that investors desire a specified number of profits to be distributed.
  Quotation: “Most stockholders would rather get an ongoing revenue from their assets.”
• Regulatory limitations: A business’s capacity to issue dividends is also influenced by the legal constraints imposed by the outside world. The business must pay out dividends in compliance with the limitations, guidelines, and laws to which it is subject.
  Quotation: “It has taken loans of over 60 lakhs from SBI and can have some restrictions on dividend payments based on the timeline of the financial setups.”