Solution of Chapter 9. Financial Management (NCERT - Business Studies Part-II Book)

What is meant by capital structure?

State the two objectives of financial planning.

Name the concept of financial management which increases the return to equity shareholders due to the presence of fixed financial charges.

Amrit is running a ‘transport service’ and earning good returns by providing this service to industries. Giving reason, state whether the working capital requirement of the firm will be ‘less’ or ‘more’.

Ramnath is into the business of assembling and selling of televisions. Recently he has adopted a new policy of purchasing the components on three months credit and selling the complete product in cash. Will it affect the requirement of working capital? Give reason in support of your answer

What is ‘Financial Risk?’ Why does it arise?

Define ‘Current Assets’. Give four examples of such assets.

What are the main objectives of financial management? Briefly explain.

Financial management is based on three broad financial decisions. What are these?

Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional `80,00,000 for replacing machines with modern machinery of higher production capacity. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was `8,00,000 and total capital investment was `1,00,00,000. Suggest whether issue of debenture would be considered a rational decision by the company. Give reason to justify your answer. (Ans. No, Cost of Debt (10%) is more than ROI which is 8%).

How does working capital affect both the liquidity as well as profitability of a business?

Aval Ltd. is engaged in the business of export of canvas goods and bags. In the past, the performance of the company had been upto the expectations. In line with the latest demand in the market, the company decided to venture into leather goods for which it required specialised machinery. For this, the Finance Manager Prabhu prepared a financial blueprint of the organisation’s future operations to estimate the amount of funds required and the timings with the objective to ensure that enough funds are available at right time. He also collected the relevant data about the profit estimates in the coming years. By doing this, he wanted to be sure about the availability of funds from the internal sources of the business. For the remaining funds, he is trying to find out alternative sources from outside.

a. Identify the financial concept discussed in the above paragraph. Also, state the objectives to be achieved by the use of financial concept so identified. ( Financial Planning).

b. ‘There is no restriction on payment of dividend by a company’. Comment. ( Legal & Contractual Constraints)

What is working capital? How is it calculated? Discuss five important determinants of working capital requirement.

“Capital structure decision is essentially optimisation of risk-return relationship.” Comment.

“A capital budgeting decision is capable of changing the financial fortunes of a business.” Do you agree? Give reasons for your answer?

Explain the factors affecting the dividend decision.

Explain the term ‘Trading on Equity’. Why, when and how it can be used by a company?

‘S’ Limited is manufacturing steel at its plant in India. It is enjoying a buoyant demand for its products as economic growth is about 7%-8% and the demand for steel is growing. It is planning to set up a new steel plant to cash on the increased demand. It is estimated that it will require about Rs. 5000 crores to set up and about Rs 500 crores of working capital to start the new plant.

a. Describe the role and objectives of financial management for this company.

b. Explain the importance of having a financial plan for this company. Give an imaginary plan to support your answer.

c. What are the factors which will affect the capital structure of this company?

d. Keeping in mind that it is a highly capital-intensive sector, what factors will affect the fixed and working capital. Give reasons in support of your answer.