AHSEC-CLASS 12 : Business Finance Important Notes for 2023 Exam | HS 2nd Year Business Studies Notes

AHSEC Class 12 Business Studies Chapter 9 : Business Finance Question Answer  can be very Valuable & useful for the Preparation of Assam Higher Secondary Education HS 2nd Year Examination . Assam Board AHSEC HS 2nd Year Business Studies Notes gives you the best information of Business Finance Chapter . You can find solutions to their questions at both basic and advanced levels.

AHSEC-CLASS 12 : Business Finance Important Notes for 2023 Exam | HS 2nd Year Business Studies Notes

AHSEC Class 12 Business Studies 



Short Answer Question (Marks for each question-3/4)

1. Explain the importance of financial planning.

Ans. Financial planning is important for following reasons
(1) Ensure Co-ordination Financial planning helps in co-ordinating various sources of funds and also in functional areas.
(2) Eliminates wastage - Financial planning helps in eliminating wastage of resources. 
(3) Cost effective - Financial planning should be in such a way that cost of using the funds is lower. Equity and loans should be planned in such a way that the use of funds is cost effective.

2.State the three decisions involved in financial management. 

Ans. The three decisions involved in financial management are --
(a) Investment decisions i.e. where to investment. 
(b) Financial decisions i.e. from where to raise funds.
(c) Dividend decisions i.e. how much to be retained and how much to be distributed?

3.Explain three objective of financial planning.

Ans. The objective of financial planning are__
(i) Adequate Funds-A financial plan would insure the availability of sufficient funds to achieve enterprise goals.
(2) Balancing of Costs and Risks-There should be balancing of costs and risks so as to protect the investors.
(3) Economy-The cost of raising the funds should be minimum 

4. State the objective of Financial Management.

Ans. The objective of Financial Management are - 
(a) Easy availability of Funds-A good financial management system should aim at meeting various needs of the enterprise. The funds should be easily available wherever a need arises
(b) Financial control - Financial management should ensure a proper control of inflow and outflow of funds in order to ensure their safety and proper utilisation.
(c) Optimum capital structure - The cost of capital and cost of raising the capital should be minimised by planning optimum capital structure. 

5. Explain three factor affecting the requirement of working capital. 

Ans. The various factors affecting working capital requirements are -
(1) Business cycle-The level of working capital is affected with the variation in business conditions.
(2) Nature and size of business-The working capital requirements is highly influenced by the nature of business. 
(3) Credit policy-The credit policy of a concern in its dealings with debtors and creditors
influences considerably the requirements of working capital. 

6. Briefly explain any three functions of a financial manager.

Ans. The functions of a financial manager are - 
(1) Financial Forecasting and planning-A Financial manager has to estimate the financial needs of a business. He has to plan the funds needed in the future. 
(2) Appraisal of Financial Performance-A Financial manager has to ensure that funds allocated to different departments have been properly used.
(3) Investment of Funds - The financial manager should ensure that the funds should be used in a best possible way. A financial manager has to keep in mind the principles of safety, liquidity while investing funds.

7. What is meant by Financial Management? State any two financial decisions taken by financial manager. 

Ans. Financial management is concerned with managerial decisions that result in the acquisition and finance of long term and short term assets of the firm The two financial decisions taken by a financial manager are__
(a) Estimating Financial requirements-The first task of a financial manager is to estimate short term and long term financial requirements of his business. For this purpose he will prepare a financial plan for present as well as future. 
(b) Deciding capital structure-The capital structure refers to the kind of and promotion of different securities for raising funds. After deciding about the quantum of funds required it should be decided which type of securities should be raised.

8.Describe in brief any four features of sound capital structure. 

Ans. An appropriate capital structure has the following features
(i) The capital structure should be flexible,
(ii) It should involve minimum possible risk of loss of cobtrol 
(iii) The capital structure must avoid undue restrictions in agreements of debt
(iv) There should be minimum possible use of leaverage.

9. Explain four importance of capital budgeting decision. 

Ans. Four importance of capital budgeting decision are
(i)Long term effects-Capital budgeting decisions have long term implications. Capital budgeting involves a careful planning of such investments with the least chances of loss.
(ii)Commitment of funds-Capital budgeting help the management in estimating the amount of funds to be invested in long term assets and the probable schedule of their recovery.
(iii) Risk factor- Investment in fixed assets is a risky proposition as it involves huge
funds getting blocked in long term assets. It affects the revenues of the firm in the long run. Any mistake in capital budgeting decisions might prove to be very costly
(iv) Irreversible decision - Capital investment decision involve commitment of large funds for a long term. Such decisions are not reversible without incurring heavy losses.

10. How does "Trading on Equity affect the choice of capital structure of a company".

Ans. Trading on equity means taking advantage of equity share capital to borrowed funds on reasonable basis. It refers to additional profits that equity shares earn because of funds raised by issuing other forms of securities ie preference shares and debentures. Trading on equity is possible under the following conditions_
(i)The rate of company's earnings is higher than the rate of interest on debentures and the rate of dividend on preference shares.
(ii) The company's earning are stable and regualr to afford payment of interest on debentures.

11. "Sound Financial Management is the key to the prosperity of business".Explain. 

Ans." Financial management is concerned with maximising the wealth of owners of business through wise and rational investment of funds." According to Tipton. "Financial management involves the application of general management principles to financial operations of a business enterprise." Financial management deals with planning, organisation, directing and controlling financial activities like utilisation of funds of an enterprise. It is concerned with following aspects__
(i) Determining the long term investment by the business and accessing the requirements of capital for the procurement of building, plant and machinery etc.
(ii) Raising of capital by tapping sources of ownership and debt capital.
(iii) Rewarding the equity shareholders i.e, distribution of dividends.

Long Answer question - (Marks5-6)

1. What is meant by capital structure? What are the factors to be kept in mind while determining the capital structure of a company.

Ans. According to Gerstenberg - Capital structure of a company refers to the composition or make up of its capitalisation and it includes all long term capital resources viz, lans, reserve, shares and bonds. In other words capital structure means the proportion of debt and equity used for financing the operation of a business.
The various factors that affect the capital structure of a company are -
(a) Nature and size of a firm-Nature and size of a firm influence its capital structure A public utility concern has a different capital structure as compared to other manufacturing concern. Public utility concern may employ more of debt because of stability and regularity of their earnings.
(b) Regularity and certainity of income - Regularity and certainity of income affect capital structure. Debentures are issued if there is certainity of income in future. 
(c) Trading on equity-If the promoters want to magnify their income they can resort to debt financing and earn more profit. This is known as trading on equity. 
(d) Assets structure-The liquidity and the composition of assets should also be kept in mind while selecting the capital structure
(e) Nature and type of investors-Nature and type of investors affect the capital structure. If investors are ready to take more risk, equity issue is better and if they do not want to take more risk then debentures are more suited.
(f) Cost of capital-Cost of capital refers to the minimum return expected by its suppliers. The capital structure should provide for the minimum cost of capital. (g) Period of finance - The period for which the finances are required is also an important factor to be kept in mind while selecting an appropriate capital mix. 
(h) Legal requirement - The Government has also issued certain guidelines for the issue of shares and debentures. The legal restrictions are very significant as these lay down a framework within which capital structure decision has to be made. 

2.What is fixed capital? Explain the factors affecting the requirement of fixed capital? 

Ans. The terms 'fixed capital' stands for the amount of capital which is required for long term to create production facilities through purchase of fixed assets such as plant, machinery, land building etc. The various factors affecting the requirement of fixed capital are
(a) Nature of the business - The nature of the business to a great extent determines the amount of fixed capital required by the business. For example public utility concern like electricity supply companies, water supply undertakings would require heavy investment in fixed assets.
(b) Size of the business - Size of the business has its impact on the fixed capital requirements. It can generally be said that larger the size of the business, the heavier would be the investment in fixed capital.
(e) Types of products-A company manufacturing simple consumer products like soap,oil etc. will require a smaller amount of fixed capital as compared to a company manufacturing complicated industrial goods such as heavy machinery, tractors etc.
(d) Method of production- A company manufacturing each part of a finished product by itself requires a greater amount of fixed capital as compared to a company which gets the parts manufactured from outside. 
(e) Type of business - There are certain industries which are capital intensive such as heavy industries, iron and steel industries etc. On the other hand certain industries are labour intensive that require lesser amount to be invested in fixed capital.
(f) Diversity of production lines-More fixed capital will be required in case of companies which have diversity of production lines as compared to companies which donot have much of diversification.

3.What is working capital. Explain the factors affecting working capital

Ans. The term working capital refers to the capital required for day to day operation of a business enterprise. It is represented by excess of current assets over current liabilities. The various factors affecting working capital requirements are__
(a) Nature of business. The working capital requirements of a firm depend upon the nature of its business Public utility undertakings like electricity, water supply etc need very limited working capital. On the other hand trading and financial firm
require a large investment in working capital. 
(b) Production cycle-The process of converting raw materials into finished goods is called production cycle. The longer is the production cycle period, the larger will be the firms working capital requirements.
(c) Size of business-The working capital investments of a concern are directly influenced by the size of its business which may be measured in terms of scale of operation Greater the size of a business unit, generally large will be the requirements of working capital
(d) Price level changes - Changes in the price level also affect the working capital requirements. Generally the rising prices will require the firm to maintain larger amount of working capital as more funds will be required to maintain the same current assets.
(e) Business cycle-The level of working capital is affected with the variati conditions. 
(f) External Environment - With the development of financial institution, means of communication, transport facility etc. the need of working capital is reduced because it can be available as and when required in business
(g) Liquidity and profitability - A negative relationship exist between liquidity and
profitability Working capital is needed for finished stock and debtors in the case of high sales and an average working capital is sufficient in the case of normal sales.

4. "The dividend decision of a company is determined by a number of factors". Explain this statement.

Ans. The dividend decision of a company is determined by a number of factors. which are discussed below__
(1) Current earnings - The most important determinant of dividend decision is the earnings of the company during the year under consideration. Generally companies distribute higher rates of dividend when the earnings are substantially higher as compared to the previous year
(2) Stability of earnings-Generally a company with stable earnings pays higher dividend as compared to a company with unstable earning positions.
(3) Cash flow position- Paying dividend means outflow of cash. Companies declare high rate of dividend only when they have surplus cash. In situation of shortage of cash companies declare no or very low dividend.
(4) Taxation Policy-The rate of dividend also depends upon the taxation policy of government. If tax rate is higher, then company prefers to pay less in the form of dividend whereas if tax rate is low then company may declare higher dividend profit after providing depreciation fund.
(5) Legal restrictions-Company's Act has given certain provisions regarding the payment of dividends that is dividends can be only out of current year profit or past year.
(6) Growth opportunities - It growth opportunities are available to the company, company retains a large share of their profits for financing the required investment the Result is that less amount is available for distribution as dividend

5.Define working capital and distinguish between fixed and working capital. 

Ans. Working capital is that portion of capital which is required for holding current assets like stack of materials and finished goods, bills receivable, accounts receivable and cash for meeting current expenses like salaries, wages, taxes, rent etc. The distinguish between fixed capital and working capital are__

6."Financing decision of a company is affected by a number of factors". Explain in brief any four factor.

Ans. "Financing decision of a company is affected by a number of factors". taking financing decision the finance manager keeps in mind the following factors While
(1) Cost- The cost of raising finance from various sources is different and finance managers always prefers the source with minimum cost.
(2) Risk - More risk is associated with borrowed fund as compared to owners fund securities. Finance manager compares the risk with the cost involved and prefer securities with moderate risk factor.
(3) Floatation Cost-If refers to cost involved in issue of securities such as broker's commission, underwriters fees, expenses on prospectus etc Firm prefer securities which involve least floatation cost.
(4) Cash flow position - The cash flow position of the company also helps in selecting the securities. With smooth and steady cash flow companies can easily afford borrowed fund securities but when companies have shortage of cash flow, then they must go for owner's fund securities only

7. You are the financial manager of a company. The Board of directors has asked you to design the capital structure of the company. Explain the factors that you consider while doing so.

Ans. The various factors that affect the capital structure of a business ecterprise are as follows:
(a) Cash flow position-It reflects ability of a business to generate enough cash flow to meet its fixed commitment like repayment of debts, dividend an preference share etc. In addition to this, cash is also required to carry out business operations smoothly and for investment in fixed assets.
(b) Cost of debt-It firm can arrange borrowed fund at low rate of interest then it will prefer more of debt as compared to equity
(c) Flexibility-Excess of debt may restrict the firm's capacity to borrow further. To maintain flexibility it must maintain some borrowing power to take care of unforseen circumstances.
(d) Tax rate-High tax rate makes debt cheaper an interest paid to debt security holder is substracted from income before calculating tax whereas companies have to pay tax on dividend paid to shareholders. So high tax rate means prefer debt whereas at law tax rate we can prefer equity in capital structure.



1Nature and Significance of ManagementClick here
2Principles of ManagementClick here
3Business EnvironmentClick here
4PlanningClick here
5OrganisingClick here
Click here
7DirectingClick here
8ControllingClick here
9Business Finance Click here
10Financial Market Click here
11Marketing Management Click here
12Consumer Protection Act. Click here

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