NCERT Solutions for Class 12 Business Studies Business Finance and Marketing Chapter 1

Financial Management Class 12

Chapter 1 Financial Management Exercise Solutions

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Multiple choice questions : Solutions of Questions on Page Number : 263

Q1 :  

The cheapest source of finance is

(a) debenture

(b) equity share capital

(c) preference share

(d) retained earning


Answer :

The cheapest source of finance is retained earnings. Retained income refers to that portion of net income or profits of an organisation that it retains after paying off dividends. An organisation can reinvest its retained earnings or profits for the purpose expansion, modernisation, etc. It neither involves any fund raising cost nor any risk. Also, unlike other sources of finance it does not involve any obligation in terms of repayment.

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Q2 :  

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) None of the above


Answer :

The decision to acquire a new and modern plant to upgrade an old one is an Investment decision. Investment decision refers to the decision regarding where the funds are to be invested so as to earn the highest possible return. The decision to acquire a new plant is a long term investment decision and affects long run working and earning capacity of the business.

On the other hand, working capital decisions refer to those investment decisions that influence the day to day working of the business. While, financing decision refers to the decisions regarding the sources from where the funds can be raised.

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Q3 :  

Other things remaining the same, an increase in the tax rate on corporate profit will

(a) make the debt relatively cheaper

(b) make the debt relatively the dearer

(c) have no impact on the cost of debt

(d) we can't say


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Q4 :  

Companies with a higher growth potential are likely to

(a) pay lower dividends

(b) pay higher dividends

(c) dividends are not affected

(d) none of the above


Answer :

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Q5 :  

Financial leverage is called favourable if

(a) Return on investment is lower than the cost of debt

(b) ROI is higher than the cost of debt

(c) Debt is easily available

(d) If the degree of existing financial leverage is low


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Q6 :  

Higher debt-equity ratio results in

(a) lower financial risk

(b) higher degree of operating risk

(c) higher degree of financial risk

(d) higher EPS


Answer :

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Q7 :  

Higher working capital usually results in

(a) higher current ratio, higher risk and higher profits

(b) lower current ratio, higher risk and profits

(c) higher equity, lower risk and lower profits

(d) lower equity, lower risk and higher profits


Answer :

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Q8 :  

Current assets are those assets which get converted into cash

(a) within six months

(b) within one year

(c) between one year and three years

(d) between three and five years


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Q9 :  

Financial planning arrives at

(a) minimising the external borrowing by resorting to equity issues

(b) entering that the firm always have significantly more fund than required so that there is no paucity of funds

(c) ensuring that the firm faces neither a shortage nor a glut of unusable funds

(d) doing only what is possible with the funds that the firms has at its disposal


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Short answerslong answersmultiple choice questions : Solutions of Questions on Page Number : 265

Q1 :  

What is meant by capital structure?


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Q2 :  

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


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Q3 :  

Discuss the two objective of Financial Planning.


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Q4 :  

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


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Q5 :  

What is financial risk? Why does it arise?


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Q6 :  

''A capital budgeting decision is capable of changing the financial fortunes of a business''. Do you agree? Why or why not?


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Q7 :  

Define a 'current asset'. Give four examples of such assets.


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Q8 :  

Explain the factors affecting the dividend decision.


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Q9 :  

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


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Q10 :  

What are the main objectives of financial management? Briefly explain


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Q11 :  

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


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Q12 :  

Higher dividend per share is associated with

(a) high earnings, high cash flows, unstable earnings and higher growth opportunities

(b) high earnings, high cash flows, stable earnings and high growth opportunities

(c) high earnings, high cash flows, stable earnings and lower growth opportunities

(d) high earnings, low cash flows, stable earnings and lower growth opportunities


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Q13 :  

A fixed asset should be financed through

(a) a long term liability

(b) a short term liability

(c) a mix of long and short term liabilities


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Q14 :  

Current assets of a business firm should be financed through

(a) current liability only

(b) long-term liability only

(c) both types (i.e. Long and short liabilities)


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Long answers : Solutions of Questions on Page Number : 266

Q1 :  

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


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Business Finance and Marketing - Business Studies : CBSE NCERT Exercise Solutions for Class 12th for Financial Management will be available online in PDF book form soon. The solutions are absolutely Free. Soon you will be able to download the solutions.

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