A.
Very Short Answer
Questions
1. What do you understand by financing
decision?
Financing decision refers to the decision regarding
the selection of sources of funds (debt or equity)
for the business and determining the proportion of
each in the capital structure.
2. What do you understand by dividend
decision?
Dividend decision refers to deciding how much of
the profit should be distributed to shareholders as
dividend and how much should be retained in the
business.
3. What do you understand by investment
decision?
Investment decision refers to deciding where and
how much funds should be invested in assets
(fixed and current assets) to earn maximum
returns.
4. What is meant by financial planning?
Financial planning is the process of estimating the
financial requirements of a business and
determining the sources of funds to meet those
requirements.
5. State the components of working
capital.
Components of working capital:
• Cash
• Bills receivable
• Debtors
• Stock (inventory)
• Short-term investments
6. Describe the components of debt and
equity.
Debt:
• Debentures
• Loans from banks/financial institutions
• Public deposits
Equity:
• Equity share capital
• Preference share capital
• Retained earnings
7. Explain the importance of information
signaling in dividend decision.
Dividend announcements act as signals to
investors.
• Increase in dividend ➔ positive signal about
future profits.
• Decrease in dividend ➔ negative signal about
company performance.
B. Short Answer Questions
1. Critically examine the objective of
financial management.
The main objective of financial management is
maximization of shareholders' wealth.
It focuses on increasing the market value of shares
by earning higher profits, proper investment
decisions, maintaining liquidity, and balancing risk
and return.
2. Explain the concept of working capital
and its choice.
Working capital refers to the capital required for
day-to-day operations of a business.
It can be:
• Gross Working Capital: Total current assets.
• Net Working Capital: Current assets minus
current liabilities.
Choice of working capital depends on nature of
business, scale of operations, production cycle,
and business policies.
3. State the sources of fixed capital.
Sources of fixed capital:
• Equity shares
• Preference shares
• Debentures
• Long-term loans
• Retained earnings
4. Explain capital structure and its
components.
Capital structure refers to the mix of debt and
equity used by a company to finance its
operations.
Components:
• Equity share capital
• Preference share capital
• Debentures
• Long-term loans
5. Explain the cost and risk associated
with equity and debt capital.
Equity Capital:
• Cost: High (dividends not fixed but expected
return is high).
• Risk: Less financial risk but ownership gets
diluted.
Debt Capital:
• Cost: Lower (interest is fixed and tax-deductible).
• Risk: Higher financial risk due to fixed interest
obligation.
6. State any four objectives of financial
planning.
1. Ensuring adequate funds.
2. Proper balance between debt and equity.
3. Avoiding over-capitalization and under-
capitalization.
4. Ensuring liquidity.
7. Explain the different modes of dividend
payments.
Modes of dividend payment:
• Cash dividend
• Stock dividend (Bonus shares)
• Property dividend
• Scrip dividend
8. Differentiate between fixed capital and
working capital.
Fixed Capital Working Capital
Used to purchase fixed assets Used for day-to-day
operations
Long-term in nature Short-term in nature
Not easily convertible into Easily convertible into
cash cash
9. Distinguish between capital structure
and financial structure.
Capital Structure Financial Structure
Includes long-term funds Includes both long-term
only and short-term funds
Consists of debt and Consists of all liabilities
equity and equity
C. Long Answer Questions (4-
5 Marks Each)
1. What is meant by Financial Planning?
Explain any four requisites of a sound
financial plan.
Financial Planning refers to the process of
estimating the financial requirements of a business
and deciding in advance the sources from which
funds will be raised to achieve organizational
objectives.
It ensures that adequate funds are available at the
right time and in the right amount.
Requisites of a Sound Financial Plan:
1. Simplicity
The financial plan should be simple and easy to
understand so that it can be implemented
without confusion.
2. Flexibility
It should allow adjustments according to
changing business conditions such as
3. Economy
The cost of raising funds should be minimum to
avoid unnecessary financial burden.
4. Provision for Contingencies
The plan should make provision for unexpected
situations like loss, market fluctuations, or
economic crisis.
Thus, a sound financial plan ensures smooth
functioning and financial stability of the business.
2. How does raising long-term funds
through debt affect shareholders'
returns? Explain with example.
Raising long-term funds through debt can increase
shareholders' returns due to trading on equity.
Debt carries a fixed rate of interest. If the company
earns more than the cost of debt, the excess profit
goes to shareholders, increasing their return.
Example:
Suppose a company has ~10,00,000 capital.
Case 1: Entirely Equity
Profit= ~2,00,000
Return on equity= 20%
Case 2: ~5,00,000 Equity+ ~5,00,000 Debt at
10% interest
Interest= ~50,000
Remaining profit = ~1,50,000
Return on ~5,00,000 equity= 30%
Thus, using debt increases shareholders' return.
However, excessive debt increases financial risk
due to fixed interest obligations.
3. What is meant by dividend? State
the factors that affect dividend
decision.
Dividend is the portion of profit distributed by a
company to its shareholders as a return on their
investment.
Factors Affecting Dividend Decision:
1. Earnings of the Company
Higher profits generally lead to higher
dividends.
2. Stability of Earnings
Companies with stable earnings can maintain
regular dividends.
3. Growth Opportunities
If the company has expansion plans, it may
retain profits instead of distributing dividends.
4. Cash Flow Position
Even if profits are high, insufficient cash may
restrict dividend payment.
5. Legal Restrictions
Companies must follow legal provisions while
declaring dividends.
6. Taxation Policy
Tax rates influence dividend decisions.
Thus, dividend policy balances shareholders'
expectations and business growth.
4. How do you assess the amount of
working capital required by a business
unit?
Working capital requirement depends upon various
factors that influence day-to-day operations.
Factors Determining Working Capital
Requirement:
1. Nature of Business
Trading firms require less working capital, while
manufacturing firms require more.
2. Size of Business
Larger businesses require more working capital.
3. Production Cycle
Longer production cycle increases working
capital requirement.
4. Credit Policy
Liberal credit policy increases working capital
requirement.
5. Inventory Policy
Large stock of raw materials and finished goods
increases requirement.
6. Seasonal Factors
Seasonal businesses need more working capital
during peak season.
Therefore, proper assessment ensures smooth
business operations.
5. "Financial management is much
more than mere procurement of
funds." Explain.
Financial management is not limited to raising
funds. It involves effective planning, allocation, and
control of financial resources.
It includes:
1. Investment Decision - Deciding where funds
should be invested for maximum returns.
2. Financing Decision - Selecting the best capital
structure (debt and equity mix).
3. Dividend Decision - Deciding how much profit
to distribute or retain.
4. Working Capital Management - Managing
short-term assets and liabilities.
5. Ensuring Liquidity and Profitability -
Maintaining balance between risk and return.
Thus, financial management ensures efficient use
of funds and maximization of shareholders' wealth.
6. What is meant by leverage? State
the different types of leverages.
Leverage refers to the use of fixed cost funds or
fixed operating costs to increase the return to
shareholders.
It magnifies both profits and losses.
Types of Leverage:
1. Operating Leverage
Arises due to fixed operating costs. It measures
the effect of change in sales on operating profit.
2. Financial Leverage
Arises due to fixed financial charges like
interest. It measures the effect of change in
EBIT on EPS.
3. Combined Leverage
It is the combined effect of operating and
financial leverage.
Leverage helps increase returns but also increases
business risk.