RUKHMANI DEVI PUBLIC SCHOOL

JHARKHEDA

REVISION TEST PAPER

Class 12 - Business Studies
Time Allowed: 3 hours
Maximum Marks: 234

General Instructions:

Chapter 9 Financial Management revision question of past 5 years papers 

Section A
1. Borrowing @ 10% and the tax rate @ 30% means the after tax cost of debt is ________. [1]

a) 10% b) 3%

c) 7% d) 20%
2. Arun is running an Advertising agency and earning a lot by providing this service to big industries. The [1]
working capital requirement of the firm will be:

a) Nil b) More

c) None of these d) Less

3. Which of the following is not concerned with the Long term investment decision [1]

a) Inventory management b) Research and Development Programme

c) Opening a new branch d) Management of fixed capital

4. The primary aim of financial management is ________. [1]

a) to ensure availability of enough funds b) optimal procurement as well as the usage of

whenever required finance

c) to maximise shareholders wealth d) to see that the firm does not raise resources
unnecessarily
5. A decision is taken in financial management to put capital of the company in different assets. This decision is [1]
called ________.

a) Financing decision b) Dividend decision

c) Investment decision d) Working capital decision

6. Assertion (A): Financial planning ensures that the firm does not raise resources unnecessarily.
[1]
Reason (R): Excess funding is almost as bad as inadequate funding.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

7. Assertion (A): If the growth potential of a concern is perceived to be higher, it will require larger amount of [1]
working capital.

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 Reason (R): So that it is able to meet higher production and sales target whenever required.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

8. Assertion (A): A trading organisation usually needs a smaller amount of working capital compared to a [1]
manufacturing organisation.

Reason (R): The basic nature of a business influences the amount of working capital required.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

9. Assertion (A): The cost of debt is lower than the cost of equity for a firm.
[1]
Reason (R): The lenders risk is lower than the equity shareholders risk, since the lender earns an assured return
and repayment of capital and, therefore, they should require a lower rate of return.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

10. Assertion (A): A trading organisation usually needs a smaller amount of working capital compared to a [1]
manufacturing organisation.

Reason (R): This is because there is usually no processing. Therefore, there is no distinction between raw
materials and finished goods.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

11. Ramnath is into the business of assembling and selling of televisions. Recently he has adopted a new policy of [1]
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.
12. How do ‘growing opportunities’ as a factor affect dividend decision? State. [1]
13. From the point of view of Control which source of finance should be avoided? [1]
14. In order to save tax, the company should go for more of equity or debt? [1]
15. What is the primary objective of financial management? [1]
16. Name and state the aspect of financial management that enables to foresee the fund requirements both in terms [1]
of ‘the quantum’ and ‘the timings’.
17. What is meant by financial risk? [1]
Section B
18. What is meant by an investment decision? Give two examples of investment decision. [3]
19. Jeet and Jeet Ltd. deals in edible oils. Besides, the company is also engaged in wholesale business of tea. Mr. [3]
Rakesh Budhiraja is the Finance Manager of the Edible Oil Division. He is to give a presentation on Capital
Structure before the Board of Directors. For the sake of its presentation, he studied Business Studies textbook of
Class-XII. The main parts of his presentation were as under:

He maintained that if the company is in a profitable position then along with Equity Share Capital it would be

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 appropriate to use fixed cost capital, like Preference Share Capital and Debt Capital. By doing so, ratio of cheap
capital in total capital increases. It leads to fall in total capital cost. Consequently, earning of equity shareholders
appreciates. However, in adverse situations, there would be risk of failure to pay fixed capital costs.

Besides this, in the meeting of the Board of Directors, opportunities available in the market were also discussed.
In this regard, it was told that these days people are very much conscious of about cholesterol. Why does not the
company bring it to zero percent level in its edible oils? By marketing such a product ahead of all others, huge
profits could be obtained. Board of Directors agreed to discuss this issue with the specialists of the Research and
Development Department.
i. In the above paragraph, two main factors of Capital Structure have been mentioned. Identity the same.
ii. Describe that factor of a business environment that has been reported in the meeting of the Board of
Directors.
iii. Which kind of organisation structure is being practiced by the company?
20. Somnath Ltd. is engaged in the business of export of garments. In the past, the performance of the company had [3]
been upto the expectations. In line with the latest technology, the company decided to upgrade its machinery. For
this, the Finance Manager, Dalmia estimated the amount of funds required and the timings. This will help the
company in linking the investment and the financing decisions on a continuous basis. Dalmia therefore, began
with the preparation of a sales forecast for the next four years. He also collected the relevant data about the profit
estimates in the coming years. By doing this, he wanted to be sure about the l availability of funds from the
internal sources of the business. For the remaining funds he is trying to find out alternative sources from outside.
Justify the financial concept discussed in the above paragraph. Also state the objectives to be achieved by the
use of financial concept, so identified.
21. “Cost of debt” is lower than the cost of “Equity share capital”. Give reason why even then a company cannot [3]
work only with the debt.
22. State why the working capital needs for a ‘Service-industry’ are different from that of a Manufacturing industry. [3]
23. Explain the following factors which affect the choice of capital structure of a company [3]
i. Cash flow position
ii. Tax rate
24. Wadhwa Ltd. has decided to improve its image in the stock market and wants the investors to invest more money [3]
in its shares. The highly ambitious company has planned to increase the dividends of its shares for the third
successive year. The increase has also been substantial. The idea is to send great news in the market regarding
the performance of the company in order to booster its image.

Identify and explain the factor affecting dividend decision highlighted above.
25. State whether we require more or less fixed capital in the following cases: [3]
i. Nitin Ltd. is a trading concern.
ii. Nidhi Ltd. is operating at a higher scale.
iii. Ahaan Ltd. is using labour intensive technique of production.
iv. Prateek Ltd. has decided to diversify its operations.
v. Leasing facilities are not freely available to Ajit Ltd.
vi. Chhavi Ltd. has an agreement with Meenakshi Ltd. and Gaurav Ltd. to share each other's facilities.
26. How do the following affect the financing decision? [3]
i. Cost
ii. Risk

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 iii. Cash flow position
27. Explain the factors that affect capital budgeting decision. [3]
28. State the two important objectives of financial planning. [3]
29. State any three points of importance of financial planning. [3]
30. What is meant by financial management? State any two financial decisions taken by a financial manager. [3]
Section C
31. Read the text carefully and answer the questions: [4]
Mr. A. Bose is running a successful business. Mr. Bose is the owner of R. K. Cement Ltd. Mr. Bose decided to
expand his business by acquiring a Steel Factory. This required an investment of Rs. 60 crores.

To seek advice in this matter, he called his financial advisor Mr. T. Ghosh who advised him about the judicious
mix of equity (40%) and Debt (60%). Employ more of cheaper debt may enhance the EPS. Mr. Ghosh also
suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is
low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also
apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest
on loan is a tax-deductible expense for computation of tax liability. After due deliberations with Mr. Ghosh, Mr.
Bose decided to raise funds from a financial institution.
(i) Identify the concept of Financial Management as advised by Mr. Ghosh in the above situation.

a) Dividend Decision b) Working Capital Decision

c) Capital Structure d) Capital Budgeting

(ii) In the above case, Mr. Ghosh suggested to raised more funds from debt. Higher debt-equity ratio results in:

a) Lower financial risk b) Higher Earning of profit.

c) Higher degree of financial risk d) Higher degree of operating risk

(iii) Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%). The proportion
of debt in the overall capital is called ________.

a) Financial Leverage b) Total Assets

c) Working Capital d) None of these

(iv) Employ more of cheaper debt may enhance the EPS. Such practice is called:

a) Equity Trading b) Financial Leverage

c) Trading on Equity d) Investment Decision

32. State any four factors which affects the requirements of working capital of a company. [4]
33. Explain the following as factors affecting financing decision [4]
i. Cost
ii. Cash flow position of business
iii. Control considerations
iv. Floatation cost
34. How do the following affect the dividend decision? [4]
i. Shareholders' preference
ii. Taxation policy
iii. Stock market reaction

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35. Explain any four factors which affect the ‘fixed capital’ requirements of a company. [4]
36. What is meant by ‘Financing Decision’? State any four factors affecting the financing decision. [4]
37. Radhika Limited manufactures blankets. Company’s history has been satisfactory, but for the past some time, [4]
its cash flow position is in a bad shape. That is why a company has not been able to pay sufficient dividends to
its equity shareholders. When Mrs. Rakhi Khetarpal, the finance manager, tried to find out the causes of the poor
financial situation of the company, she observed that the control of the company was in the hands of several
persons who were unable to take any concrete decision. To come out of this financial crisis, Mrs. Khetarpal has
been deliberating on the kind of source of finance that needs to be tapped to arrange funds. She wants to make
use of such a source as does not prove to be a fixed burden on the company. She has also to keep in mind that the
company has got its premises on rent and the rent is exorbitant. Similarly, it has to bear the burden of fixed
salaries. She is also worried about the fact that in the future control of the company should not be in the hands of
too many persons.

Above discussion hints at those factors which help the finance manager in deciding as to which financial source
(Equity shares or Debentures) he should tap for the needed funds. Of the four factors mentioned here, two are in
favour of issuing equity shares and the other two are in favour of issuing debentures. Identify these factors and
explain by underscoring the relevant lines.
38. Ghoom Pvt. Ltd. is a travel agency owned by twin brothers Dev and Baldev in Ahmedabad. In order to promote [4]
their business initially, they had offered liberal credit to their clients. At the same time, they raised loans from
many banks to meet their increased capital requirements. They opted for debt capital because it is considered the
cheapest of all sources. However, now the company's cash flow proves to be inadequate to meet its financial
obligations.

In the context of the above case:

a. Comment upon the working capital requirement of "Ghoom Pvt. Ltd." with the help of factor stated in the
paragraph.
b. What kind of risk is a business subject to if its unable to meet its financial obligations?
c. Why is debt is considered the cheapest of all sources?
d. Name and explain the decision that determines the overall cost of capital and the financial risk of the
enterprise.
39. Aval Ltd. is engaged in the business of export of canvas goods and bags. In the past, the performance of the [4]
company had been up to 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 number 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 concepts so identified. ( Financial Planning).
b. There is no restriction on the payment of dividends by a company. Comment. (Legal & Contractual
Constraints).
40. What are the main objectives of financial management? Briefly explain. [4]
41. What is meant by the financial planning? [4]

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42. [4]
Mr. A. Bose is running a successful business. Mr. Bose is the owner of R. K. Cement Ltd. Mr. Bose decided to
expand his business by acquiring a Steel Factory. This required an investment of Rs. 60 crores.

To seek advice in this matter, he called his financial advisor Mr. T. Ghosh who advised him about the judicious
mix of equity (40%) and Debt (60%). Employ more of cheaper debt may enhance the EPS. Mr. Ghosh also
suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is
low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also
apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest
on loan is a tax-deductible expense for computation of tax liability. After due deliberations with Mr. Ghosh, Mr.
Bose decided to raise funds from a financial institution.

Based on the information given above, answer the following questions:

i. Identify the concept of Financial Management as advised by Mr. Ghosh in the above situation.
a. Capital Budgeting
b. Capital Structure
c. Dividend Decision
d. Working Capital Decision
ii. In the above case Mr. Ghosh suggested to raised more fund from debt. Higher debt-equity ratio results in:
a. Lower financial risk
b. Higher degree of operating risk
c. Higher degree of financial risk
d. Higher Earning of profit.
iii. "Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%)". The proportion of
debt in the overall capital is called ________.
a. Working Capital
b. Financial Leverage
c. Total Assets
d. None of these
iv. Employ more of cheaper debt may enhance the EPS. Such practice is called:
a. Equity Trading
b. Financial Leverage
c. Investment Decision
d. Trading on Equity
Section D
43. Read the text carefully and answer the questions: [5]
Charu and Arpita, who are young fashion designers, left their job with a famous fashion designer chain to set-up
a company 'Trends Pvt. Ltd'. They decided to run a boutique during the day and coaching classes for entrance
examination of National Institute of Fashion Designing in the evening. For the coaching centre, they took on
lease the first floor of a nearby building. Their major expense was money spent on photocopying of notes for
their students. They thought of buying a photocopier knowing fully that their scale of operations was not
sufficient to make full use of the photocopier.

In the basement of the building of 'Trends Pvt. Ltd.', Ramesh and Suresh were carrying on a printing and

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 stationery business in the name of 'Fine Prints Pvt. Ltd.' Charu approached Ramesh with the proposal to buy a
photocopier jointly which could be used by both of them without making separate investment. Ramesh agreed to
this.
(i) They decided to run a boutique during the day and coaching classes for entrance examination of
National Institute of Fashion Designing in the evening. This statement represents which factor affecting
the fixed capital requirements of Trends Pvt. Ltd.?

a) Growth prospects b) Choice of technique

c) Diversification d) Scale of operations

(ii) For the coaching centre, they took on lease the first floor of a nearby building. This statement
represents which factor affecting the fixed capital requirements of Trends Pvt. Ltd.?

a) Growth prospects b) Nature of business

c) Scale of operations d) Financing alternatives

(iii) They thought of buying a photocopier knowing fully that their scale of operations was not sufficient
to make full use of the photocopier. This statement represents which factor affecting the fixed capital
requirements of Trends Pvt. Ltd.?

a) Scale of operations b) Choice of technique

c) Growth prospects d) Level of collaboration

(iv) Charu approached Ramesh with the proposal to buy a photocopier jointly which could be used by
both of them without making separate investment. This statement represents which factor affecting the
fixed capital requirements of Trends Pvt. Ltd.

a) Financing alternatives b) Technology upgradation

c) Level of collaboration d) Diversification

(v) Managing Fixed Capital is also known as-

a) Lending b) Financing

c) Leveraging d) Capital Budgeting

44. Read the text carefully and answer the questions: [5]
'Spun Ltd.' is a company manufacturing cotton Yarn for the past 15 years. It has been consistently earning good
profits for many years and is a market leader. This year too, it has been able to generate enough profits. There is
availability of enough cash in the company and good prospects for growth in future as the demand for its
products has been consistently increasing. It is a well-managed organisation and believes in quality, equal
employment opportunities and good remuneration practices and has been able to maintain the same for the past
several years.

It has many shareholders who prefer to receive a regular income from their investments. It has taken a loan of ₹
40 lakhs from ICICI and is bound by certain restrictions on the payment of dividend according to the terms of
loan agreement.

The above discussion about the company leads to various factors which decide how much of the profits should
be retained and how much has to be distributed by the company.
(i) It has been consistently earning good profits for many years. This statement represents which factor
affecting the dividend decision of Spun Ltd.?

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 a) Cash flow position b) Amount of earnings

c) Stability of dividends d) Stability of earnings

(ii) There is availability of enough cash in the company. This statement represents which factor affecting
the dividend decision of Spun Ltd.?

a) Amount of earnings b) Access to capital market

c) Cash flow position d) Stability of earnings

(iii) It has many shareholders who prefer to receive regular income from their investments. This
statement represents which factor affecting the dividend decision of Spun Ltd.?

a) Shareholders' preference b) Legal constraints

c) Cash flow position d) Access to capital market

(iv) It has taken a loan of ₹ 40 Lakhs from ICICI and is bound by certain restrictions on the payment of
dividend according to the terms of loan agreement. This statement represents which factor affecting the
dividend decision of Spun Ltd.?

a) Legal constraints b) Taxation policy

c) Contractual constraints d) Shareholders' preference

(v) ".....and good prospects for growth in future as the demand for its products has been consistently
increasing". This statement highlights which factor affecting the Dividend Decision and what will be its
effect on Dividend payout?

a) Demand, Increase b) Growth Opportunities, Increase

c) Growth Opportunities, Decrease d) Demand, Decrease

Section E
45. Explain any four points that highlight the importance of financial planning. [6]
46. Tata International Ltd. earned a net profit of Rs. 50 crores. Ankit, the finance manager of Tata International Ltd. [6]
wants to decide how to appropriate these profits. Discuss any five factors which will help him in taking -this
decision.
47. Well-being Ltd. is a company engaged in the production of organic foods. Presently, it sells its products through [6]
indirect channels of distribution. But, considering the sudden surge in the demand for organic products, the
company is now inclined to start its online portal for direct marketing. The financial managers of the company
are planning to use debt in order to take advantage of trading on equity. In order to finance its expansion plans, it
is planning to raise a debt capital of Rs. 40 lakhs through a loan @ 10% from an industrial bank. The present
capital base of the company comprises of Rs. 9 lakh equity shares of Rs. 10 each. The rate of tax is 30%.

In the context of the above case:

a. What are the two conditions necessary for taking advantage of trading on equity?
b. Assuming the expected rate of return on investment to be the same as it was for the current year i.e. 15 %, do
you think the financial managers will be able to meet their goal. Show your workings clearly.
48. Computer Tech Ltd. is one of the leading information technology outsourcing services providers in India. The [6]
company provides business consultancy and outsourcing services to its clients. Over the past five years the
company has been paying dividends at high rate to its shareholders. However, this year, although the earnings of
the company are high, its liquidity position is not so good. Moreover, the company plans to undertake new

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 ventures in order to expand its business.

In the context of the above case:

a. Give any three reasons because of which you think Computer Tech Ltd. has been paying dividends at high
rate to its shareholders over the past five years.
b. Comment upon the likely dividend policy of the company this year by stating any two reasons in support of
your answer.
49. Hurray Ltd. owns an amusement park in Lucknow. Till now the company had been operating on owner's fund. [6]
Keeping in view its plan to set up two more amusement parks in the country the company raised debt capital to
take advantage of trading on equity. The proportion of debt in the total capital of the company is 30%. The debt
has been raised @ 12% whereas the return on investment is 10%. However, even after employing debt the
earning per share i.e. EPS of the company is falling.

In the context of the above case:

a. Identify and explain the two types of financial decisions taken by the company.
b. Why do you think that even after employing debt the earning per share i.e. EPS of the company is falling?
c. State any two factors which favoured the issue of debt by the company.
50. Arun is a successful businessman in the paper industry. During his recent visit to his friend's place in Mysore, he [6]
was fascinated by the exclusive variety of incense sticks available there. His friend tells him that the Mysore
region is known as a pioneer in the activity of Agarbathi manufacturing because it has a natural reserve of forest
products especially Sandalwood to provide for the base material used in production. Moreover, the suppliers of
other types of raw material needed for production follow a liberal credit policy and the time required to
manufacture incense sticks is relatively less. Considering the various factors, Arun decides to venture into this
line of business by setting up a manufacturing unit in Mysore.

in the context of the above case:

a. Identify and explain the type of financial decision taken by Arun.
b. Identify the three factors mentioned in the paragraph which are likely to affect the working capital
requirements of his business.
51. Kay Ltd. is a company manufacturing textiles. It has a share capital of Rs 60 lakhs. In the previous year, it's [6]
earning per share was Rs. 0.50. For diversification, the company requires an additional capital of Rs. 40 lakhs.
The company raised funds by issuing 10% debentures for the same. During the year, the company earned a profit
of Rs. 8 lakhs on the capital employed. It paid tax @ 40%.
a. State whether the shareholders gained or lost, in respect of earning per share on diversification. Show your
calculations clearly.
b. Also, state any three factors that favor the issue of debentures by the company as part of its capital structure.
52. Explain briefly any four factors that affect the working capital requirements of a company. [6]
53. Explain the factors affecting the dividend decision. [6]
54. Explain the following as factors affecting dividend decision [6]
i. Stability of earnings
ii. Growth opportunities
iii. Cash flow position
iv. Taxation policy
55. ‘Sarah Ltd’ is a company manufacturing cotton yarn. It has been consistently earning good profits for many [6]

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 years. This year too, it has been able to generate enough profits. There is the availability of enough cash in the
company and good prospects for growth in the future. It is a well managed organisation and believes in quality,
equal employment opportunities and good remuneration practices. It has many shareholders who prefer to
receive a regular income from their investments.
It has taken a loan of 40 lakhs from IDBI and is bound by certain restrictions on the payment of dividend
according to the terms of loan agreement.

The above discussion about the company leads to various factors which decide how much of the profits should
be retained and how much has to be distributed by the company.

Quoting the lines from the above discussion identify and explain any four such factors.
56. Sakshi Ltd is a company manufacturing electronic goods. It has a share capital of Rs120 lakhs. The earning per [6]
share in the previous year was Rs 0.5. For diversification, the company requires additional capital of Rs80 lakhs.
The company raised funds by issuing 10% debentures for the same. During the current year the company earned
profit of Rs16 lakhs on capital employed. It paid tax @40%.
i. State whether the shareholders gained or lost in respect of earning per share on diversification, show your
calculations clearly.
ii. Also state any three factors that favour the issue of debentures by the company as part of its capital structure.
57. Explain the following as factors affecting the requirements of working capital [6]
i. Nature of business
ii. Scale of operations
iii. Seasonal factors
iv. Production cycle
58. “A Capital budgeting decision is capable of changing the financial fortunes of a business”. Do you agree? Give [6]
reasons for your answer.
59. 'Abhishek Ltd' is manufacturing cotton clothes. It has been consistently earning good profits for many years. [6]
This year too, it has been able to generate enough profits. There is the availability of enough cash in the
company and good prospects for growth in the future. It is a well-managed organization and believes in quality,
equal employment opportunities, and good remuneration practices. It has many shareholders who prefer to
receive a regular income from their investments.

It has taken a loan of Rs. 50 lakhs from ICICI Bank and is bound by certain restrictions on the payment of
divided according to the terms of the loan agreement.

The above discussion about the company leads to various factors that decided how much of the profits should be
retained and how much has to be distributed by the company. Identify and explain any five such factors.
60. Explain the term “Trading on Equity” Why, when and how it can be used by a company? [6]
61. What is meant by financial structure or capital structure of an organisation? Explain any two advantages and two [6]
limitations of it.
62. S Limited is manufacturing steel at its plant in India. It is enjoying a buoyant demand for its products as [6]
economic growth is about 7 - 8 per cent 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.

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 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.
63. A businessman who wants to start a manufacturing concern approaches you to suggest him whether the [6]
following manufacturing concerns would require large or small working capital:
i. Bread
ii. Sugar
iii. Coolers
iv. Furniture manufacturing against specific orders, and
v. Motorcars
Give your viewpoint with reasons in each of the above cases.
64. Explain the following as factors affecting ‘dividend decision’. [6]
i. Stability of dividend
ii. Shareholders’ preference
iii. Legal constraints
iv. Access to capital market

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