Financial Management is a crucial chapter in Class 12 Business Studies. It involves efficiently managing a company’s finances to ensure profitability and growth. Here are the Financial Management Class 12 Important Questions.
1 Mark Questions
- What is financial management?
Ans: Financial management is the process of planning, organizing, directing, and controlling financial resources to achieve organizational goals. - Name any two objectives of financial management.
Ans: (i) Profit maximization, (ii) Wealth maximization - What is meant by capital budgeting?
Ans: Capital budgeting is the process of evaluating and selecting long-term investment projects. - What is the primary goal of financial management?
Ans: The primary goal is the wealth maximization of shareholders. - Define financial planning.
Ans: Financial planning refers to estimating the capital requirements and determining its sources. - What do you mean by financial risk?
Ans: Financial risk is the possibility of losing money due to poor financial decisions or market conditions. - What is the significance of working capital management?
Ans: It ensures that a firm has sufficient short-term assets to meet its liabilities. - Give an example of a long-term investment decision.
Ans: Expansion of a factory or purchase of new machinery. - What is meant by ‘dividend decision’?
Ans: The dividend decision determines the portion of profit distributed as dividends and retained earnings. - Mention any one factor affecting the capital structure of a company.
Ans: Cost of debt and equity. - What is financial leverage?
Ans: It refers to the use of debt to increase the potential return on investment. - What is meant by ‘ploughing back of profit’?
Ans: It is the reinvestment of a company’s profit into its business rather than distributing it as dividends. - Which two sources of finance are available to a company?
Ans: (i) Equity capital, (ii) Debt capital - Name any two financial decisions.
Ans: (i) Investment decision, (ii) Dividend decision - What is working capital?
Ans: It is the difference between current assets and current liabilities.
3-4 Marks Questions
- What are the main objectives of financial management?
Ans: The main objectives are:- Profit maximization: Ensuring the company earns maximum profits.
- Wealth maximization: Increasing the value of shareholders’ investments.
- Ensuring financial security: Managing risks effectively.
- Proper utilization of funds: Avoiding wastage and ensuring optimum use.
- Explain any three factors affecting capital budgeting decisions.
Ans:- Cost of investment: The amount required for investment.
- Expected returns: The profitability of the project.
- Risk factor: Higher-risk projects require careful analysis.
- What are the factors affecting dividend decisions?
Ans:- Earnings of the company: Higher earnings lead to higher dividends.
- Stability of earnings: Companies with stable earnings pay regular dividends.
- Growth opportunities: Firms with expansion plans retain earnings.
- Explain the importance of financial planning.
Ans:- Ensures availability of funds: Helps in determining the right sources of finance and ensures adequate funds for business operations and expansion.
- Reduces uncertainties: Proper financial planning minimizes risks by preparing for unforeseen expenses and economic fluctuations.
- Helps in optimum utilization of resources: Ensures that financial resources are used efficiently, avoiding wastage and improving profitability.
- What are the components of financial management?
Ans:- Investment decision: Selecting the right assets.
- Financing decision: Choosing sources of finance.
- Dividend decision: Determining profit distribution.
- Explain any three factors affecting working capital requirements.
Ans:- Nature of business: Manufacturing firms require more working capital.
- Credit policy: Flexible credit policies increase working capital needs.
- Operating cycle: Longer cycles require more working capital.
- Explain any three decisions in financial management.
Ans:- Investment decision: This decision relates to selecting the best investment avenues for the business. It involves allocating resources to profitable projects, purchasing fixed assets, and deciding on capital expenditure. The company must evaluate various investment opportunities using techniques such as Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period to ensure maximum returns.
- Financing decision: This decision determines the sources of funds for the business. It involves choosing between equity, debt, or a mix of both. The company needs to analyze factors such as cost of capital, financial risk, and control considerations before selecting the best financing option.
- Dividend decision: This decision focuses on how much profit should be distributed to shareholders as dividends and how much should be retained for reinvestment. The company must consider factors like profitability, future growth plans, shareholder expectations, and tax implications while making this decision.
- State the importance of capital structure.
Ans: Capital structure is crucial for the financial health and stability of a business. Its importance includes:
- Maximizing Returns – A well-balanced capital structure helps in optimizing the use of debt and equity to maximize shareholders’ wealth.
- Ensuring Financial Stability – Proper capital structure ensures that the company has enough funds for operations while maintaining financial stability.
- Minimizing Cost of Capital – An optimal mix of debt and equity reduces the overall cost of capital, leading to increased profitability.
- Flexibility in Operations – A good capital structure provides financial flexibility, allowing the company to adjust to market conditions and expansion needs.
Financial Management Class 12 Notes
6 Marks Questions
- Discuss the various factors affecting financial decisions.
Ans: Financial decisions impact the overall growth and sustainability of an organization. The major factors influencing financial decisions are:- Cost of Capital: Firms prefer sources of funds that offer a lower cost of capital.
- Risk Factor: High debt levels increase financial risk, making financing decisions crucial.
- Control Considerations: Issuing equity may dilute control over the company.
- Market Conditions: Interest rates, inflation, and economic stability impact financial choices.
- Business Expansion Plans: Companies planning growth may prefer retained earnings over external borrowing.
- Explain the various sources of finance available to a company.
Ans: Companies require funds from multiple sources, including:- Equity Shares: These provide ownership to shareholders and involve dividend payments.
- Preference Shares: Offer fixed returns but do not provide voting rights.
- Debentures: Long-term borrowing instruments that involve fixed interest payments.
- Bank Loans: Easily accessible sources of finance but involve interest obligations.
- Retained Earnings: Companies reinvest their profits for expansion and development.
- Describe the importance of working capital management.
Ans: Efficient working capital management ensures smooth business operations. Its importance includes:- Ensuring Liquidity: Firms must maintain sufficient cash flow to meet obligations.
- Improving Profitability: Proper inventory and receivables management enhances profits.
- Enhancing Creditworthiness: Strong financial health helps in securing loans easily.
- Maintaining Operational Efficiency: Avoiding cash shortages ensures seamless production and sales processes.
- What are the factors affecting capital structure decisions?
Ans: The capital structure determines a firm’s financial stability. The key factors influencing it are:- Cost of Capital: Firms aim for the cheapest financing options.
- Risk Considerations: More debt means higher repayment obligations, increasing financial risk.
- Market Conditions: Economic stability affects interest rates and financing choices.
- Growth and Profitability: Companies with strong profitability can sustain higher debt levels.
- Flexibility: Maintaining a balanced capital structure allows adaptability to financial needs.
- Explain in detail the scope of financial management.
Ans: Financial management covers key areas essential for business success:- Investment Decisions: Choosing the best projects and assets for growth.
- Financial Decisions: Determining the best mix of debt and equity.
- Dividend Decisions: Balancing retained earnings with shareholder payouts.
- Liquidity Management: Ensuring enough funds for smooth operations and unexpected expenses.
- Risk Management: Identifying and mitigating financial risks to protect assets.
These questions and answers will help students prepare effectively for their Class 12 Business Studies exams. Regular practice and understanding of concepts are key to scoring well!
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