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Financial Management

NCERT Class 12 · Business Studies Based on NCERT Class 12 Business Studies textbook · Free CBSE study kit

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Chapter Notes

Overview
This chapter explains the concept of business finance and the role of financial management in an enterprise. It covers the three key financial decisions—investment, financing, and dividend—and their impact on shareholder wealth maximisation. The chapter also delves into financial planning, capital structure, and the factors affecting fixed and working capital requirements. The one big idea is that every financial decision must aim to increase the market price of equity shares, balancing risk and return.
Key Concepts (18)
Business Finance
Money required for carrying out business activities is called business finance. It is needed to establish, run, modernise, expand, or diversify a business, and for buying tangible and intangible assets as well as running day-to-day operations.
e.g. A textile company needs finance to buy machinery (tangible asset) and to pay salaries and buy raw materials (day-to-day operations).
Financial Management
Financial management is concerned with optimal procurement as well as the usage of finance. It aims at reducing the cost of funds procured, keeping the risk under control, and achieving effective deployment of such funds.
e.g. A company comparing bank loan interest rates (cost) and equity dividend expectations to choose the cheapest source of finance.
Wealth Maximisation
The primary aim of financial management is to maximise shareholders’ wealth, which is referred to as the wealth-maximisation concept. It means maximising the market value of equity shares.
e.g. If a decision to invest in a new machine yields benefits exceeding its cost, the share price rises, increasing shareholder wealth.
Investment Decision
The investment decision relates to how the firm’s funds are invested in different assets. It can be long-term (capital budgeting) or short-term (working capital management).
e.g. Deciding whether to invest Rs. 100 crores in a new factory (long-term) or how much inventory to hold (short-term).
Capital Budgeting Decision
A long-term investment decision involving committing finance on a long-term basis, such as investing in a new machine, acquiring a fixed asset, or opening a new branch.
e.g. Tata Steel’s decision to acquire Corus for $12 billion is a capital budgeting decision.
Working Capital Decision
Short-term investment decisions concerned with the levels of cash, inventory, and receivables. These affect the day-to-day working, liquidity, and profitability of a business.
e.g. A retailer deciding how much cash to keep in hand and how much credit to offer to customers.
Financing Decision
This decision is about the quantum of finance to be raised from various long-term sources, including shareholders’ funds (equity, retained earnings) and borrowed funds (debt, debentures).
e.g. A company deciding to raise Rs. 10 crores through a mix of 60% equity and 40% debentures.
Financial Risk
The chance that a firm would fail to meet its payment obligations, such as interest on debt or repayment of principal.
e.g. If a company has high debt and its profits fall, it may default on interest payments, increasing financial risk.
Dividend Decision
The decision regarding how much of the profit earned by a company (after paying tax) is to be distributed to shareholders as dividend and how much should be retained in the business.
e.g. A company with stable earnings may decide to pay 60% of profit as dividend and retain 40% for expansion.
Financial Planning
The process of estimating the fund requirement of a business and specifying the sources of funds. It aims to ensure availability of funds whenever required and to avoid raising resources unnecessarily.
e.g. A company forecasting sales growth of 20% and preparing budgets for the next five years to arrange funds accordingly.
Capital Structure
Capital structure refers to the mix between owners’ funds (equity, preference, retained earnings) and borrowed funds (debt, debentures, loans). It can be expressed as debt-equity ratio.
e.g. A company with Rs. 20 lakh debt and Rs. 10 lakh equity has a debt-equity ratio of 2:1.
Financial Leverage
The proportion of debt in the overall capital. It is computed as D/E or D/(D+E). As financial leverage increases, cost of funds declines but financial risk increases.
e.g. If a company has Rs. 10 lakh debt and Rs. 20 lakh equity, financial leverage is 0.5 (10/20).
Trading on Equity
The increase in profit earned by equity shareholders due to the presence of fixed financial charges like interest. It is favourable when RoI > cost of debt.
e.g. Company X with RoI 13.33% and debt at 10% interest sees EPS rise from Rs. 0.93 to Rs. 1.40 as debt increases.
Fixed Capital
Investment in long-term assets that remain in the business for more than one year, such as plant, machinery, land, and buildings.
e.g. A manufacturing company investing Rs. 50 crores in a new factory building and machinery.
Working Capital
Investment in current assets that get converted into cash or cash equivalents within one year, such as inventories, debtors, cash, and bills receivable.
e.g. A retailer holding Rs. 5 lakh worth of inventory and Rs. 2 lakh in cash for daily operations.
Interest Coverage Ratio (ICR)
The number of times earnings before interest and taxes (EBIT) of a company covers its interest obligation. ICR = EBIT / Interest.
e.g. If EBIT is Rs. 4 lakh and interest is Rs. 1 lakh, ICR = 4 times.
Debt Service Coverage Ratio (DSCR)
A ratio that compares cash profits generated by operations with total cash required for debt service (interest, preference dividend, and repayment obligations). DSCR = (PAT + Depreciation + Interest + Non-cash expenses) / (Preference dividend + Interest + Repayment obligation).
e.g. A company with PAT Rs. 2.8 lakh, depreciation Rs. 1 lakh, interest Rs. 1 lakh, and repayment Rs. 0.5 lakh has DSCR = (2.8+1+1)/(0+1+0.5) = 4.8/1.5 = 3.2 times.
Floatation Cost
The cost involved in raising funds, such as underwriting fees, legal charges, and printing costs for public issues.
e.g. A company issuing shares spends Rs. 2 lakh on legal and printing fees — this is floatation cost.
How It Works
Wealth Maximisation through Financial Decisions
  1. Step 1: Identify all available investment, financing, and dividend alternatives.
  2. Step 2: Evaluate each alternative based on its cost, risk, and return.
  3. Step 3: Select the alternative where benefits exceed costs, ensuring value addition.
  4. Step 4: Implement the decision, which should increase the market price of equity shares.
  5. Step 5: Monitor the impact on shareholder wealth and adjust future decisions accordingly.
💡 Wealth maximisation is not profit maximisation; it focuses on long-term market value of shares, not short-term profits.
EBIT-EPS Analysis for Capital Structure
  1. Step 1: Determine the total funds required and the interest rate on debt.
  2. Step 2: Calculate EBIT (Earnings Before Interest and Taxes) for the company.
  3. Step 3: For different debt levels, compute interest, EBT, tax, and EAT.
  4. Step 4: Divide EAT by the number of equity shares to get EPS.
  5. Step 5: Compare EPS across debt levels. If EPS rises with debt, financial leverage is favourable (RoI > cost of debt). If EPS falls, leverage is unfavourable.
💡 Students often forget that the number of equity shares changes when debt is used — more debt means fewer shares (since less equity is used), which affects EPS calculation.
Financial Planning Process
  1. Step 1: Prepare a sales forecast for the planning period (e.g., 5 years).
  2. Step 2: Estimate the funds required for fixed capital and working capital based on sales forecast.
  3. Step 3: Estimate expected profits and retained earnings (after dividend payouts).
  4. Step 4: Calculate the external funds requirement (total funds minus internal accruals).
  5. Step 5: Identify sources for external funds and prepare cash budgets.
💡 Financial planning is not the same as financial management — planning focuses on fund availability, while management focuses on optimal procurement and usage.
Exam Traps — Don't Make These Mistakes
⚠ Confusing Wealth Maximisation with Profit Maximisation
✗ The objective of financial management is to maximise profit.
→ Profit maximisation is a narrow, short-term goal that ignores risk and timing. Wealth maximisation considers the market value of shares and long-term shareholder value.
✓ The primary aim of financial management is to maximise shareholders’ wealth, i.e., the market price of equity shares.
⚠ Mixing Up Investment Decision and Financing Decision
✗ Investment decision is about how to raise funds from different sources.
→ Investment decision is about where to invest funds (assets), not how to raise them. Financing decision is about raising funds from sources like debt and equity.
✓ Investment decision relates to how the firm’s funds are invested in different assets (long-term or short-term). Financing decision is about the quantum of finance to be raised from various long-term sources.
⚠ Thinking Debt is Always Better Because It Is Cheaper
✗ Debt is always better than equity because it is cheaper and increases EPS.
→ Debt increases financial risk. If RoI is less than the cost of debt, EPS falls (unfavourable leverage). Also, high debt may increase cost of equity and reduce share price.
✓ Debt is cheaper but riskier. A company should use debt only up to a level where the increase in financial risk does not outweigh the benefit of lower cost, ensuring maximisation of shareholder wealth.
⚠ Ignoring the Difference Between Fixed Capital and Working Capital Factors
✗ Nature of business affects working capital requirement.
→ Nature of business primarily affects fixed capital (e.g., manufacturing needs more fixed assets than trading). Working capital is affected by factors like operating cycle and credit policy.
✓ Nature of business affects fixed capital requirement — a manufacturing concern needs higher fixed capital than a trading concern. Working capital requirement is influenced by factors like the length of the operating cycle and credit terms.
⚠ Confusing Financial Risk with Business Risk
✗ Financial risk is the risk of loss due to changes in market conditions.
→ Financial risk specifically refers to the chance that a firm will fail to meet its fixed payment obligations (interest, principal). Business risk (operating risk) depends on fixed operating costs.
✓ Financial risk is the chance that a firm would fail to meet its payment obligations, such as interest on debt. Business risk depends on fixed operating costs and is separate from financial risk.
Compare & Contrast
Definition and Time Horizon
Fixed Capital
Working Capital
Fixed capital refers to investment in long-term assets (more than one year), while working capital refers to investment in current assets (converted into cash within one year).
Cost and Risk
Debt
Equity
Debt is cheaper (interest is tax-deductible) but riskier (obligatory interest and principal repayment). Equity is costlier (higher expected return) but less risky (no compulsion to pay dividend or repay capital).
Focus Area
Investment Decision
Financing Decision
Investment decision focuses on where to invest funds (assets), while financing decision focuses on how to raise funds (sources of capital).
Exam Focus
Marks pattern: 2 MCQs (1 mark each), 1 Short Answer (3 marks), 1 Long Answer (5 marks), and occasionally a case study (4-5 marks). Total approximately 12-14 marks.
Most asked: Objectives of financial management (wealth maximisation) · Factors affecting capital structure (especially cash flow, RoI, risk, control) · Trading on Equity and EBIT-EPS analysis · Factors affecting fixed and working capital requirements · Difference between investment, financing, and dividend decisions
Don't skip: Explain the concept of financial leverage and trading on equity with a numerical example (EBIT-EPS analysis).; Discuss any five factors affecting the choice of capital structure.; Distinguish between fixed capital and working capital and explain factors affecting their requirements.
One-Line Revision (read aloud before the exam)
  1. Business finance is the money required for carrying out all business activities from establishment to expansion.
  2. Financial management aims at optimal procurement and usage of finance to maximise shareholders' wealth.
  3. Wealth maximisation means maximising the market price of equity shares, not just profits.
  4. Investment decision involves where to invest funds; it includes capital budgeting and working capital decisions.
  5. Financing decision determines the proportion of debt and equity in the capital structure.
  6. Dividend decision decides how much profit to distribute as dividend and how much to retain.
  7. Financial planning ensures availability of funds at the right time and avoids idle finance.
  8. Capital structure is the mix of owners' funds and borrowed funds, measured by debt-equity ratio.
  9. Financial leverage is the proportion of debt in total capital; higher leverage increases risk.
  10. Trading on equity is the use of debt to increase EPS when RoI exceeds cost of debt.
  11. Fixed capital is investment in long-term assets like plant and machinery.
  12. Working capital is investment in current assets like inventory, debtors, and cash.
  13. Interest Coverage Ratio = EBIT / Interest; higher ratio means lower risk of default.
  14. Factors affecting fixed capital include nature of business, scale, technology, and growth prospects.
  15. Factors affecting working capital include nature of business, operating cycle, credit policy, and inflation.

MCQs — 10 Questions with Answers

Q1. Which of the following best defines business finance?

  • A. Money earned by the business from its operations and sales
  • B. Money required for carrying out business activities at any stage of its life ✓
  • C. Money borrowed only from banks and financial institutions
  • D. Money spent on purchasing fixed assets only

Answer: B — Business finance includes all money needed to establish, run, modernise, expand, or diversify a business from any source and for any purpose.

Q2. In the Tata Steel Corus acquisition case, the primary reason for raising $8 billion through debt was to:

  • A. Reduce the total cost of finance procurement
  • B. Finance the $12 billion acquisition and maintain ownership control ✓
  • C. Ensure that debt equity ratio remains balanced
  • D. Comply with regulatory requirements of Dutch authorities

Answer: B — Tata Steel used debt as a major source because it needed substantial funds for the acquisition while maintaining control through equity investment.

Q3. What is the primary objective of financial management?

  • A. To minimise all business expenses and costs
  • B. To maximise the market value of equity shares and shareholder wealth ✓
  • C. To ensure the company borrows the maximum possible amount
  • D. To reduce the role of debt in capital structure

Answer: B — The wealth-maximisation concept states that financial management aims to increase the market price of equity shares by ensuring each decision adds value.

Q4. Which of the following is NOT a component affected by financial management decisions?

  • A. Size and composition of fixed assets
  • B. Quantum of current assets and receivables
  • C. Employee recruitment and job rotation methods ✓
  • D. Proportion of long-term and short-term funds

Answer: C — Financial management decisions affect financial statements and asset composition, but recruitment methods and job rotation are HR decisions, not financial management decisions.

Q5. Capital structure refers to:

  • A. The physical infrastructure and buildings of a company
  • B. The mix of long-term and short-term funds including debt and equity ✓
  • C. Only the amount of equity shares issued by the company
  • D. The total value of all company assets

Answer: B — Capital structure is the composition of long-term financing—the proportion of debt, equity shares, and preference shares used to finance the business.

Q6. In a scenario where a manufacturing company invests Rs. 200 crores in new machinery and production facilities, which financial management aspect is most directly affected?

  • A. The quantum and composition of current assets only
  • B. The size of the company's working capital requirement
  • C. The size and composition of fixed assets, and subsequently the working capital requirement ✓
  • D. The proportion of debt and equity in capital structure only

Answer: C — Investing in fixed assets increases their size and composition; this also requires proportionate increase in working capital to support expanded operations.

Q7. Which statement correctly describes the relationship between procurement cost of funds and investment returns?

  • A. Returns from investment should be less than procurement cost to maximise profit
  • B. Procurement cost and investment returns are independent of each other
  • C. Investment returns must exceed the cost at which funds are procured to create value ✓
  • D. Financial management aims to equalise procurement cost with investment returns

Answer: C — Financial management's core principle is that funds are procured at some cost and must be invested to earn returns exceeding that cost; otherwise value is destroyed.

Q8. Which of the following statements is correct regarding the Tata Steel-Corus acquisition?

  • A. Tata Steel used only internal accruals to finance the $12 billion acquisition
  • B. Tata Sons and Tata Steel each invested $1 billion in preference shares, while Tata Steel raised over $8 billion in debt ✓
  • C. The acquisition was financed entirely through equity and preference shares
  • D. A special purpose vehicle was created because Tata Steel lacked ownership capacity

Answer: B — The case clearly states Tata Sons invested $1 billion in preference shares, Tata Steel invested $1 billion equally, and $8 billion was raised through debt via SPV.

Q9. Assertion: Financial management decisions determine almost all items in a company's Balance Sheet and Profit & Loss Account. Reason: Financial statements reflect the cumulative impact of past and current financial decisions taken by the company.

  • A. Both assertion and reason are correct, and reason explains assertion ✓
  • B. Assertion is correct but reason is incorrect
  • C. Both assertion and reason are correct but reason does not explain assertion
  • D. Both assertion and reason are incorrect

Answer: A — The assertion is true because decisions on assets, liabilities, debt, equity, and investments directly shape the financial statements; the reason correctly explains why this happens.

Q10. Which of the following most correctly defines the concept of wealth maximisation in financial management?

  • A. Increasing the total amount of money the company holds in cash reserves
  • B. Maximising the market value of equity shares by ensuring each financial decision adds value and increases share price ✓
  • C. Reducing all business liabilities and borrowing as much as possible
  • D. Ensuring that all profits are distributed as dividends to shareholders

Answer: B — Wealth maximisation means increasing the market price of equity shares through efficient financial decisions that add value, not merely accumulating cash or cutting costs arbitrarily.

Flashcards

What is business finance?

Money required for carrying out business activities like establishing, running, modernising, expanding, or diversifying a business at any stage of its life.

Define financial management in one sentence.

Financial management is concerned with optimal procurement and usage of finance to reduce cost of funds, control risk, and achieve effective deployment of funds.

What is the primary objective of financial management?

To maximise shareholders' wealth, which means maximising the market value of equity shares by ensuring each financial decision adds value.

What is capital structure?

The mix of long-term and short-term funds used to finance a business, including the proportion of debt, equity shares, and preference shares.

Name two sources from which Tata Steel raised finance for Corus acquisition.

Tata Steel raised finance through debt (over $8 billion), equity investment from Tata Sons ($1 billion preference shares), and internal accruals.

What is fixed capital?

Long-term investment in tangible assets like machinery, factories, buildings, and intangible assets like patents and trademarks needed to establish business operations.

What is working capital?

Current assets needed for day-to-day operations like cash, inventory, and receivables minus current liabilities to keep the business running smoothly.

Why is financial planning important?

Financial planning ensures availability of funds whenever required, avoids idle finance, controls costs, and supports business growth and survival.

What is a Special Purpose Vehicle (SPV) in the context of Corus deal?

Tata Steel UK was an SPV created specifically to facilitate the acquisition and raise the required $12 billion for the Corus transaction.

How do financial management decisions affect the Balance Sheet and P&L statement?

Almost all items like fixed assets, current assets, interest expense, depreciation, and dividends in financial statements are directly affected by financial management decisions.

Important Board Questions

Define business finance and state any two reasons why it is essential at every stage of a business. [2 marks]

Business finance = money required for business activities. Reasons: establish business (fixed assets), run day-to-day operations (working capital), expand/modernise, or diversify activities.

Explain with examples how financial management decisions affect the composition of a company's current assets. (Show how credit policy and inventory decisions impact working capital.) [5 marks]

Current assets = cash, inventory, receivables. Explain: stricter credit policy → lower receivables; higher inventory → larger current assets; better receivables management → better cash position. Example: retail company holding more inventory during festival season increases current assets; manufacturing firm giving 90-day credit increases receivables.

Analyse the Tata Steel Corus acquisition case and explain how the company's financial management decisions affected its capital structure. What are the key factors that influenced Tata Steel's choice between debt and equity financing for this $12 billion transaction? [6 marks]

Capital structure = debt + equity mix. Tata Steel raised: $8B debt + $2B equity (Tata Sons $1B preference + Tata Steel $1B equity). Factors: (1) cash flow position—could service debt through operations; (2) interest coverage—capability to pay interest; (3) control—maintain ownership; (4) cost of debt vs equity; (5) risk—debt increases financial risk but equity dilutes control; (6) flexibility—debt has fixed obligations; (7) market conditions—2007 credit was available. SPV structure used to manage complexity.

Assertion-Reason Questions for Financial Management

Q1. Assertion (A):

Financial management is essential for the survival and growth of a business because it determines how funds are procured and deployed.

Reason (R):

The optimal procurement of finance at minimum cost and its efficient deployment to earn returns exceeding the cost are the core objectives of financial management.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both the assertion and reason are true. The reason correctly explains WHY financial management is essential—it's not just about having funds, but about procuring them efficiently (low cost, manageable risk) and deploying them wisely (returns exceed costs). The chapter emphasizes this as the foundation of financial management's importance. The reason is the correct causal explanation for the assertion.

Q2. Assertion (A):

The Profit and Loss Account of Tata Steel in 2008-09 (year after Corus acquisition) would show higher interest expenses compared to pre-acquisition years.

Reason (R):

The company raised $8 billion in debt to finance the acquisition, and higher debt amounts necessarily result in higher interest expense in the P&L Account.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both are true and the reason correctly explains the assertion. The chapter explicitly states that 'Higher amount of debt means higher interest expense in future.' Since Tata Steel raised substantial debt, interest expense would increase. This is a direct cause-and-effect relationship clearly outlined in the chapter regarding how financing decisions impact the P&L Account.

Q3. Assertion (A):

The size and composition of fixed assets shown on the Balance Sheet is directly influenced by financial management decisions.

Reason (R):

Capital budgeting decisions determine the quantum of fixed assets that a company will acquire, which in turn affects the Balance Sheet composition.

Answer: B — Both A and R are true, but R is NOT the correct explanation of A — Both statements are true. The chapter confirms both that 'The size and composition of fixed assets of the business' is affected and that capital budgeting decisions drive this. However, the reason is not the ONLY or primary explanation—it's one of several financial management decision areas. The reason is accurate but not the unique/complete explanation for why fixed assets are affected (other decisions like financing also impact composition). This tests whether students understand that true statements can have correct but incomplete causal relationships.

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Case-Based Questions (CBQ) for Financial Management

Case Study:

Reliance Industries Limited is planning a Rs. 50,000 crore expansion project for its refinery and petrochemicals division. The company has identified that it requires Rs. 30,000 crores in fixed capital for new machinery and infrastructure, and Rs. 20,000 crores in working capital for inventory, receivables, and operations. The company can raise funds through three sources: bank loans at 9% interest annually, issuing equity shares where investors expect a 14% return, and retaining Rs. 8,000 crores of current year profits as internal accruals. The company's current debt-to-equity ratio is 1:2, and financial analysts project that adding Rs. 15,000 crores of new debt would increase the ratio to 1:1, making lending institutions cautious about default risk.

Q1. Based on the case, which combination of financing sources best aligns with the wealth-maximization objective of financial management?

  • A. Use only bank loans for Rs. 50,000 crores to minimize cost at 9% interest
  • B. Use Rs. 8,000 crores internal accruals + Rs. 15,000 crores debt + Rs. 27,000 crores equity to balance cost and risk ✓
  • C. Use only equity financing to avoid any interest expense
  • D. Use Rs. 42,000 crores debt to maximize the cost advantage over the 14% equity cost

Answer: B

Q2. The Rs. 20,000 crore working capital requirement mentioned in the case represents:

  • A. Only the inventory needed for manufacturing
  • B. Current assets required to support expanded operations including inventory, receivables, and cash ✓
  • C. Long-term funds required for the refinery project
  • D. Fixed assets like machinery and building for the expansion

Answer: B

Q3. Why would financial analysts be concerned if Reliance raised Rs. 15,000 crores of debt (changing the debt-to-equity ratio from 1:2 to 1:1)?

  • A. The company would have less operational flexibility and higher financial risk
  • B. Higher debt ratio increases interest expenses, reducing profitability
  • C. Lenders become cautious about default risk, and cost of future borrowing may increase
  • D. All of the above ✓

Answer: D

Q4. If Reliance invests the Rs. 30,000 crores in fixed assets and the project generates an annual return of Rs. 2,700 crores, and the weighted average cost of capital is Rs. 2,400 crores, should the project be undertaken according to the chapter's principles?

  • A. Yes, because annual returns (Rs. 2,700 crores) exceed annual cost of capital (Rs. 2,400 crores), creating shareholder value ✓
  • B. No, because annual returns should exceed the total investment amount
  • C. No, because the project requires Rs. 50,000 crores total investment
  • D. Yes, only if all funding comes from internal accruals

Answer: A

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Previous Year Questions (PYQ) for Financial Management

Real CBSE board exam questions from past papers — free to attempt.

CBSE 2026 · Set 66/2/1 · 1 mark

The process of estimating the fund requirements of a business and specifying the sources of funds is called _______.

  • Trading on Equity
  • Capital Budgeting decision
  • Financial Management
  • Financial Planning

CBSE 2026 · Set 66/2/1 · 1 mark

There are two statements, Assertion (A) and Reason (R). Assertion (A): The dividend in growth companies is more than that in the non-growth companies. Reason (R): Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. Choose the correct alternative from those given below:

  • Assertion (A) is false and Reason (R) is true.
  • Both Assertion (A) and Reason (R) are false.
  • Assertion (A) is true and Reason (R) is false.
  • Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).

CBSE 2026 · Set 66/2/1 · 1 mark

Alka Motors is one of the leading automobile companies in India. Due to growing demand for electric vehicles, Alka Motors planned to expand its business and for this, it wanted to raise funds. The finance manager suggested that it should raise funds through equity as the market was bullish. As per the suggestion of finance manager, the company decided to raise ` 3,500 crore from equity for its expansion plan for electric vehicles. The factor that the finance manager took into consideration to raise funds through equity was:

  • Cash flow position
  • Flexibility
  • Cost of debt
  • Stock-market conditions

CBSE 2026 · Set 66/2/1 · 6 marks

'Freshju' is a trading company, selling bottled juices made by other manufacturers. Now, it planned to sell its juices across India. For this, 'Freshju' decided to enter into 'Juice manufacturing'. It also has ambitious plans to export its juices to other countries in the future. To meet anticipated higher demand in future, the company set-up a larger manufacturing unit. The Chief Executive Officer, Ravinder, ordered automatic juice-filling and bottling machines to increase speed, improve hygiene and for consistency in production. Since the investment was huge, instead of buying all new machinery 'Freshju' took some expensive machines on lease. They also collaborated with a nearby packaging unit to use their packing machines during peak-season. This helped 'Freshju' to manage seasonal surges in demand without investing in additional equipment that would remain underutilized during off season. Quoting lines from the above, identify and explain any four factors that will affect the fixed capital requirements of 'Freshju'.

CBSE 2026 · Set 66/2/3 · 1 mark

Alka Motors is one of the leading automobile companies in India. Due to growing demand for electric vehicles, Alka Motors planned to expand its business and for this, it wanted to raise funds. The finance manager suggested that it should raise funds through equity as the market was bullish. As per the suggestion of finance manager, the company decided to raise ` 3,500 crore from equity for its expansion plan for electric vehicles. The factor that the finance manager took into consideration to raise funds through equity was :

  • Cash flow position
  • Flexibility
  • Cost of debt
  • Stock-market conditions

CBSE 2026 · Set 66/2/3 · 1 mark

There are two statements, Assertion (A) and Reason (R). Assertion (A) : The dividend in growth companies is more than that in the non-growth companies. Reason (R) : Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. Choose the correct alternative from those given below :

  • Assertion (A) is false and Reason (R) is true.
  • Both Assertion (A) and Reason (R) are false.
  • Assertion (A) is true and Reason (R) is false.
  • Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).

CBSE 2026 · Set 66/1/1 · 1 mark

A position when a company is unable to meet its fixed financial charges like interest payment, dividend on preference shares and repayment obligations is referred to as ______.

  • Trading on equity
  • Financial risk
  • Business risk
  • Operating risk

CBSE 2026 · Set 66/1/1 · 1 mark

'Certain provisions of the Companies Act place restrictions on payouts as dividend. Such provisions must be adhered to while declaring the dividend.' The factor affecting dividend decision discussed above is:

  • Access to capital market
  • Contractual constraints
  • Legal constraints
  • Stock market reaction

CBSE 2026 · Set 66/1/1 · 6 marks

'Koka Manufacturing Ltd.' is a large scale manufacturer in the electronics industry. In this industry assets are prone to obsolescence and their replacement becomes due faster with change in technology. The company is constantly under pressure to upgrade its machinery and equipment as it would help company to stay competitive, improve its product quality and reduce production costs. So instead of purchasing the machinery, company decides to lease the required machinery, giving it flexibility to upgrade equipment at the end of lease term. This helps company to maintain operational efficiency, technological competitiveness and financial flexibility. Identify and explain four factors that would affect the fixed capital requirements of 'Koka Manufacturing Ltd.'.

CBSE 2026 · Set 66/1/2 · 1 mark

'If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same.' The factor affecting dividend decision discussed above is:

  • Stability of dividends
  • Amount of earnings
  • Legal constraints
  • Shareholders' preference

CBSE 2026 · Set 66/1/3 · 1 mark

While granting loans to a company, sometimes the lender may impose certain restrictions on the payment of dividends in future. The factor affecting dividend decision discussed above is

  • Access to capital market
  • Contractual constraints
  • Legal constraints
  • Stock market reaction

CBSE 2026 · Set 66/1/3 · 6 marks

Koka Manufacturing Ltd. is a large scale manufacturer in the electronics industry. In this industry assets are prone to obsolescence and their replacement becomes due faster with change in technology. The company is constantly under pressure to upgrade its machinery and equipment as it would help company to stay competitive, improve its product quality and reduce production costs. So instead of purchasing the machinery, company decides to lease the required machinery, giving it flexibility to upgrade equipment at the end of lease term. This helps company to maintain operational efficiency, technological competitiveness and financial flexibility. Identify and explain four factors that would affect the fixed capital requirements of Koka Manufacturing Ltd.

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