Class 12 Business Studies - Chapter Financial Management NCERT Solutions | Aval Ltd. is engaged in the business of
Aval Ltd. is engaged in the business of export of canvas goods and bags. In the past, the performance of the company had been upto 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 amount 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 concept so identified. ( Financial Planning).
b. ‘There is no restriction on payment of dividend by a company’. Comment. ( Legal & Contractual Constraints)
a. Identify the financial concept discussed in the above paragraph. Also, state the objectives to be achieved by the use of financial concept so identified.
Ans. The financial concept discussed in the above paragraph is called Capital budgeting decision. It is a long term investment decision. Capital Budgeting decisions are very crucial, as they affect the earning capacity of the business in the long-run. Since, these decisions involve huge amount of investment and are irreversible, they need to be taken with utmost care.
In the above case the company wants to invest in new machinery which will affect the operation of the company that leads to affect the profitability of the company as well.
The objectives can be achieved by the use of this financial concept are:
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Cash Flows of the project: When a business invests huge amount of money in a certain project, then it expects regular and reasonable cash inflows from such an investment. Cash generated from operations are analysed in selecting the desired project.
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The Rate of Return: Return expected from the investment is a major determinant of investment decision. The project is selected after comparing expected returns of different projects and the degree of risk involved in them.
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The Investment Criteria Involved: The decision to invest in a particular project involves a number of calculations regarding the amount of investment, interest rate, cash flows and rate of return. There are different techniques to evaluate investment proposals. These techniques are helpful in selecting a particular project.
b. ‘There is no restriction on payment of dividend by a company’. Comment.
Ans. Dividend is that part of profit, which is distributed among shareholders on regular basis. There are various factors which affect the dividend decision:
Legal Constraints: Certain provisions of the Companies Act, place restrictions on payouts as dividend. Such provisions must be adhered to, while declaring the dividend.
Contractual Constraints: While granting loans to a company, sometimes, the lender may impose certain restrictions on the payment of dividends in future. The companies are required to ensure that the dividend payout does not violate the loan agreement in this regard.
More Questions From Class 12 Business Studies - Chapter Financial Management
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Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional ₹ 80,00,000 for replacing machines with modern machinery of higher production capacity. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was ₹ 8,00,000 and total capital investment was ₹ 1,00,00,000. Suggest whether issue of debenture would be considered a rational decision by the company. Give reason to justify your answer. (Ans. No, Cost of Debt (10%) is more than ROI which is 8%).
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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.
c. What are the factors which will affect the capital structure of this company?
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What are the main objectives of financial management? Briefly explain.
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Explain the factors affecting dividend decision?
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What is financial risk? Why does it arise?
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“A capital budgeting decision is capable of changing the financial fortunes of a business.” Do you agree? Give reasons for your answer?
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“Capital structure decision is essentially optimisation of risk-return relationship.” Comment.
- Q:-
Name the concept of financial management which increases the return to equity shareholders due to the presence of fixed financial charges.
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