MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Financial Management Class 12 MCQ Questions With Answers

Financial Management MCQ Class 12 Chapter 9 Question 1.

Which of the following statements is false regarding financial management?

(A) Aims at ensuring availability of enough funds whenever required.
(B) Aims at reducing the cost of funds procured.
(C) Is concerned with optimal procurement as well as usage of finance.
(D) Facilitates price discovery for securities of ompany.
Answer:
(D) Facilitates price discovery for securities of ompany.

Explanation:
The main objective of financial management is to maximize the wealth of shareholders. This include a proper estimation of the funds required for different purposes such as for the purchase of long term assets or to meet day-to-day expenses of business, etc.

Financial Management Class 12 MCQ Chapter 9 Question 2.

The foremost objective of financial management is:

(A) Maximisation of market share
(B) Maximisation of shareholders’ wealth
(C) Maintenance of liquidity
(D) Profit maximisation
Answer:
(B) Maximisation of shareholders’ wealth

Explanation:
The primary aim of financial management is to maximise shareholders’ wealth, which is referred to as the wealth maximisation concept.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 3.

For optimal procurement of manager identifies different and compares those items in terms of cost and associated risks. Identify concept highlighted in the above lines.

(A) Financial management
(B) Financial decisions
(C) Working capital
(D) None of the above
Answer:
(A) Financial management

Question 4.

Which of the financial decisions is about the quantum of finance to be raised from various long-term sources?

(A) Investment
(B) Dividend
(C) Financing
(D) None of these
Answer:
(C) Financing

Explanation:
Financing decision relates to the proportion in which funds are raised from various sources. Factors like cost of fund, risk involved, control, cash flow, etc. are considered before taking financial decision. In financing decision the firm has to decide the ratio of owned funds and borrowed funds.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 5.

A decision to acquire a new and modern plant to upgrade an old one is known as ………….. decision.

(A) Financing
(B) Working capital
(C) Investment
(D) Dividend
Answer:
(C) Investment

Explanation:
The investment decision relates to how the firm’s funds are invested in different g assets. These decisions are very crucial for any business since they affect its earning capacity in the long run.

Question 6.

Which of the following statements is false regarding financial management ?

(A) Money required for carrying out business activities is called business finance.
(B) For optimal procurement, different available sources of finance are identified and compared in terms of their costs and associated risks.
(C) The objective of financial management is to minimise the current price of equity shares.
(D) All of the above
Answer:
(C) The objective of financial management is to minimise the current price of equity shares.

Explanation:
The objectives of financial management is to maximize the wealth of shareholders, to provide maximum returns to the owners on their investment. To ensure continuous availability of sufficient funds at reasonable cost, etc.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 7.

Dilip is the finance manager of Venus Ltd. He is facing difficulty in deciding the amount of profit earned by the company that should be distributed as dividend to the shareholders. In the current year, the company earned high profit. However, Dilip thinks that it is better to declare higher dividend as he is sure about the earning potential of the company in the coming years. Which of the following factors affected Dilip’s choice regarding dividend decision.

(A) Taxation Policy
(B) Cash Flow Position
(C) Stability of Dividends
(D) Shareholders’ Preference
Answer:
(C) Stability of Dividends

Explanation:
Companies generally follow a policy of stabilising dividend per share. The increase in dividends is generally made when there is confidence that their earning potential has gone up and not just the earnings of the current year.

Question 8.

Tractors Pvt. Ltd. producing 2,00,000 trucks and generating revenue of ₹ 2,000 crores annually, has recently acquired the world’s second largest truck manufacturing company. After this acquisition, Tractors Pvt. Ltd. will become the world’s largest truck manufacturer. For financing the acquisition, the company had to arrange about ₹ 1,00,000 crores through debt and equity function is being performed by the company for arranging the funds through debt and equity.

(A) Investment
(B) Financing
(C) Dividend
(D) All of these
Answer:
(B) Financing

Explanation:
Issue of more equity may lead to dilution of management’s control over the business. Debt financing has no such implication. Companies afraid of a takeover bid would prefer debt to equity.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 9.

Match the FINANCIAL DECISIONS in Column I with their correct EXAMPLES in Column II.

Column I Column II
(a) Investment Decision (i) Profit  earned by company (after paying tax) is to be distributed to the shareholders.
(b) Financing Decision (ii) Decisions about the levels of cash, inventory and receivables.
(c) Dividend Decision (iii) The proportion of debt, equity, preference share capital.

(A) (ii), (iii), (i)
(B) (iii), (ii), (i)
(C) (ii), (i), (iii)
(D) (iii), (i), (ii)
Answer:
(A) (ii), (iii), (i)

Question 10.

Financial planning usually begins with the preparation of a………………

(A) Sales forecast
(B) Profit forecast
(C) Business cycle
(D) None of theses
Answer:
(A) Sales forecast

Explanation:
The financial planningbegins with determination of total capital requirement. For this the finance managers do the sales forecast and if the future prospects appear to be bright and expect increase in sale, then firm needs to increase its production capacity which means more requirement of long term funds.

Question 11.

takes into consideration the growth, performance, investments and requirement of funds for a given period.

(A) Business cycle
(B) Financial planning
(C) Organising
(D) Working capital
Answer:
(B) Financial planning

Explanation:
Financial planning is essentially the preparation of a financial blueprint of an organisation’s future operations. The objective of financial planning is to ensure that enough funds are available at right time.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 12.

Vikrant joins his father’s business of Organic masalas, near Kotgarh in Himachal after completing his MBA. In order to capture a major share of the market, he decided to sell the product in small attractive packages by using the latest packaging technology. His father suggested that they hire financial consultants to estimate the amount of funds that would be required for the purpose and timings when it would be required. The concept being discussed by Vikrant’s father, links which financial decision with the investment decision?

(A) Dividend decision
(B) Financial planning
(C) Capital structure decision
(D) Financing decision
Answer:
(B) Financial planning

Explanation:
The financial statements are prepared keeping in mind the requirement of funds for investment in the fixed capital and working capital. Then the expected profits during the period are estimated so that an idea can be made of how much of the fund requirements can be met internally.

Question 13.

Mr. Raghav, Finance manager of Manav InfraTech Pvt. Ltd., prepared a detailed plan of financial needs of the firm in coming six months and the sources from where funds will be acquired to meet out these needs as company is planning to open a new branch in other states of India. Identify the financial concept discussed here:

(A) Business cycle
(B) Financial planning
(C) Capital structure
(D) Working capital
Answer:
(B) Financial planning

Explanation:
Financial planning is broader in scope as it does not end by raising estimated finance. It includes long term investment decision- In financial planning finance manager analyses various investments plans and selects the most appropriate.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 14.

Which of the following statements is incorrect?

(A) Financial planning is the process of estimating the fund requirement of a business and specifying the sources of funds.
(B) The objective of financial planning is to ensure that enough funds are available at right time.
(C) Financial planning is a substitute of Financial Management.
(D) None of the above
Answer:
(C) Financial planning is a substitute of Financial Management.

Explanation:
Financial planning is not equivalent to, or a substitute for, financial management. Financial management aims at choosing the best investment and financing alternatives by focusing on their costs and benefits. Its objective is to increase the shareholders’ wealth. Financial planning on g the other hand aims at smooth operations by focusing on fund requirements and their availability in the light of financial decisions.

Question 15.

Which of the following is not an objective of financial planning?

(A) To ensure availability of funds whenever required.
(B) To choose the best investment and financing alternatives by focusing on their costs and benefits.
(C) To see that the firm does not raise resources unnecessarily.
(D) All are the objectives of financial planning.
Answer:
(B) To choose the best investment and financing alternatives by focusing on their costs and benefits.

Explanation:
The main objectives of financial planning is to ascertain the amount of fixed capital as well as the working capital required in a given period, to determine the amount to be raised through various sources using a judicious debt-equity mix and to ensure that the required amount is raised on time at the lowest possible cost.

Question 16.

Detailed plans of action are prepared under financial planning. What benefits does this result in?

(A) Reducing waste
(B) Reducing duplication of efforts
(C) Reducing gaps in planning
(D) All of the above
Answer:
(D) All of the above

Explanation:
Financial planning helps in coordinating various business functions, e.g., sales and production functions, by providing clear policies and procedures and making detailed plans of action which reduces waste, duplication of efforts, and gaps in planning.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 17.

Financial planning takes into consideration which of the following:

(A) Growth
(B) Performance
(C) Investments
(D) All of these
Answer:
(D) All of these

Explanation:
Financial planning takes into consideration the growth, performance, investments and requirement of funds for a given period. Financial planning includes both short-term as well as long-term planning. Long term planning relates to long term growth and investment. It focuses on capital expenditure programmes. Short term planning covers short term financial plan called budget

Question 18.

ICR =…………….

(A) EBIT/Interest
(B) EBIT x Interest
(C) EBIT – Interest
(D) Interest/EBIT
Answer:
(A) EBIT/Interest

Explanation:
The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation.

Question 19.

Which component of capital structure determines the overall financial risk ?

(A) Debt
(B) Equity
(C) Both (A) and
(B) (D) None of these
Answer:
(A) Debt

Explanation:
Debt is cheaper but is more risky for a business because the payment of interest and the return of principal is obligatory for the business.

Question 20.

Samara Ltd. has Debt Equity ratio of 3:1 whereas Gehlot Ltd. has Debt Equity ratio of 1:1. Name the advantage Samara Ltd. will have over Gehlot Ltd., when the rate of interest is lower than the rate of return on investment of the company.

(A) Trading on equity
(B) Low risk
(C) Low cost of equity
(D) Greater flexibility
Answer:
(A) Trading on equity

Explanation:
If the ROI of the company is higher, it can choose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater.

Question 21.

Which of the following statements is incorrect?

(A) A low Debt Service Coverage Ratio indicates better ability to meet cash commitments and consequently, the company’s potential to increase debt component in its capital structure.
(B) Use of higher debt increases the cost of equity.
(C) Low interest rates increase a firm’s capacity to employ higher debt.
(D) None of the above
Answer:
(A) A low Debt Service Coverage Ratio indicates better ability to meet cash commitments and consequently, the company’s potential to increase debt component in its capital structure.

Explanation:
A higher DSCR indicates better ability to meet cash commitments and consequently, the company’s potential to increase debt component in its capital structure.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 22.

When the stock market is bearish, a company must go for which of the following?

(A) More debt
(B) Less debt
(C) More equity
(D) Equal mix of debt and equity
Answer:
(A) More debt

Explanation:
During a bearish phase, a company may find raising of equity capital more difficult and it may opt for debt.

Question 23.

When the stock market is bullish, a company must go for which of the following?

(A) More debt
(B) More equity
(C) Less equity
(D) Equal mix of debt and equity
Answer:
(B) More equity

Explanation:
If the stock markets are bullish, equity shares are more easily sold even at a higher price. Use of equity is often preferred by companies in such a situation.

Question 24.

Of the following sources of funds, are Owner’s Funds.

(A) Equity share capital
(B) Preference share capital
(C) Reserves and surpluses
(D) All of the above
Answer:
(D) All of the above

Explanation:
Owners’ funds consist of equity share capital, preference share capital and reserves and surpluses or retained earnings.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 25.

Of the following sources of funds, are not Borrowed Funds.

(A) Loans
(B) Retained earnings
(C) Public deposits
(D) Debentures
Answer:
(B) Retained earnings

Explanation:
Borrowed funds can be in the form of loans, debentures, public deposits, etc. These may be borrowed from banks, other financial institutions, debenture holders and public.

Question 26.

Match the TERMS in Column I with their correct MEANING in Column II.

Column I Column II
(a) Floatation Costs (i) Comparing cash profits with the total cash required for the service of the debt and the preference share capital.
(b) ICR (Interest Coverage  Ratio) (ii) Extent to which earnings before interest and taxes of a company covers the interest obligation.
(c) DSCR (Debt Service Coverage Ratio) (iii) Cost involved in the process of raising resources

(A) (ii), (i), (iii)
(B) (iii), (ii), (i)
(C) (i), (iii), (ii)
(D) (iii), (i), (ii)
Answer:
(B) (iii), (ii), (i)

Question 27.

Fixed capital is financed through:

(A) Equity shares
(B) Preference shares
(C) Debentures
(D) All of these
Answer:
(D) All of these

Explanation:
Fixed capital be financed through long-term sources of capital such as equity or preference shares, debentures, long-term loans and retained earnings of the business. Fixed Assets should never be financed through short-term sources.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 28.

Net working capital may be defined as the:

(A) Excess of current assets over current liabilities
(B) Excess of current liabilities over current assets
(C) Both (A) and (B)
(D) one of the above
Answer:
(A) Excess of current assets over current liabilities

Explanation:
Some part of current assets is usually financed through short-term sources, i.e., current liabilities. The rest is financed through long-term sources and is called net working capital. Thus, NWC = CA – CL (i.e. 1 Current Assets – Current Liabilities.)

Question 29.

………………. is the time span between the receipt of raw material and their conversion into finished goods.

(A) Production cycle
(B) Business cycle
(C) Both (A) and (B)
(D) None of these
Answer:
(A) Production cycle

Explanation:
Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Some businesses have a longer production cycle while some have a shorter one. Duration and the length of production cycle, affects the amount of funds required for raw materials and expenses.

Question 30.

Which of the following statements is true?

(A) Higher competition requires larger stocks to meet urgent orders from customers which results into requirement of more working capital.
(B) The companies having growth prospects require lesser amount of working capital.
(C) If the rate of inflation is high, an organisation is required to invest less in working capital. .
(D) All of the above
Answer:
(A) Higher competition requires larger stocks to meet urgent orders from customers which results into requirement of more working capital.

Explanation:
Higher level of competitiveness may necessitate larger stocks of finished goods to meet urgent orders from customers. This increases the working capital requirement. Competition may also force the firm to extend liberal credit terms.

Question 31.

There is a boom in the demand for i-pods. How does it affect the requirement of working capital for companies manufacturing i-pods?

(A) More working capital will be needed.
(B) Less working capital will be needed.
(C) No change in working capital needed.
(D) None of the above
Answer:
(A) More working capital will be needed.

Explanation:
The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a smaller amount of working capital compared to a manufacturing organisation. This is because there is usually no processing.

Question 32.

Cars Udyog Ltd. plans to manufacture solar cars in its new plant. It has an offer from Toyota for collaboration. What impact will the collaboration have on the requirement of fixed capital for Cars Udyog Ltd.?

(A) Increase the requirement for fixed capital
(B) Decrease the requirement for fixed capital
(C) No change in fixed capital needed
(D) None of these
Answer:
(B) Decrease the requirement for fixed capital

Explanation:
At times, certain business organisations share each other’s facilities. Such collaboration reduces the level of investment in fixed assets for each one of the participating organisations.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 33.

Bright Bulbs Pvt. Ltd., is manufacturing good quality LED bulbs and catering to the local market. The current production of the company is 1,000 bulbs a day. Anita, the marketing manager of the company, surveyed the market and decided to supply the bulbs to five-star-hotels also. She anticipated the higher demand in future and decided to buy a sophisticated machine to further improve the quality and quantity of the bulbs produced. Which factor affected the fixed capital requirements of the company?

(A) Scale of Operations
(B) Growth Prospects
(C) Diversification
(D) Choice of Techniques
Answer:
(B) Growth Prospects

Explanation:
Companies which are expanding and have higher growth plan require more fixed capital as to expand they need to expand their production capacity and to expand production capacity companies need more plant and machinery so more fixed capital.

Question 34.

Tapan, after leaving his job, wanted to start a Private Limited Company with his son. His son was keen that the company may start manufacturing of Mobile-phones with some unique features. However, Tapan felt that the mobile phones are prone to quick obsolescence and a heavy fixed capital investment would be required regularly in this business. Therefore, he convinced his son to start a furniture business factor affecting fixed capital requirements is making Tapan choose furniture business over mobile phone.

(A) Scale of operations
(B) Choice of techniques
(C) Financing alternatives
(D) Technology upgradation
Answer:
(D) Technology upgradation

Explanation:
Industries in which technology up-gradation is fast need more amount of fixed capital as when new technology is invented old machines become obsolete and they need to buy new plants and machinery whereas companies where technological up-gradation is slow they require less fixed capital as they can manage with old machines.

Question 35.

Match the TERMS in Column I with their corresponding MEANING or EXPLANATION in Column II

Column I  Column II
(a) Fixed capital (i) Investment in current assets
(b) Working capital (ii) Assets which get converted into cash or cash equivalents within one year
(c) Fixed assets (iii) Assets which remains in the business for more than one year
(d) Current assets (iv) Investment in long-term assets

(A) (ii), (i), (iii), (iv)
(B) (iii), (iv), (ii), (i)
(C) (iv), (i), (iii), (ii)
(D) (iii), (i), (ii), (iv)
Answer:
(C) (iv), (i), (iii), (ii)

Assertion and Reason Based MCQs

Directions: In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:
(A) Both (A) and (R) are true, and (R) is the correct explanation of (A).
(B) Both (A) and (R) are true, but (R) is not the correct explanation of (A).
(C) (A) is true, but (R) is false.
(D) (A) is false, but (R) is true.

Question 1.

Assertion (A): Higher the flotation cost, less attractive the source.
Reason (R): The choice between the payment of dividend and retaining the earnings is, to some extent, affected by the difference in the tax treatment of dividends and capital gains.

Answer:
(B) Both (A) and (R) are true, but (R) is not the correct explanation of (A).

Explanation:
If the floatation cost is high, it will be more expensive for the company to raise funds, because the company ends up spending much higher money than it would if floatation cost less.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 2.

Assertion (A): Financial planning tries to link the present with the future.
Reason (R): Financial planning is essentially the preparation of a financial blueprint of an organisation’s future operations.

Answer:
(A) Both (A) and (R) are true, and (R) is the correct explanation of (A).

Explanation:
Financial planning means deciding in advance how much to spend and on what to spend according to the funds at your disposal. It enables the management to foresee the funds requirements both the quantum as well as the timing.

Question 3.

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

Answer:
(B) Both (A) and (R) are true, but (R) is not the correct explanation of (A).

Explanation:
Excess funding is almost as bad if as inadequate funding. Even if there is some surplus money, good financial planning would
put it to the best possible use so that the financial resources are not left idle and don’t unnecessarily add to the cost.

Question 4.

Assertion (A): Financial planning includes both short-term as well as long-term planning.
Reason (R): Short-term planning focuses on capital expenditure programmes.

Answer:
(C) (A) is true, but (R) is false.

Explanation:
Long-term planning relates to long term growth and investment. It focuses on capital expenditure programmes. Short term planning covers short term financial plan called budget.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 5.

Assertion (A): Financial planning includes determining the objectives, policies, procedures and programmes to deal with financial activities.
Reason (R): Financial planning facilitates in developing a sound capital structure which gives maximum returns to shareholders.

Answer:
(B) Both (A) and (R) are true, but (R) is not the correct explanation of (A).

Explanation:
Financial planning involves estimating the amount of capital to be raised determining the pattern of financing i.e., deciding on the form and proportion of capital to be raised and formulating the financial policies and procedures for procurement, 1 allocation and effective utilisation of funds.

Question 6.

Assertion (A): Debt and equity differ significantly in their cost and riskiness for the firm.
Reason (R): Debt is cheaper but is more risky for a business because the payment of interest and the return of principal is obligatory for the business.

Answer:
(A) Both (A) and (R) are true, and (R) is the correct explanation of (A).

Explanation:
The cost of debt is lower than the cost of equity for a firm because the lender’s risk is lower than the equity shareholder’s
risk, since the lender earns an assured return and repayment of capital and, therefore, they should require a lower rate of return. There is no such compulsion in case of equity, which is therefore, considered risk less for the business.

Question 7.

Assertion (A): Capital structure of a company affects only the profitability.
Reason (R): A capital structure will be said to be optimal when the proportion of debt and equity is such that it results in an increase in the value of the equity share.

Answer:
(D) (A) is false, but (R) is true.

Explanation:
Capital structure of a company affects both the profitability and the financial risk as capital structure is the mix between owner’s funds and borrowed funds.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 8.

Assertion (A): A higher DSCR indicates better ability to meet cash commitments.
Reason (R): If a firm uses its debt potential to the full, it loses flexibility to issue further debt.

Answer:
(B) Both (A) and (R) are true, but (R) is not the correct explanation of (A).

Explanation:
A higher DSCR indicates better ability to meet cash commitments and consequently, the company’s potential to increase debt component in its capital structure. If a firm uses its debt potential to the full, it loses flexibility to issue further debt, To maintain flexibility, it must maintain some borrowing power to take care of unforeseen circumstances.

Question 9.

Assertion (A): The higher the ICR, lower shall be the risk of company failing to meet its interest payment obligations.
Reason (R): If the ROI of the company is higher, it can choose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater.

Answer:
(B) Both (A) and (R) are true, but (R) is not the correct explanation of (A).

Explanation:
A higher ICR ratio indicates a better financial health. It means company is more capable to meet its interest obligations from operating earnings.

Question 10.

Assertion (A): A trading organisation usually needs a smaller amount of working capital compared to a manufacturing organisation.
Reason (R): The basic nature of a business influences the amount of working capital required. S3

Answer:
(A) Both (A) and (R) are true, and (R) is the correct explanation of (A).

Explanation:
The working capital requirement of the manufacturing companies is usually high as they require huge stock-in-trade (inventories) and the amount of their debtors is also expected to be large because of the credit sales involved.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 11.

Assertion (A): A labour-intensive organisation requires higher investment in plant and machinery.
Reason (R): Those manufacturing enterprises which make use of modern and automatic machines need large amount of fixed capital.

Answer:
(D) (A) is false, but (R) is true.

Explanation:
Companies using capital intensive techniques require more fixed capital whereas companies using labour-intensive techniques require less capital because capital intensive techniques make use of plant and machinery and company needs more fixed capital to buy plants and machinery.

Question 12.

Assertion (A): In peak season, because of higher level of activity, larger amount of working capital is required.
Reason (R): Most business have some seasonality in their operations.

Answer:
(A) Both (A) and (R) are true, and (R) is the correct explanation of (A).

Explanation:
The seasonal enterprises, i.e., the enterprise whose operations pick up seasonally may require more working capital to meet their increased operations during the particular season.

Question 13.

Assertion (A): With rising prices, larger amounts are required even to maintain a constant volume of production and sales.
Reason (R): The working capital requirement of a business become higher with higher rate of inflation.

Answer:
(A) Both (A) and (R) are true, and (R) is the correct explanation of (A).

Explanation:
Inflation leads to increase in prices of raw materials, thus more working capital is required. Changes in the price level also affect the working capital requirements. Generally, the rising prices will require the firm to maintain larger amount of working capital as more funds will be required to maintain the same current assets.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Case-Based MCQs

I. Read the following text and answer the following questions on the basis of the same:

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 ? 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.

Question 1.

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
Answer:
(B) Both (A) and (R) are true, but (R) is not the correct explanation of (A).

Explanation:
Capital structure refers to the mix between owners and borrowed funds. Capital structure of a company affects both the profitability and the financial risk. A capital structure will be said to be optimal when the proportion df debt and equity is such that it results in an increase in the value of the equity share.

Question 2.

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 degree of operating risk
(C) Higher degree of financial risk
(D) Higher earning of profit
Answer:
(C) Higher degree of financial risk

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 3.

“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
Answer:
(B) Financial Leverage

Explanation:
as the financial leverage increases, the cost of funds declines because of increased use of cheaper debt but the financial risk increases. The impact of financial leverage on the profitability of a business can be seen I through EBIT-EPS (Earning before Interest and Taxes-Earning per Share) analysi

Question 4.

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
Answer:
(D) Trading on Equity

Explanation:
Trading on Equity refers to the increase in profit earned by the equity shareholders due to the presence of fixed financial charges like interest.

II. Read the following text and answer the following questions on the basis of the same:

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. It involves committing the finance on a long-term basis. These decisions are very crucial for any business since they affect its earning capacity in the long run. 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. Instead of issuing 10% debenture the company can issue equity shares for raising the funds. The financial manager of the company would normally opt for a source which is the cheapest.

Question 1.

What is the other name of long-term decision ?

(A) Capital budgeting
(B) Gross working capital
(C) Financial management
(D) Working capital
Answer:
(A) Capital budgeting

Explanation:
Capital budgeting decision. involves committing the finance on a long term basis. For example, making investment in a new machine to replace an existing one or acquiring a new fixed asset or opening a new branch, etc. These decisions are very crucial for any business since they affect its earning capacity in the long run.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 2.

A decision for replacing machines with modern machinery of higher production capacity is a:

(A) Financing decision
(B) Working capital decision
(C) Investment decision
(D) None of the above
Answer:
(C) Investment decision

Question 3.

A decision for raising fund of ₹ 80,00,000 either from 10% debenture or equity shares is a:

(A) Financing decision
(B) Dividend decision
(C) Investment decision
(D) None of these
Answer:
(A) Financing decision

Explanation:
Financing decision is about the quantum of finance to be raised from various long-term sources.

Question 4.

The financing decisions are affected by various factors. Which one of the following factor is discussed in the above case?

(A) Cash flow position of the company
(B) Cost
(C) Amount of earnings
(D) Taxation policy
Answer:
(B) Cost

Explanation:
The cost of raising funds through different sources are different. A prudent financial manager would normally opt for a source which is the cheapest.

III. Read the following text and answer the questions given below:

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 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.

Question 1.

‘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) Scale of operations
(B) Choice of technique
(C) Growth prospects
(D) Diversification
Answer:
(D) Diversification

Explanation:
A firm may choose to diversify its operations for various reasons. With diversification, fixed capital requirements increase e.g., a textile company is diversifying and starting a cement manufacturing plant.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 2.

‘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) Nature of business
(B) Financing alternatives
(C) Growth prospects
(D) Scale of operations
Answer:
(B) Financing alternatives

Question 3.

‘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) Level of collaboration
(C) Growth prospects
(D) Choice of technique
Answer:
(A) Scale of operations

Explanation:
A larger organisation operating at a higher scale needs bigger plant, more space etc. and therefore, requires higher investment in fixed assets when compared with the small organisation.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 4.

‘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) Technology upgradation
(B) Diversification
(C) Level of collaboration
(D) Financing alternatives
Answer:
(C) Level of collaboration

Explanation:
If companies are preferring collaborations, then companies will need less fixed capital as they can share plant and machinery with their collaborators but if company prefers to operate as independent unit then there is more requirement of fixed f capital.

IV. Read the following text and answer the questions given below:

‘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.

Question 1.

‘It has been consistently earning good profits for many years’. This statement represents which factor affecting the dividend decision of Spun Ltd.?

(A) Cash flow position
(B) Stability of earnings
(C) Amount of earnings
(D) Stability of dividends
Answer:
(B) Stability of earnings

Explanation:
A company having stable earning is in a better position to declare higher dividends. As against this, a company having unstable earnings is likely to pay smaller dividend.

Question 2.

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

(A) Cash flow position
(B) Stability of earnings
(C) Amount of earnings
(D) Access to capital market
Answer:
(A) Cash flow position

Explanation:
The payment of dividend involves an outflow of cash. A company may be earning profit but may be short on cash. Availability of enough cash in the company is necessary for declaration of dividend.

MCQ Questions for Class 12 Business Studies Chapter 9 Financial Management

Question 3.

‘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
Answer:
(A) Shareholders’ preference

Question 4.

‘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) Shareholders’ preference
(B) Taxation policy
(C) Contractual constraints
(D) Legal constraints
Answer:
(C) Contractual constraints

Explanation:
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 does not violate the terms of the loan agreement in this regard.

MCQ Questions for Class 12 Business Studies with Answers