Financial Management: Class 12 PYQs 2016–2026 with solutions

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_________.

'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:

Assertion (A): The dividend in growth companies is more than in non-growth companies. Reason (R): Companies with good growth opportunities retain more of their earnings to finance investment. (A) A false, R true (B) both false (C) A true, R false (D) both true, R explains A

'Radhe Textiles' and 'Ghanshyam Garments' jointly set up a common dyeing and finishing plant because neither had enough scale to use it fully. The fixed capital requirement of each will be: (A) higher (B) lower than earlier (C) same (D) nil

Assertion (A): The cost of debt is higher than the cost of equity. Reason (R): The lender's risk is lower than the equity shareholder's, since the lender earns an assured return and repayment of capital. (A) both true, R explains A (B) both true, R does not explain A (C) A true, R false (D) A false, R true

Which is not a factor affecting capital structure? (A) cash flow position (B) return on investment (C) financing alternatives (D) stock market conditions

Which will require higher working capital? (A) trading organisations (B) short processing cycles (C) high level of competition (D) strict credit policy towards debtors

The risk related to inability to meet fixed financial charges like interest payment and other repayment obligations is known as:

There are two Statements, Assertion (A) and Reason (R). Assertion (A): Larger the lead time, larger is the quantity of material required to be stored and larger shall be the amount of working capital required. Reason (R): If the raw material do not have a record of uninterrupted availability, higher stock levels may be required. Choose the correct alternative from the alternatives given below:

CVX Ltd (home appliances), earning well and paying high dividends, decided to make soup makers, toasters and irons and enter emerging markets abroad; for the extra investment it retained earnings and paid smaller dividends. The factor affecting dividend decision is: (A) amount of earnings (B) stability of earnings (C) stability of dividends (D) growth opportunities

'Isha Sweets' makes healthy date-based sweets; this year the cost of dates, dry fruits and other ingredients rose, so more funds were needed to maintain the same production and sales, raising working capital. The factor is: (A) availability of raw material (B) inflation (C) scale of business (D) production cycle

Statement I: The cost of debt is more than the cost of equity. Statement II: Lenders' risk is lower than equity shareholders' risk. (A) both true (B) both false (C) I true, II false (D) I false, II true

'To ensure that enough funds are available at the right time to honour the commitments and carry out the plans' is discussed in: (A) capital structure (B) financial leverage (C) financial planning (D) investment decision

KJ Ltd, a tile maker in Udaipur with stores across Rajasthan, decides to lease trucks instead of owning them. The effect on capital requirements is: (A) decrease fixed capital requirements (B) increase fixed capital (C) no effect on fixed capital (D) decrease working capital

Identify the incorrect statement about financial leverage: (A) the proportion of debt in overall capital is financial leverage (B) financial risk rises with financial leverage (C) the proportion of equity in overall capital is financial leverage (D) as leverage increases, the cost of funds declines

Which factor affects the capital budgeting decision? (A) investment criteria involved (B) floatation costs (C) tax rate (D) state of capital market

Which factors affect fixed capital requirements? 1 financing alternatives 2 level of collaboration 3 production cycle 4 choice of technique 5 seasonal factors 6 level of competition. (A) 2, 3, 6 (B) 3, 4, 5 (C) 3, 4, 6 (D) 1, 2, 4

'Dovex' was a large company with a renowned name in healthcare industry, specialising in the development and production of life saving medications and medical devices. With a strong reputation for ethical practices, 'Dovex' attracted a large number of investors who had great faith in the company's future. This allowed 'Dovex' to raise capital easily from the market whenever expansion or new projects were to be undertaken. As a result, it could pay high dividends to the shareholders.
The factor affecting dividend decision discussed above, which allowed 'Dovex' to pay high dividends to the shareholders is:

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

'Mudro Infratech' earned 40% more profit from a temporary contract; the Finance Manager did not raise the dividend per share because earnings had gone up but not the earning potential. The factor: (A) cash flow position (B) shareholders' preference (C) growth opportunities (D) stability of dividends

Which does not highlight the importance of financial planning? (A) forecasts what may happen (B) avoids business shocks and surprises (C) links investment and financing decisions (D) detailed plans increase waste, duplication and gaps

Which is not a factor affecting financing decision? (A) fixed operating costs (B) cash flow position (C) control considerations (D) diversification

During the Covid-19 pandemic, the restaurant industry faced many challenges. The slowdown led to huge decrease in demand. From April 2022, the effect of Covid started reducing. The economy started picking up and a boom was noticed in the restaurant industry. As a result, larger amount of working capital was required with increased production and sales.
The factor affecting the working capital requirement discussed above is:

Which of the following statements does not highlight the importance of financial planning?

In the paint industry, various raw materials are mixed in different proportions with petroleum for manufacturing different kinds of paints. One specific raw material is not readily and regularly available to the paint manufacturing companies. Bonler Paints Company is also facing this problem and because of this there is a time lag between placing the order and the actual receipt of the material. But, once it receives the raw materials, it takes less time in converting it into finished goods.
Identify the factors affecting the working capital requirements of this industry.

What is meant by 'Capital Structure'?

Name and state the aspect of financial management that enables to foresee the fund requirements both in terms of 'the quantum' and 'the timings'.

Rizul Bhattacharya 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. Rizul Bhattacharya 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.
Identify the factor affecting fixed capital requirements which made Rizul Bhattacharya to choose furniture business over mobile phones.

Explain how these factors affect fixed capital requirements: (i) nature of business (ii) technology upgradation (iii) level of collaboration.

State any three points of importance of financial planning.

State any three factors that determine the fixed capital requirement of a company.

State any three factors that affect the fixed capital requirements of a company.

Abhinav, production manager of KPG Ltd, a steel plant, proposed replacing machinery with new high-tech machines; the finance manager said it must be evaluated carefully as it involves huge investment and is irreversible except at huge cost. Identify the decision and state two factors affecting it.

Explain the factors affecting fixed capital requirements: (i) nature of business (ii) choice of technique (iii) growth prospects.

Explain the factors affecting financing decision: (i) fixed operating costs (ii) control considerations (iii) state of capital market.

Amrit Ltd and Nimrit Ltd each have capital employed of ₹ 80 lakh. Amrit: equity ₹ 40 lakh (40,000 shares of ₹ 100) and 6% debt ₹ 40 lakh. Nimrit: 80,000 equity shares of ₹ 100. ROI 10% for both; tax rate 50%. (a) Calculate EPS. (b) Which has better EPS and why?

Kanav, after passing out of college with specialization in renewable energy, was determined to start a solar power plant. The venture required heavy investment in plant and machinery and less on manual labour. Kanav invested in the latest solar panel technology and infrastructure and purchased the latest solar panels, inverters and battery storage systems.
Despite the high risk and substantial investment, Kanav's business had good expansion possibilities. The world was increasingly moving towards clean energy solutions, and there was a growing demand for sustainable power sources. So, Kanav decided to create a higher capacity to meet the anticipated demand quickly. This entailed further investment in fixed assets which Kanav was able to arrange.
As the years passed, the solar power plant did very well and played a pivotal role in the city's transition towards a greener and more sustainable future.
Identify and explain the two factors affecting the fixed capital requirements discussed in the above case.

Explain as factors affecting financing decision: (i) fixed operating costs (ii) cash flow position.

State any three factors affecting the dividend decision.

State any three factors affecting working capital requirements of a company.

Explain the objectives of Financial Planning.

What is meant by 'Financial Management'? State the primary objective of Financial Management.

The Return on Investment (ROI) of a company ranges between 10–12% for the past three years. To finance its future fixed capital needs, it has the following options for borrowing debt:
Option 'A': Rate of interest 9%
Option 'B': Rate of interest 13%
Which source of debt, 'Option A' or 'Option B', is better? Give reason in support of your answer. Also state the concept being used in taking the decision.

Ramnath Ltd. is dealing in import of organic food items in bulk. The company sells the items in smaller quantities in attractive packages. Performance of the company has been up to the expectations in the past. Keeping up with the latest packaging technology, the company decided to upgrade its machinery. For this, the Finance Manager of the company, Mr. Vikrant Dhull, 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.
Therefore, Mr. Vikrant Dhull 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 availability of funds from the internal sources. For the remaining funds he is trying to find out alternative sources.
Identify the financial concept discussed in the above paragraph. Also, state any two points of importance of the financial concept, so identified.

'Suruchi Textiles Ltd', with stable earnings, has paid regular dividends for seven years, building a loyal investor base; many shareholders depend on regular income and expect a minimum dividend, so it followed a high dividend policy. For expansion it had limited retained funds but, with a strong reputation, raised capital from the capital market. Identify and explain four factors affecting dividend decision.

'Ratan Ltd' and 'Lara Ltd' each have capital employed of ₹ 20,00,000. Ratan is financed wholly by shares; Lara has 60% equity (shares of ₹ 100 each) and 40% debt (8% debentures). Both earn ROI 10%; tax rate 40%. State with reason which company gives a better return to shareholders. Show calculations.

VK Ltd. is a fast moving consumer goods company. It has shareholders spread all over India. Most of its shareholders depend upon a regular income from their investment. VK Ltd. has been earning consistent profits. The management of the company keeps in mind the preference of the shareholders regarding payment of dividend. Since its shareholders, in general, desire that at least a certain amount is paid as dividend to them every year, the company declares dividend every year. Atul, the Finance Manager of the company identified promising growth opportunities. He suggested to the Chief Executive Officer to retain the earnings to finance the required investments instead of declaring dividend every year. For this, the Chief Executive Officer decided to call a General Body Meeting of the shareholders. (i) Identify two factors affecting dividend decision discussed above. (ii) State two other factors that affect the dividend decision of a company.

'Langar', a successful takeaway food business, plans to open branches in many cities and import advanced machines costing ₹ 12 crore each for consistent quality and hygiene; the decision involves huge cost and is irreversible. (i) Identify and state the financial decision. (ii) Explain two factors affecting it.

'Luxury At Home' needs ₹ 150 crore for projects in eight more cities. Finance manager Shyam advised 40% equity and 60% debt: as the company earns enough profit it can use trading on equity to maximise EPS; a loan from a financial institution would cost less; debt would not dilute management's holding. (i) State the concept suggested. (ii) State three factors discussed.

'Omara Ltd' makes jackets from organic, recycled materials; sourcing eco-friendly fabric, slow production and ethical practices create a big gap between receipt of fabric and finished jackets; intense competition forces it to hold large stocks for urgent orders; it offers liberal credit to customers. (i) Will its working capital requirement be high or low? (ii) Justify with three factors.

Explain how the following factors affect the working capital requirement of a business:
(i) Operating efficiency
(ii) Credit availed

Explain how the following factors affect the choice of capital structure of a company:
(i) Flexibility
(ii) Cost of equity

Explain how (i) scale of operations (ii) financing alternatives affect fixed capital requirements.

Explain how (i) cash flow position (ii) growth opportunities affect dividend decision.

Explain how (a) level of competition (b) inflation affect working capital requirements.

'Kaysons Ltd' needed more capital; its Finance Manager suggested a public issue of shares as the stock market was bullish; the CEO knew it would reduce management's holding and need considerable expenditure, but agreed, and the issue complied with SEBI guidelines. Identify and state four factors affecting capital structure.

'X Ltd.' issued 14% Debentures of ₹ 4,00,000 and 10,000 Equity shares of ₹ 60 each. This investment resulted in a net profit of ₹ 2,00,000 before interest and tax. The tax rate was 50%.
(a) Calculate the 'Return on Investment' and 'Earning per Share' of 'X Ltd.'
(b) State with reason whether the above example is that of favourable or unfavourable financial leverage.

Anurag Tiwari is a famous newsreader. He has recently started a news company 'Axis Media Corporation Ltd.' The aim of this company is to launch a 24-hour Hindi news channel to broadcast the latest news from India and around the world.
For this new venture, the company will have to decide how to invest funds in different assets. The purchase of few assets like equipment, computers, vehicles, etc. will involve committing the finance on a long-term basis. It will affect the earning capacity of the business in the long run. Therefore, the company needs to take the decision to invest in such assets with utmost care.
(a) Identify and state the type of investment decision discussed in the above paragraph.
(b) State any three factors which affect the decision identified in (a) above.

'Reliable Labs Ltd.' is a trusted name in diagnostic services with seven branches spread across the city of Pune. The directors of this company have projected that with the rise in health consciousness in the society and the rising burden of chronic diseases, the demand for diagnostic tests is expected to grow in future. Considering this, they decided to open branches of their diagnostic labs in Ahmedabad.
It was estimated that it will require ₹ 100 crore of additional funds. The directors have to take the decision about how much funds should be raised from equity capital and how much from debt. It will affect the overall cost of capital and the financial risk of the company.
(a) Identify and state the financial decision discussed in the above paragraph.
(b) State any three factors that should be kept in mind by a company while taking the decision identified in (a) above.

'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.'.

'Freshju', a trading company selling others' bottled juices, decided to enter juice manufacturing, plans exports, set up a larger unit to meet anticipated higher demand, ordered automatic filling and bottling machines, leased some expensive machines, and collaborated with a nearby packaging unit to use its machines in peak season. Quoting lines, identify and explain four factors affecting its fixed capital requirements.

'Quality Foods Ltd', with a good reputation and loyal customers, earned manifold profits from a new range of baked snacks. Knowing that investors see a dividend increase as good news and stock prices react positively, the Board wanted a high dividend. The CFO pointed to a loan clause restricting dividend, a large amount tied up in receivables leaving little cash, and a planned expansion into breakfast cereals needing huge investment. (a) Identify and explain two factors that would favour a high dividend. (b) Identify and explain two factors raised by the CFO.

Explain the factors affecting working capital requirements: (i) nature of business (ii) credit availed (iii) operating efficiency (iv) seasonal factors.

Sankalp started 'Sankalp Builders' to build flats on 30 acres, needing expensive bulldozers and excavators; he could buy or lease; his father advised caution as construction machinery becomes outdated fast, and said he may diversify later and need funds for that too. Identify and state four factors affecting fixed capital requirements.

Explain the factors affecting working capital requirements: (i) nature of business (ii) inflation (iii) seasonal factors (iv) growth prospects.

Explain the factors affecting dividend decision: (i) stability of dividend (ii) shareholders' preference (iii) access to capital market (iv) legal constraints.

Explain the factors affecting fixed capital: (i) choice of technique (ii) financing alternatives (iii) growth prospects.

Explain the factors affecting capital structure: (i) cost of equity (ii) control (iii) stock market conditions.

Explain the factors affecting working capital: (i) operating efficiency (ii) credit availed (iii) level of competition.

Explain the factors affecting dividend decision: (i) stability of dividends (ii) contractual constraints (iii) stock market reaction.

Determining the relative proportion of various types of funds depends upon various factors. Explain any six such factors.

Explain any six factors affecting the decision that determines the amount of profit earned to be distributed and to be retained in the business.

Explain briefly any four factors affecting the fixed capital requirements of an organisation.

Explain briefly any four factors that affect the working capital requirements of a company.

Kay Ltd. is a company manufacturing textiles. It has a share capital of Rs. 60 lakhs. In the previous year its earning per share was Rs. 0.50. For diversification, the company requires additional capital of Rs. 40 lakhs. The company raised funds by issuing 10% Debentures for the same. During the year the company earned profit of Rs. 8 lakhs on 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 favour the issue of debentures by the company as part of its capital structure.