1. Financial Management: Concept, Objectives & Role
3 Marks
State the primary objective of Financial Management. Explain briefly.
CBSE 2019
The primary objective of financial management is to maximize shareholders' wealth. This is also known as the wealth maximisation concept. It means maximizing the current market value of equity shares of the company. It ensures that the benefits exceed the costs, leading to an appreciation in share price.
3 Marks
How does financial management help in reducing the 'Cost of Funds'?
PREDICTIVE 2026
Financial management helps by identifying various sources of funds and comparing them based on their cost and risk. By selecting an optimal mix of debt and equity (Capital Structure), a finance manager ensures that the overall weighted average cost of capital is kept at the minimum possible level.
4 Marks
Explain the role of 'Financial Management' in a business organization.
CBSE 2021
Financial management impacts all financial aspects of a business:
1. Size and Composition of Fixed Assets: Decisions on investment determine the total fixed assets.
2. Quantum of Current Assets: It decides the level of cash, inventory, and receivables.
3. Amount of Long-term and Short-term Funds: It decides the proportion of funding sources.
4. Items in P&L Account: Financial decisions affect interest expenses, depreciation, and ultimately the net profit.
1. Size and Composition of Fixed Assets: Decisions on investment determine the total fixed assets.
2. Quantum of Current Assets: It decides the level of cash, inventory, and receivables.
3. Amount of Long-term and Short-term Funds: It decides the proportion of funding sources.
4. Items in P&L Account: Financial decisions affect interest expenses, depreciation, and ultimately the net profit.
2. Financial Decisions
3 Marks
What is 'Investment Decision'? State its two types.
CBSE 2020
An investment decision involves deciding how the firm's funds are invested in different assets.
Types:
1. Long-term Investment Decision (Capital Budgeting): Investing in fixed assets (e.g., buying a new machine).
2. Short-term Investment Decision (Working Capital Management): Managing day-to-day cash and inventory.
Types:
1. Long-term Investment Decision (Capital Budgeting): Investing in fixed assets (e.g., buying a new machine).
2. Short-term Investment Decision (Working Capital Management): Managing day-to-day cash and inventory.
4 Marks
Explain any four factors affecting the 'Dividend Decision'.
CBSE 2022
1. Amount of Earnings: Dividends are paid out of current and past earnings.
2. Stability of Earnings: A company with stable earnings can declare higher dividends.
3. Growth Opportunities: If a company has good expansion plans, it retains more profit and pays less dividend.
4. Cash Flow Position: Payment of dividend requires actual outflow of cash; hence, strong cash flow is necessary.
2. Stability of Earnings: A company with stable earnings can declare higher dividends.
3. Growth Opportunities: If a company has good expansion plans, it retains more profit and pays less dividend.
4. Cash Flow Position: Payment of dividend requires actual outflow of cash; hence, strong cash flow is necessary.
6 Marks
Discuss the three main financial decisions taken by a finance manager.
CBSE SQP 2024
1. Investment Decision: Relates to how funds are committed to various assets to earn the highest possible return for investors.
2. Financing Decision: Relates to the identification of various sources of funds and determining the proportion of debt and equity to be raised.
3. Dividend Decision: Relates to how much of the profit earned by the company (after tax) is to be distributed to the shareholders and how much should be retained in the business for future needs.
2. Financing Decision: Relates to the identification of various sources of funds and determining the proportion of debt and equity to be raised.
3. Dividend Decision: Relates to how much of the profit earned by the company (after tax) is to be distributed to the shareholders and how much should be retained in the business for future needs.
3. Financial Planning
3 Marks
State the two twin objectives of Financial Planning.
CBSE 2020
1. To ensure availability of funds whenever required: This includes estimating the time and amount of funds needed.
2. To see that the firm does not raise resources unnecessarily: Excess funding carries a cost and remains idle, which reduces profitability.
2. To see that the firm does not raise resources unnecessarily: Excess funding carries a cost and remains idle, which reduces profitability.
4 Marks
Why is 'Financial Planning' considered important for a business?
CBSE 2023
1. Helps in forecasting what may happen in the future under different situations.
2. Helps in avoiding business shocks and surprises.
3. Coordinates various functions like sales and production.
4. Links present with the future and investment with financing decisions.
5. Acts as a base for financial control by setting standards for actual performance.
2. Helps in avoiding business shocks and surprises.
3. Coordinates various functions like sales and production.
4. Links present with the future and investment with financing decisions.
5. Acts as a base for financial control by setting standards for actual performance.
4. Capital Structure
4 Marks
What is 'Trading on Equity'? Explain with a small example.
PREDICTIVE 2026
Trading on Equity refers to the use of fixed interest-bearing securities (Debt) in the capital structure to increase the return on equity (ROE).
Example: If a company's ROI (Return on Investment) is 15% and the interest rate on debt is 10%, the extra 5% earned on the borrowed money belongs to the equity shareholders, thereby increasing their Earnings Per Share (EPS).
Example: If a company's ROI (Return on Investment) is 15% and the interest rate on debt is 10%, the extra 5% earned on the borrowed money belongs to the equity shareholders, thereby increasing their Earnings Per Share (EPS).
6 Marks
Explain any six factors that determine the Capital Structure of a company.
CBSE 2023
1. Cash Flow Ability: Use debt only if cash flows are enough to cover interest.
2. Interest Coverage Ratio (ICR): Higher ICR means company can easily borrow debt.
3. Return on Investment (ROI): If ROI > Interest Rate, more debt should be used.
4. Cost of Debt: Low interest rates make debt more attractive.
5. Tax Rate: Interest is tax-deductible; higher tax rates make debt cheaper.
6. Flexibility: Too much debt reduces the firm's ability to borrow further in emergencies.
2. Interest Coverage Ratio (ICR): Higher ICR means company can easily borrow debt.
3. Return on Investment (ROI): If ROI > Interest Rate, more debt should be used.
4. Cost of Debt: Low interest rates make debt more attractive.
5. Tax Rate: Interest is tax-deductible; higher tax rates make debt cheaper.
6. Flexibility: Too much debt reduces the firm's ability to borrow further in emergencies.
5. Fixed and Working Capital
4 Marks
Explain any four factors affecting 'Fixed Capital' requirements.
CBSE 2021
1. Nature of Business: Manufacturing units need more fixed capital than trading units.
2. Scale of Operations: Large-scale organizations need more plants and machinery.
3. Choice of Technique: Capital-intensive techniques need more investment than labor-intensive ones.
4. Growth Prospects: Higher growth potential requires more investment in fixed assets.
2. Scale of Operations: Large-scale organizations need more plants and machinery.
3. Choice of Technique: Capital-intensive techniques need more investment than labor-intensive ones.
4. Growth Prospects: Higher growth potential requires more investment in fixed assets.
6 Marks
Discuss the factors affecting the 'Working Capital' requirements of a business.
CBSE SQP 2025
1. Nature of Business: Trading/Service firms need less working capital; Manufacturing needs more.
2. Scale of Operations: Large organizations need more inventory and cash.
3. Business Cycle: Boom period needs more working capital due to high sales/production.
4. Production Cycle: Longer time to convert raw material to finished goods means more capital is tied up.
5. Credit Allowed: Giving long credit periods to customers increases capital needs.
6. Credit Availed: Getting longer credit from suppliers reduces the need for working capital.
2. Scale of Operations: Large organizations need more inventory and cash.
3. Business Cycle: Boom period needs more working capital due to high sales/production.
4. Production Cycle: Longer time to convert raw material to finished goods means more capital is tied up.
5. Credit Allowed: Giving long credit periods to customers increases capital needs.
6. Credit Availed: Getting longer credit from suppliers reduces the need for working capital.
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