Financial Management Class 12 Notes CBSE Business Studies Chapter 9 (Free PDF Download)

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Financial Management Class 12 Notes CBSE Business Studies Chapter 9 (Free PDF Download), Financial Management Class 12 Notes CBSE Business Studies Chapter 9

Financial Management Class 12 Notes CBSE Business Studies Chapter 9

Class12th 
Chapter No09
ProvidingNcert solutions
Chapter NameControlling process
BoardCBSE
Book NCERT
SubjectBusiness studies
Medium English
Study MaterialsFree VVI Study Materials are Available
Download PDFFinancial Management Class 12 pdf

Financial Management Class 12 Notes CBSE Business Studies Chapter 9 (Free PDF Download)

Main points of the lesson – Financial management is that area of ​​business management under which the financial needs of the business are fulfilled in such a way that the objectives of the business can be easily accomplished. The basic objective of financial management is to maximize the interests of business owners.

Finance is called the life blood of business. Therefore, it is absolutely essential to have adequate finance for the healthy operation of the business. From this point of view, the primary function of financial management is to arrange adequate finance at the right time for efficient operation of the business.

प्रबन्ध Financial Management

“Financial planning is a mental process in which planning is done in advance regarding capitalization and capital structure of the enterprise. In other words, financial planning is actually a mental process of determining in advance the capital requirements and its structure of an enterprise.

Just as blood has importance in the physical structure of a human being, similarly financial policy planning has importance in the capital structure of any enterprise. Just as man cannot survive without blood, similarly enterprise cannot survive without finance. Capital structure is also called capital structure. Capital structure means the mutual ratio of long-term means of capital. Capital structure is a broad term which includes all long-term funds.

While determining the capital structure, the promoters of the company have to decide what will be the ratio of ownership capital to fixed debt capital. The future progress and success of a business entity, including a company, depends to a great extent on its capital structure. Therefore, it becomes necessary to consider many elements while determining the capital structure.

In simple words, capitalization means the sum of long-term capital sources. It includes issued equity and preference share capital, debentures, long-term loans and free reserves. This does not include short term loans.

In other words, if short-term capital sources are removed from the capital structure, then what is left will be called capitalization. Capitalization is the sum of created share capital, debentures, long term loans and retained earnings. Capitalization = Share capital + Debenture + Long term debt + Retained earnings or free reserves. 

When a business organization continuously fails to earn adequate amount of income on its total invested capital, then such a situation is called a situation of over-capitalization. Under-capitalization is actually the exact opposite of over-capitalization. 

When a business organization is consistently successful in earning unusually high income on its invested capital, then such a situation is called a situation of undercapitalization. In such a situation, the business organization (company) continuously earns dividends at a high rate. 

Both over-capitalization and under-capitalization are troublesome for any business organization, but if we compare both, then capitalization is relatively less bad in both of them because it makes the reputation and financial condition of the company less than -1, shareholders gets benefit and economic development of the country takes place. An efficient manager should discourage both tendencies.

In every business, assets are divided into the following two parts: Fixed Assets and Current Assets. Fixed assets include permanent assets, such as land, buildings, machines, tools, furniture and fittings. Etcetera. On the other hand, assets are of temporary nature which keep changing, like cash, manufactured or semi-finished goods, raw materials etc.

In simple words, working capital means the excess of current assets over current liabilities.

In other words, if the sum of current liabilities is subtracted from the sum of current assets, then what remains will be called ‘working capital’. Current assets mean those assets. Which does not remain constant but keeps changing, like cash in hand, cash in bank, sundry debtors, last stick

Paid income, bills receivable, marketable securities, prepaid expenses etc. Dividend is that part of the profit of a company which is declared and distributed as a percentage of the par value of the share or as a fixed amount per share (eg Rs 1 per share) under the decision and option of the board of directors of the company. goes. 

Dividend decision means that decision of the financial management of the company under which it is decided how much amount of the remaining net profit of the business should be distributed among the shareholders as dividend and how much amount should be saved in the business. Dividend decision is considered a very important and thorny decision from the point of view of the development of the company.


VERY SHORT ANSWER TYPE QUESTIONS


Q.1. What does financial management mean? 

Ans. Meaning of Financial Management: Management means efficient financial arrangement of a business enterprise.

Q. 2. Explain the philosophy of financial management. 

Ans. Approach to Financial Management – ​​There are following two ideologies of financial management –

1. Traditional approach (Traditional approach is related to obtaining funds i.e. making arrangements). 

2. Modern Approach – Under modern ideology, equal attention is given to both the receipt of funds for business and their use.

Q. 3. Describe the objective of financial management.

Ans. Objectives of Financial Management— 

1. Maximizing profits.

2. Maximizing wealth.

3. Other objectives—(i) To obtain adequate funds at minimum cost; (ii) ensuring security of funds; (ii) Optimum utilization of funds; (iv) Financial control and (v) Ensuring adequate credit.

Q.4 . Explain the functions of financial management. (Explain the functions of financial management.)

Ans. Functions of Financial Management – ​​Financial functions can be divided into the following two parts –

Administrative Functions – 

1.Financial Forecasting. 

2. Financial planning. 

3. Attainment of wrath. 

4. Financial decisions. 

5. Appropriation decision. 

6. Article of income 

Q.5. Describe the importance of financial management. (Discuss the importance of financial management.)

Ans. Importance of Financial Management-

1. Optimal investment decision. 

2. Optimal financial decisions. 

3. Optimum Dividend Decision. 

4. Makes the role of managers effective. 

5. Makes the role of financial institutions effective.

Q.6 . What is the meaning of financial planning? (What is the meaning of financial planning?)

Ans. Meaning of Financial Planning – Financial planning is a mental process in which planning is done in advance regarding capitalization and capital structure of the enterprise.

Q.7. Write the importance of financial planning. (Write the importance of financial planning?)

Ans. Importance of Financial Planning –

1. Adequate funds;

2. Development and expansion of business; 

3. Liquidity in business;

4. Reasonable return on capital employed;

5. Future Development;

6. Best financial control;

7. Increase in profitability

Q.8. Describe the limitations of financial planning. Discuss the limitations of financial planning.)

Ans. Limitations of Financial Planning –

1. Based on forecasts;

2. Lack of cooperation and coordination;

3. Change in economic conditions and

4. Restriction on initiative and creative power.

Q.9. Mention the determining factors of financial planning. (Explain the factors determining financial planning.) 

Ans. Factors/Elements determining Financial Planning – 1. Nature of business. 2. Status and size of the business. 3. Degree of risk. 4. Cost of capital. 5. Business income. 6. Elasticity. 7. Government control. 8. Capital market conditions.

Q. 10. List the characteristics of sound financial planning. (Listed the characteristics of sound financial planning.) 

Ans. Characteristics of Sound Financial Planning – 1. Simplicity; 2. Liquidity; 3. Economy, 4. Flexibility, 5. Foresight and 6. Optimum utilization of funds.

Q. _ 11. What things are included in financial management? (What is the various points listed in financial planning?)

Ans. 1. Financial Planning

2. Financial Control

3. Procurement and Investment of funds

4. Management of Earnings

Q. 12. How will you assess financial needs? (How would you predict financial requirements?) 

Ans. In case of establishment of a new business, the financial needs are ascertained by estimating as much as possible the working capital required for business promotion expenditure and purchase of fixed assets. This estimate is based on the business turnover as per the previous forecast.

Q. 13. What is meant by capital? (What is the meaning of capital?)

Ans. The word capital is a word with multiple meanings. It is difficult to give a definite definition of this word. Its meaning is applied differently depending on the purposes in different places. Therefore, it is meaningless to define the word capital without context. Capital includes all those substances which are not free gifts to nature but are the result of human labor and are used for future production.

Q. 14. Explain the meaning of capital structure. (What is the meaning of capital structure?) 

Ans. Meaning of Capital Structure: Capital structure means the mutual ratio of long-term means of capital. It includes all long-term funds, such as share capital, debentures, long-term loans and reserves.

Q. 15. Describe the factors affecting capital structure. (Discuss the factors affecting capital structure.) 

Ans. Factors affecting (determining) capital structure – 1. Nature of business, 2. Location and size of business, 3. Degree of risk, 4. Cost of capital, 5. Type of business Income, 6. Elasticity, 7. Period of finance, 8. Attitude of managers, 9. Government control, 10. Conditions of capital market, 11. Psychology of investors.

Q. 16. Explain the meaning of capitalization. (What is the meaning of capitalization?)

Ans. Meaning of Capitalization: Capitalization means the combination of long-term capital sources. This includes issued equity and preference share capital, debentures, long term loans

And free reserve funds are included.

Q. 17. Differentiate between capitalization and capital structure. (Discuss the differene between capitalization and capital structure.) 

Ans. Difference between Capitalization and capital-structure – The basis of difference between these two are as follows-

1. Meaning, 2. Aspect and 3. Affect. 


SHORT ANSWER TYPE QUESTIONS


Q.1. Explain the importance of financial planning. (Explain the importance of Financial Planning.) 

Ans. Capital is the lifeblood of modern industries. No industry, whether small or big, can be successful unless it has adequate capital. Starting any business requires capital in all circumstances, from the moment the idea comes to its mind, till its launch, operation, expansion and its closure. 

If finance is not arranged as per requirement and on time, even the biggest and best plans fail. Therefore, managers should do this financial planning well. The future success of the company depends on the soundness of its financial planning. If adequate knowledge, technical experience and foresight is used in its construction, it will prove to be a boon for the future. 

On the contrary, a hasty financial plan based on short-sightedness, immature knowledge and inexperience poses a permanent threat to the future of the company and the interests of the shareholders. To achieve both short-term and long-term goals of the enterprise, it is very important that financial planning is done properly. 

Q. _ 2. What is the function of permanent capital management? Explain its nature. (What is the Management of Fixed Capital? Explain the nature of fixed Capital Management.)

Ans. A progressive business always keeps moving forward. Its fixed assets keep on improving or require improvement. The money spent in increasing fixed assets is called fixed capital. The money invested in this way gets invested for a long time. 

Benefits from this are available after a long time and they are not bought for immediate sale. Machine, plant, building, furniture etc. are fixed assets. These assets are purchased from long-term sources.

Nature of Fixed Capital Management – ​​Fixed capital management has the following nature – 

1. They are related to long term finance.

2. The amount of money spent on these is quite large.

Q.3 . Explain four characteristics of financial planning. (Give four characteristics of Financial Planning.)

Ans. Characteristics—

1. Objectivity: Financial planning should be made in the context of the long-term objectives of the firm. Managers should have a clear understanding of the goals of the firm.

2. Foresight: The promoters should take full care that the financial position of the organization remains balanced during its rise and fall in the future and can cope well with the financial problems that arise from time to time.

3. Flexibility: To run a business successfully, it is necessary that there should not be any kind of rigidity in its structure but it should be of such a type that instead of becoming a burden on it, it can become a supporting mechanism for it. The financial plan should be such that it can easily absorb contraction and change. of business

4. Liquidity: Although in business, actual funds are not required as much as the goodwill and property of the businessman, yet to run the business successfully, there must be a certain amount of money and property in it. This amount depends on the business, credit and nature of the undertaking.

Q.4. Give any four elements affecting financial planning. (Give any four factors to be considered in drafting a Financial Plan.)

Ans. Various elements have an impact on the financial planning of the enterprise. Therefore, those elements should be carefully considered while planning. Following are the main such elements

1. Nature of Industry – The nature of the industry has its say in the formulation of financial plan. Capital intensive industries require more capital and labor intensive industries require less capital.

2. Amount of Risks: Industries with high risk will have to depend more on ownership securities to raise their capital, whereas industries with low risk will have to ‘trade on equity’ by taking loans. Can give benefit of. 

3. Status of Industrial Unit – This includes the personal characteristics of the enterprise such as its age, size, work area and reputation and reputation of the promoters and managers etc. Large sized companies do not have much difficulty in raising capital. Every investor is ready to invest in old and good reputation institutions. But new promoters have to face many difficulties in collecting money. 

4. Appraisal of alternative sources of Finance – Whenever capital is required, securities prevalent and popular in the market. One should look at and consider their face value, issue cost and other facts while deciding how much money is to be collected from which means, it will also have to be kept in mind that at that time is the favorable time to collect money from that means. Timing issues) or not.

Q.5 . Explain the limitations of financial planning. (Explain the Limitations of Financial Planning.) 

Ans. Limitations of Financial Planning –

The above financial plan will be quite effective, permanent and flexible, but still every financial plan has some limitations, some of which are as follows – 

1. All financial planning is based on financial forecasts and nothing can ever be said with absolute certainty about the future. If the predictions turn out to be wrong. Financial planning will also prove ineffective. 

2. Even if the officers responsible for the successful implementation of the financial plan do not work together and in coordination, the financial plan will fail.

In practice, the financial manager adopts a rigid approach towards financial planning and is not prepared to make occasional changes in it. That’s why the planning starts happening somewhat the same.

Q.6. Explain the cost principle of capitalization. (Discuss Cost Theory of Capitalization.) 

Ans. The Cost Theory of Capitalization – Under the cost theory, capitalization is the investment in the fixed capital of the corporation (such as equipment and machinery, patents, land, buildings and others), the amount of regular working capital for running the business, enforcement’ And depends on the sum of establishment expenses and other cost expenses. 

Although all these factors are taken into account in determining the capital requirements of any new corporation, yet, if the production capacity of a corporation (a fixed dividend rate on the capital employed) is not fixed, its cost increases. 

For example, if some part of the fixed assets sits idle or becomes old (obsolete) or is rarely used, the income will be low and the company will be unable to declare a fixed and reasonable dividend rate on its employed capital. As a result the corporation will become a victim of overcapitalization. Will become a victim of capitalization based only on cost principle. 

By capitalizing only on the basis of cost principle, we will know only the momentary value of the corporation, because the nature of initial cost is very static and it does not reflect the changes that may occur in future. Apart from this, the main thing is the earning power of the industry and not its cost or assets etc.

Q.7. Define over-capitalization. (Define Over – Capitalisation.) 

Ans- Definitions of Over-Capitalisation: The definitions of over-capitalisation are as follows –

1. In the words of Hogland, “When the actual share of fixed assets in a company is more than the par value of the capital received through debentures, then in such a situation it can be said that the organization is overcapitalized. ” Original

2. Arthur S. In the words of Dewing, “The situation of over-capitalization arises when the earning power of the company is not sufficient to distribute fair dividends to the shareholders.

and the assets can be maintained in a balanced manner or the net worth of the business falls below the value of the securities issued and its securities are not sold at par.”

Q. 8. What are the duties of the Chief Financial Manager? What are the functions of the Chief Financial Controller?) 

Ans. The main functions of the Chief Financial Controller are as follows:

1. Financial Planning – Planning involves determining the capital structure of the organization in which the proportions of share capital are decided, such as how much ordinary capital and how many preference shares should be kept.

2. Receiving Finance The chief manager makes judicious plans to obtain the required capital from various means.

3. Control: The chief financial manager also sees whether the programs of the given plan are running or not. Analyzes profitability by analyzing reports and cost control from time to time.

4. Miscellaneous Functions – The Chief Financial Manager also has to perform some main tasks which are as follows – Management of Fixed Assets, compilation of necessary data, deposits in the bank and dealing with debtors. The amount received, the credit period given to them (collection period) etc.

Q.9.Write the objectives of financial planning. (Write the objectives of Financial Planning.) 

Ans. Following are the objectives of financial planning-

1. Maximizing profits.

2. Minimizing risks. 

3. To control finances.

4. To bring flexibility in the management of mines.

5. To bring proper liquidity in the banks.

6. To make proper use of the goals of the organization.

Q.10. Write the elements affecting financial planning. (Write the factors to be considered in Drifting a Financial Planning.)

Ans. 1. Nature of Industry

2. Amount of Risks

3. Appraisal of alternative sources of finance 

4. Status of Industrial Unit

5. Attitude of management

6. Plans for future expansion

7. Conservative amount of capital requirement (Capital structure must be of high grade securities)

8. Magnitude of external capital requirement

9. Government Control

Q. 11.How many types of preference shares are there? (Give the types of Preference Shares.)

 Ans. Preference shares can be of the following types:

1. Cumulative and Non-cumulative – On cumulative priority terms, if the company is not able to pay dividend in any year due to insufficient profits, then it has to be paid before giving the dividend. This right is not given to the owners of non-cumulative preference shares, that is, their shares are not accumulated.

Partners Called ‘precedence’ part. Non-participating preference shares do not have this right

Only fixed dividends are given on them. 3. Redeemable and Irredeemable – The shares for which it is declared at the time of issue that they will be paid after a certain period

Gaega calls them redeemable preference shares. Non-redeemable preference shares are paid along with the equity shares at the time of winding up of the company. According to the Companies Act, 1988, no company can issue preference shares for a period of more than 10 years in the future.

4. Convertible and Non-convertible – The shares whose owners are given the right to convert the shares into equity shares after a certain period are called convertible preference shares. the parts on which

Those rights which are not given are called irrevocable preferential shares. 

Q. 12. What do you understand by capital structure? (What do you understand by the term Capital Structure?)

Ans. Meaning of Capital Structure – Capital structure or capital structure – Under this it is decided

It has to be determined as to what types of securities this capital will be invested in and in what quantity. In other words, determining the amount of capital that will be collected from the issue of ordinary shares, preference shares and debentures is called determining the form of capital. 

This has to be decided because there is a difference in the nature of ordinary shares and debentures and their impact on the company is different. Dividend has to be paid on shares, which is given only in case of profit and the capital collected through shares does not have to be returned during the lifetime of the company. 

A fixed rate of interest has to be paid on the capital collected by issuing debentures whether there is profit in the company or not and this capital has to be returned after a fixed time. Due to this difference, a company has to decide the capital to be collected from these different securities keeping in mind the nature of its business and the amount of profit.

Q.13 . What do you understand by capital matching? (What do you understand by Capital Gearing?)

Ans. Capital Gearing – A company owns its capital in two ways – ownership capital and debt capital. Ownership capital is the capital that is appropriated by the shareholders as owners of the company and on which the company has to give something only in case of profit. Is. In case of loss, their capital is the first to be affected. 

Debt- Capital can be collected by the company by issuing debentures or other securities and on these the company has to pay interest at a fixed rate whether the company makes profit or not. Capital matching is a measure of the ratio of these two types of capital. Capital ratio is the measure of the ratio of the company’s ordinary share capital to its debt capital. This matching may be more or less.

Q. 14. Give the meaning and definition of undercapitalization. (Explain the meaning and definition of Under-Capitalisation.) 

Ans. Under-Capitalisation Under-Capitalisation Virtually

It is the opposite situation of over-capitalization. Just as over-capitalization is the situation in which the actual value of the shares becomes less than their book value, similarly under-capitalization is the situation when the actual value of the shares of the enterprise exceeds their book value. 

This increase in the value of shares is due to the increase in the dividend rate on them at the normal rate of return and the company is able to pay more dividends only when it has less capital in proportion to its business needs. With this less capital, it earns more profit by doing more business and distributes dividends at a higher rate on less capital. Thus, the situation of undercapitalization is the situation of intensive use of share capital of the company.

Definitions of Under-Capitalisation- Various scholars have defined under-capitalisation in the following manner –

1. In the words of Hoagland, “Undercapitalization means the property invested in business and its. The total share is the excess of assets over capital.”

2. In the words of Gutenberg, “When the actual and market value of all the assets of the company is more than their book value, that situation is a situation of undercapitalization.”

Q. 15. What is called trade at parity? (What do you mean by Trading on Equity)

Ans. Trading on Equity – When a business organization operates its business on the basis of borrowed capital rather than owned capital, then it is called the policy of trading on equity.

According to Gastenberg, “When an individual or a corporation conducts its regular business by taking ownership capital as well as debt capital, it is called business at parity.” According to Guthman and Dugal, “A firm needs financial management at fixed costs.

“Using sequential funds is called trading at parity.” 

Q. 16. What is proper capitalization? What are its objectives? (What is the meaning of Fair Capitalisation? What are its objects?)

Ans. Meaning of Fair Capitalization – Creation of capital structure

In Formation of Capital Structure, the aim of the promoters should be proper capitalization. Capital should be organized in such a way that neither there is more capital than required nor there is shortage of it. Thus, proper capitalization should be done in the institution.

Proper capitalization means that there should be neither overcapitalization nor undercapitalization in the organization. overcapitalization and

Undercapitalization is both dangerous. One should be cautious of both. Objective- 

1. Earning maximum income on the shares of the company.

2. To minimize the company’s cost of obtaining capital. 

Q.17. Explain the measures to eliminate undercapitalization.

Ans. 1. Issuance of new shares, 2. Issuance of bonus shares, 3. Sub-division of shares (divide into smaller parts), 4. Increase in the face value of shares.

Q.18. Define working capital. (Define working capital.)

Ans. Working capital means the capital which is required to meet the current expenses of the company. It is often required in industry to reduce raw material, wages etc. It is called by many names. Such as short term capital, circulating capital payment

Q. 19. Differentiate between capitalization and capital structure. (Distinguish between Capitalization and Capital Structure.) 

Ans. There is a substantial difference between capitalization and capital structure. capitalization

In Capitalisation, it is determined how much capital should be obtained for the institution. Whereas in the capital structure it is determined through which securities and in what proportion this amount of capital should be obtained. 


LONG ANSWER TYPE QUESTIONS


Q.1. What do you understand by financial planning? What elements will you keep in mind while making a financial plan? (What do you mean by Financial Planning. Discuss in brief the impor- While preparing the financial plan of a company, you have to keep the following factors in mind.)

Ans. Meaning of Financial Planning – Meaning – Financial planning is related to determining the amount of capital and ensuring that

How much capital will the owners invest and how much capital will be obtained from other sources in the form of loan and if capital is collected from the market then how much capital shares and debentures will be issued. Their detailed determination is financial planning.

Definitions-

A. S. In the words of Deing, “Capitalization or valuation of capital in financial planning includes both stock and debt.”

According to Robert Jerrett Jr., “Comprehensive financial planning means advance planning of all plans of financial management and undertaking of those plans.”

Integrating and coordinating with the operating plans of the Some scholars have also called financial planning as capitalization or capital structure.

Financial Plan – The efficiency of an organization and its growth and expansion depend on financial planning. Therefore, it is necessary that management financial planning be made with special care. Thus, financial planning is the cornerstone of financial planning. 

The success of industry and business depends on the strength of financial planning. There would be no exaggeration if it is said that financial planning is the key to business success. Due to lack of proper financial planning, many institutions have to face financial difficulties in future. Therefore, every aspect of financial planning should be considered from the beginning. Objectives of Financial Plan—

1. Adequate amount of capital: The amount of capital in the organization should be sufficient so that the industrial activities can be run smoothly. The amount of capital should be according to the profit earning capacity of the industry. 

2. Capital accumulation at minimum cost – The necessary capital accumulation should be at minimum cost.

Business Study-12th (Group-B)

3. Balance between cost and risk – Dividend on ordinary shares should be higher than that of preference shares and the rate of dividend on preference shares should be higher than the onion rate of debentures, that is, the more risk the investor takes, the more he will get. Reward should be given.

“Factors Influencing Financial Plan – The following factors influence the formulation of financial plan of an industrial organization. 

1. Nature of Industry, 

2. The amount of risk in the industry, 

3. Industrial Unit Level (Status), 

4, Future expansion plans of the industry, 

5. Attitude of managers, 

6. Need for external capital, 

7. Availability of sources of capital accumulation, 

8. Government Control. 

Q. 2. What are the essential elements of a sound financial planning? (What are the essential elements of a sound financial Plan/Management?) 

Ans. Elements of an Ideal Financial Plan – While doing financial planning, managers should consider each and every aspect of it in detail and try to include in it all the features which are there in a good plan. should do. The features that make a financial plan efficient are the following: 

1. Simplicity: Financial planning should be simple because a simple plan is easy to implement and its management and control. A complex plan creates difficulty for the organization and makes it difficult to take decisions regarding investment. 

2. Flexibility – While making a financial plan, estimates are made regarding the needs of the organization, the condition of the financial market and other facts. These estimates may be wrong due to which it may be necessary to make some changes in the financial plan of the organization. Therefore, the financial plan should be such that there is no special difficulty in making changes.

3. Provision for Emergencies: Business does not always remain the same. Changes keep coming in the condition of business. Sometimes the market conditions are favorable for business and sometimes it becomes difficult to continue the business. Just as a business makes huge profits during boom times, it becomes difficult to run it during recession times. Financial planning should make adequate arrangements to keep the business standing in such times.

4. Intensive Use – Financial planning should be such that the capital is used optimally and the capital does not remain wasted. For this, it is necessary that there should be such a planning system in the organization that there should be neither more nor less capital than required. Also, there should be coordination in the capital spent on various assets and it should not happen that too much is spent on fixed assets and there remains a shortage of working capital.

5. Liquidity – Even if a company has assets worth crores of rupees, its production or work runs on cash only. Therefore, the business always has to keep a certain amount of capital in cash so that the work of the organization does not stop due to lack of money. Therefore, adequate cash provision should be made in the financial plan.

6. Based on Facts and Information – Every plan is made considering the conditions. Managers should not make direct estimates regarding the condition, rather whatever condition is told should be based on facts and information. Financial plans should be based on facts and not on the wishes of managers.

7. Economy – There should be a provision for minimum expenditure for obtaining capital in the financial plan. Discount for issue of shares and securities. Many expenses like underwriting commission and brokerage etc. have to be incurred. Efforts should be made to economize on these expenses in financial planning.

8. Foresightness: One should be prudent in making financial planning and planning should be done after considering every aspect from different perspectives. The more accuracy and foresight are taken care of, the more successful the plan will be. 

Q.3. What do you understand by capital structure? Describe various facts affecting capital structure. (What do you understand by the term capital structure? Discuss the factors that influence capital structure.)

Ans. Meaning of Capital Structure: Under this, it has to be decided that in what quantity this capital will be collected from which types of securities.

Will go. In other words, what amount of capital will be raised from the issue of ordinary shares, preference shares and debentures. Their determination is called determination of the form of capital. This has to be decided because there is a fundamental difference in the nature of ordinary shares and debentures and their impact on the company is different. 

There is a demand to be paid on the shares which has to be paid only in case of profit and the capital collected through shares does not have to be returned during the lifetime of the company. A fixed rate of interest has to be paid on the capital collected by issuing debentures whether there is profit in the company or not and this capital has to be returned after a fixed time. 

Due to this difference, a company has to decide the capital to be collected from these different entities keeping in mind the nature of its business and the amount of profit.

Capital Gearing – A company can collect its capital in two ways – ownership capital and debt capital. Ownership capital is the capital that is appropriated by the owners of the company i.e. the ordinary shareholders and on which the company can raise its capital only when the company is making profit. Something has to give. 

In case of loss, their capital is the first to be affected. Debt capital can be collected by the company by issuing debentures or other securities and on these the company has to pay interest at a fixed rate whether the company makes profit or not. Capital matching is a measure of the ratio of these two types of capital. Capital ratio is the measure of the ratio of the company’s ordinary share capital to its debt capital. This matching may be more or less. 

If the share or ratio of ordinary share capital in the total capital of the organization is less then we call it high gearing. If the share or proportion of ordinary share capital in the total capital of the organization is more then it is called low gearing of capital. Apart from this, there are some other factors which affect the selection of securities and their quantity.

Have a significant impact on determination. These elements are as follows- 

1. Nature of Risk – In businesses where the risk is high, ordinary shares are more suitable and in those where the risk is low and stability in profit is expected, debentures or senior shares are suitable.

2. Desire to Retaining Control – When the promoters of the company want to maintain their control over the company, then they collect a large part of the capital through loans and a small part of it through shares because by doing this they get a little- by C capital

By purchasing a large portion of ordinary shares, one can control the entire company. 3. Trading on Equity The capital required by a company can be obtained in the form of ownership capital or debt capital. An institution can obtain loan from the market on the basis of its ownership capital on which interest has to be paid at a fixed rate.

FAQs

Q. Explain the meaning of over-capitalisation.(What is the meaning of over-capitalisation?) 

Ans. Meaning of Over-capitalisation: When a business organization continuously fails to earn adequate amount of income on its total invested capital, then such situation is called over-capitalisation.

Q. Describe the determining factors of dividend decision. (Discuss the determinants of dividend decision.)

Ans. Determinants of Dividend Decision: 1. Status of profits, 2. Liquidity in funds, 3. Stability of dividend, 4. Age of shareholders, 5. Age of the company, 6. Statutory requirements or restrictions, 7. Government policy, 5. Tax policy, 9. Public opinion and 10. Other elements/factors – (a) Need for additional capital, (5) Availability of funds, (c) Ownership structure, (d) Economic implications and (m) Capital market effect.

NCERT Solutions for Class 12 Commerce Stream


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