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NCERT Solutions for Class 12th: Ch 9 Financial Management (MCQ and Short Questions)

Exercises

Page No. 263

Objective–type questions

1. The cheapest source of finance is:
a. debenture 
b. equity share capital
c. preference share
d. retained earning
► c. preference share

2. A decision to acquire a new and modern plant to upgrade an old one is a:
a. financing decision
b. working capital decision
c. investment decision
d. None of the above
► b. working capital decision

3. Other things remaining the same, an increase in the tax rate on corporate profits will:
a. make the debt relatively cheaper
b. make the debt relatively the dearer
c. have no impact on the cost of debt
d. we can’t say
► a. make the debt relatively cheaper 

Page No. 264

4. Companies with a higher growth pattern are likely to:
a. pay lower dividends
b. pay higher dividends
c. dividends are not affected by growth considerations
d. none of the above
► a. pay lower dividends

5. Financial leverage is called favourable if:
a. Return on Investment is lower than the cost of debt
b. ROI is higher than the cost of debt
c. Debt is easily available
d. If the degree of existing financial leverage is low
► b. ROI is higher than the cost of debt

6. Higher debt-equity ratio results in:
a. lower financial risk
b. higher degree of operating risk
c. higher degree of financial risk
d. higher EPS
► c. higher degree of financial risk

7. Higher working capital usually results in:
a. higher current ratio, higher risk and higher profits
b. lower current ratio, higher risk and profits
c. higher equity, lower risk and lower profits
d. lower equity, lower risk and higher profits
► a. higher current ratio, higher risk and higher profits

8. Current assets are those assets which get converted into cash:
a. within six months
b. within one year
c. between one and three years 
d. between three and five years
► a. within six months

9. Financial planning arrives at:
a. minimising the external borrowing by resorting to equity issues
b. entering that the firm always have significantly more fund than required so that there is no paucity of funds
c. ensuring that the firm faces neither a shortage nor a glut of unusable funds
d. doing only what is possible with the funds that the firms has at its disposal
► c. ensuring that the firm faces neither a shortage nor a glut of unusable funds

Page No. 265 

10. Higher dividend per share is associated with:
a. high earnings, high cash flows, unstable earnings and higher growth opportunities
b. high earnings, high cash flows, stable earnings and high growth opportunities
c. high earnings, high cash flows, stable earnings and lower growth opportunities
d. high earnings, low cash flows, stable earnings and lower growth opportunities
► c. high earnings, high cash flows, stable earnings and lower growth opportunities

11. A fixed asset should be financed through:
a. a long-term liability
b. a short-term liability
c. a mix of long and short-term liabilities
► c. a mix of long and short-term liabilities

12. Current assets of a business firm should be financed through:
a. current liability only
b. long-term liability only
c. both types (i.e. long and short term liabilities)
► a. current liability only

Short Answer Questions

1. What is meant by capital structure?

Answer

Capital structure refers to the mix between owners and borrowed funds. It can be calculated as debt/equity ratio.

2. Discuss the two objectives of financial planning.

Answer

Two objective of financial planning 
• To ensure availability of funds whenever required.
• To see that the firm does not raise resources unnecessarily.

3. What is financial risk? Why does it arise?

Answer

Financial risk refers to a position when a company is unable to meet its fixed financial charges for example interest payment, preference dividend, and repayment obligations.
Financial risk arise when higher fixed coast arise. And it is obligatory for the company to pay the interest charges on debt along with the principle amount.

4. Define ‘Current Assets’. Give four examples of such assets?

Answer

A ‘current assets’ is a assets which are expected to generate economic benefit or which is help in running our business and within one year we can converted in to cash.
For example-Cash, gold, investment, foreign currency.

5. Financial management is based on three broad financial decisions. What are these?

Answer 

• The size and the composition of the fixed assets of the business.
• All items in the profit and Loss Account , e.g.. Interest, Expense, Depreciation etc.
• Break- up of long–term financing in to debt, equity etc.

6. What are the main objective of financial management? Briefly explain.

Answer

The main objective of financial management is to maximize shareholders’ wealth. This is because company funds belong to the shareholders and the manner in which they are invested and the return earned by them determines their market value and price. All financial decisions aim at ensuring that each decisions is efficient and add some value.

7. How does working capital affect both the liquidity as well as profitability of a business?

Answer

The working capital should neither be more nor less than, if working capital is more than required, it will increase liquidity but decrease profitability  For instance, if large amount of cash is kept as working capital,  then this excessive cash will remain idle and cause the profitability to fall.
On the contrary, if the amount of cash and other current assets are very little then lot of difficulties will have to be faced in meeting daily expenses of the organisation
and making payment to the creditors. So, working capital affect both the liquidity as well as profitability of a business.
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