WrittenaspertherevisedsyllabusprescribedbytheMaharashtraStateBoard

ofSecondaryandHigherSecondaryEducation,Pune.

STD. XII Commerce

Secretarial Practice

Fourth Edition: March 2016

SalientFeatures:
ExhaustivecoverageofsyllabusinQuestionAnswerFormat.

CoversanswerstoallTextualQuestions,BoardQuestions(Mar08Mar16).
RelevantMarkingSchemeforEachQuestion.

IncludesAdditionalImportantQuestionsforbetterpreparation.

Mnemonicstofacilitateeasyanswerrecall.
QuickRecapattheendofeachchaptertofacilitatequickrevision.

TwoModelQuestionPapersasperthelatestpaperpattern.
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SimpleandLucidlanguage.
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PREFACE
Secretarial Practice is a subject that compiles the knowledge and skills a Company Secretary should posses. The
competencyofthecompanysecretaryliesinconductingvalidcorrespondencebetweentheBoardofDirectorsand
thepublic,therebyactingasafrontfaceoftheorganization.
Wepresenttoyou "Std.XIICommerce:SecretarialPractice"witharevolutionaryfreshapproachtowardscontent
thuslayingaplatformforanindepthunderstandingofthesubject.
ThisbookhasbeenwrittenaccordingtotherevisedsyllabusandguidelinesaspertheStateBoardandcoversanswers
notonlytothetextualquestionsbutalsoforboardquestionpapersfromMarch2008toMarch2016.
Inadditiontothis,wehaveincludedextraquestionsineachlessonthatnotonlyaimatcoveringtheentiretopicbut
alsomakestudentsreadytofacethecompetition.ThesubtopicwiseclassifiedQuestionandAnswerformatofthis
bookhelpsstudentsineasycomprehension.
Furthermore, we have provided model answers to each question in the form of pointers which makes it easy for
studentstomemorizeandreproducetheanswersintheirexaminations.
We have incorporated Mnemonics to facilitate easy answer recall. Every chapter ends with a Quick Recap to
facilitatequickrevisionofthelessonlearnt.Thebookalsoincludestwomodelquestionpapersasperthelatestpaper
pattern.Themodelquestionsareprovidedwithrelevantmarkingschemessoastohighlighttheimportanceofeach
question.
We are sure this study material will turn out to be a powerful resource for students and facilitate them in
understandingtheconceptsofthissubjectinthemostlucidway.
Thejourneytocreateacompletebook isstrewnwithtriumphs,failuresandnearmisses.Ifyouthinkwe'venearly
missedsomethingorwanttoapplaudusforourtriumphs,we'dlovetohearfromyou.
Pleasewritetouson:mail@targetpublications.org

Bestoflucktoalltheaspirants!
Yoursfaithfully,
Publisher

GyanGuru(GG)

Wepresenttoyouourmascot'GG',whohasbeenproudly

introducedbyusfortheveryfirsttime.GGisastudentbuddy
whopopsupthroughoutthebookanddrawsyourattentionto
importantbitsofknowledgealsotermedas'GoodtoKnow'.
These'GoodtoKnow'sectionshelpyouunderstandaconcept
distinctlywithacorrespondingexamplefromyourimmediate
environment.Thisisourinitiativeineducationthathelpslinking
learningtolifeandwe'rehopefulthatyouaregoingtoloveit.

BOARDPAPERPATTERN
Time:3Hours TotalMarks:80

Q.1. Objectivetypequestions: [15]

Includesthreesubquestionsoffivemarkseach.Allsubquestionsarecompulsory.
(A) Select the correct answer from the possible choices given below and rewrite the
statements:
Fivesubquestions.Eachsubquestioncarriesthreeoptions. [onemarkeach]
(B) Matchthepairs:
Itcontains5pointsinGroupAand10optionsinGroupB. [onemarkeach]
(C) Write a word or phrase or a term which can substitute each of the following
statements:
Fivesubquestionswillbegiven.[onemarkeach]

Q.2. Distinguishbetweenthefollowing: [15]

(Anythreeoutoffive)[5markseach]

Q.3. Writeshortnoteson: [15]

(Anythreeoutoffive) [5markseach]

Q.4. Statewithreasons,whetherthefollowingstatementsareTrueorFalse: [15]

(Anythreeoutoffive) [5markseach]
[1markForstatingTrueorFalse;4marksReasons(Minimumfourreasonsareexpected)]

Q.5. Answerinbrief: [10]

(Anytwooutoffour) [5markseach]
[Outofthefourquestions,threewillbeaskedonbusinesscorrespondencewithdebentureholders
anddepositors]

Q.6. Answerthefollowing: [10]

(Anyoneoutoftwo)
[Outofthetwoquestions,onewillbeaskedonbusinesscorrespondencewithmembers]
Total: 80

SchemeofEvaluation
Marks
(A) WrittenExamination 80
(B) Project(withViva) 20
Total: 100

(A) UnitwiseWeightage
Sr.No. Units Marks MarksWithOption
1. BusinessFinance 07 12
2. SourcesofBusinessFinance 18 28
3. RoleofaSecretaryinCapitalFormation 12 22
4. A.IssueofDebentures
B.Deposits 12 17
C.DepositoryandDematerialisation
 5. DeclarationandPaymentofDividend 07 12
6. A.CorrespondencewithMembers
B.CorrespondencewithDebentureholders 17 27
C.CorrespondencewithDepositors
7. A.FinancialMarkets
07 12
B.StockExchange
Total: 80 130

(B) WeightagetoObjectives
Sr.No. Objectives Marks MarkswithOption Percentage
1. Knowledge 15 15 18.75
2. Understanding 20 40 25.00
3. Application 25 40 31.25
4. Skill 20 35 25.00
Total: 80 130 100.00
(C) WeightagetoTypeofQuestions

Sr.No. TypeofQuestions Marks MarkswithOption Percentage

1. ObjectiveType 15 15 18.75
2. ShortAnswers 55 95 68.75
3. LongAnswers 10 20 12.50
Total: 80 130 100.00

Sr.No. TopicName PageNo.

1. BusinessFinance 1
2. SourcesofBusinessFinance 21
3. RoleofaSecretaryinCapitalFormation 56
4. IssueofDebentures 84
5. Deposits 97
6. DepositoryandDematerialization 111
7. DeclarationandPaymentofDividend 123
8. CorrespondencewithMembers 137
9. CorrespondencewithDebentureholders 161
10. CorrespondencewithDepositors 173
11. FinancialMarkets 184
12. StockExchange 196
ModelQuestionPaperI 214
ModelQuestionPaperII 216
BoardQuestionPaper:March2014 218
BoardQuestionPaper:October2014 220
BoardQuestionPaper:March2015 222
BoardQuestionPaper:October2015 224
BoardQuestionPaper:March2016 226

Note:AllTextualquestionsarerepresentedby*mark.
 01.BusinessFinance Chapter01:BusinessFinance

Introduction
Mr.Arunisamusicianandintendstostartsomethingofhisown.Hiswifeisaschoolteacher.
Sheaskedhimtogoaheadwithhisplanofopeningamusicclass.
Nowforexecutingthisplan,ArunrequiresvariousmusicalinstrumentslikeKeyboards,Guitar
etc. He is an expert in playing Guitar and Mandolin himself. However, he requires skilled
musicians to teach vocals and keyboard. He also requires a place for conducting the music
class.Hiswifeiswellawareofhisfinancialworriesandhenceoffershim`30,000outofher
ownsavings.Hehimselfhassavingstothetuneof`50,000whichheisreadytoinvestinhis
newventure.Hewantstocheckwhethertheircombinedsavingswouldbeenoughtofundhis
venture.Sohemakesalistofhisexpendituresasshownbelow:
MusicalInstruments=`1,00,000;Rent=`15,000p.m.;Feestomusicteachers=` 20,000.
He is short of funds to the tune of ` 55,000 and hence approaches some of his friends and
acquaintancesforhelp.Theycontribute`20,000.
Asalastresort,Arungoestoabankforaloantofundtheremainingamountof`35,000.He
getstheloaneasilyonthesecurityofjewellery.Hethenmakesalistoftheavailablesourcesof
fundstoseeiftheamounttallieswiththeplannedexpenditure.
Retainedearnings(own+wife'ssavings)=`80,000
BorrowedFunds(fromfriends)=`20,000
BorrowedFunds(throughbankloan)=`35,000
TotalFundsEmployed=` 1,35,000
Inthischapter,wewill learntheimportanceand objectives offinancial planning,meaningof
capitalstructure&itscomponentsandthefactorsaffectingrequirementofcapital.

BusinessFinance
MeaningofBusinessFinance:
The term business finance can be broadly explained by considering the factors business
andfinance.
Thetermbusinessdealswithproductionanddistributionofgoodsandservices.
Thetermfinanceisrequiredforconsumptionaswellasinvestmentinanybusiness.
In simple words, business finance applies to all financial activities of agriculture, industry,
banking,transport,insuranceetc.
Thus,thescopeofbusinessfinanceincludescommercialfinance,industrialfinance,property
finance,corporatefinanceandevenagriculturefinance.
It mainly deals with raising, administering and disbursing of funds by a business firm or an
organization.
Inactualpractice,businessfinancereferstocorporationfinance.
In this era of MNCs, the business finance is almost identified with corporation finance as
suchfinancedealswithfinancialmattersofcorporateenterprise.
In the academic world, the term corporation finance is now known as financial
management.
MeaningofFinancialManagement
*Q.1. WhatisFinancialManagement?Stateitsroleintheorganization. [5]
Ans: Being a specialized function of general management, financial management is mainly
concernedwithraisingoffinanceanditsoptimumandeffectiveutilizationforachievement
ofgoalsoftheorganization.
Itdealswithplanning,organizing,directing,coordinatingandcontrollingfinancialactivities.
ItisalsocalledasResourceManagement.
1
 Std.XII:Commerce
DefinitionsofFinancialManagement:
Inthewordsof EzraSoloman, FinancialManagementisconcernedwitheffectiveuseofan
importanteconomicresource,namelycapitalfunds.
Inthewordsof KuchalS.C., FinancialManagementdealswithprocurementoffundsand
theireffectiveutilizationinbusiness.
RoleofFinancialManagement:
Theroleoffinancialmanagementcanbeexplainedwithreferencetothefunctionsperformed
byit.Theyareroutinefunctionsandexecutivefunctions.
RoutineFunctions:[Mnemonic:KFCCD]
i. RecordKeepingandReporting:
Thefinancemanagerhastokeeprecordsofallfinancialtransactionsandsendthereportsto
differentdepartmentalheads.
ii. PreparingvariousFinancialStatements:
The finance manager prepares various financial statements to analyze the position and
performanceofanorganization.
iii. CashPlanning:
Cashplanningisproperlydonebythefinancemanagerasitallowsthecompanytoplanits
workingcapital.
iv. CreditManagement:
Thefinancialmanagerhastomanagethecreditproperly.
Thismeansmanagingthefundswhicharedue(withthecreditors)andaccordinglydeciding
thecreditperiodthatistobeofferedtothedebtors.
v. ReportingtoDirectors:
ProvidingaccurateinformationtoBoardofDirectorsoncurrentfinancialpositionformaking
decisionsofpurchases,marketing,pricingetc.
Executivefunctions:[Mnemonic:CARDIP]
i. CheckingandAnalysisofFinancialPerformance:
Anorganizationpreparesandanalyzesvariousfinancialstatementswhichhelpsinimproving
techniquesoffinancialcontrol.
ii. AdvisingBoardofDirectors:
AfinancemanagerbringstothenoticeoftheBoardofDirectorsproblemsrelatedtofinance
andalsosuggestspossiblesolutionsforthesame.
He also gives advice on important matters such as pricing, expansion, acquisition, dividend
policyetc.
iii. ForecastingFinancialRequirements:
Forecastingoffinancemeansprojectionoffinancialneedsofbusinessforfuture.
Insimplewords,forecastingmeansbudgetingfinancialneedsoftheexpectedprogrammes.
Anorganizationrequirescapitali.e.fixedcapital(longterm)andworkingcapital(shortterm)
forrunningitsbusiness.
Forecastingnotonlyconsiderstheamountoffundsrequiredbutalsoconsiders:
whenthefundsarerequired,
durationforwhichfundsarerequired,and
kindoffunds(i.e.ownedorborrowed).
iv. DecidingSourcesofFunds:
Afterdeterminingtheamountoffinancerequired,varioussources(suchasshares,debentures,
financialinstitutions,moneylendersetc.)ofraisingsuchfundsaretobeconsidered.
Utmostcareistobetakenwhileselectingthesourceasthereneedstobeaproperbalance
betweenownedfundsandowedfunds.
Further,therehastobeaproperbalancebetweenlongtermfundsandshorttermfunds.
22
 Chapter01:BusinessFinance
v. InvestmentDecisions:
Afterraisingthefunds,thesefundsmustbewiselyutilized.


Investmentdecisionensureseffectiveutilizationoffundsraisedbytheorganizationin:

longtermassetsorfixedassetssuchasland,building,machinery,furnitureetc.

shorttermassetsorcurrentassetssuchasinventory,accountreceivables,etc.

Thedecisionregardingfixedassetsispopularlyknownascapitalbudgeting.

Whereas,thedecisionregardingcurrentassetsisknownasworkingcapitalmanagement.

Itbecomestheresponsibilityofthefinancemanagertoensureefficientutilizationofevery
currentassettomaintaincontroloncashinflowandcashoutflow.
vi. DividendPolicy:
A finance manager has to decide the proportion of profit that it is to be retained in the
businessforfutureexpansionandtheproportionthatistobedistributedasdividendamong
shareholders.
Itistheprimedutyofthefinancemanagertobalancetheinvestorsexpectationsanduseof
retainedearningsforfutureexpansionoracquisitionofadditionalassets.

GoodtoKnow:
In ancient times, there was no concept of financial
management as we understand it today. However,
monarchsandstateswereabletoinfluencetheamountof
their revenues through the ownership and control of
property, labour and taxes, and by means of further
conquest. The introduction of coinage in the late seventh
centuryBC,andthesubsequentmonopolyofthemonarch
or state on coining and issuing rights, provided an important means of adding to those
revenuesthroughthemanipulationofacurrency'sweightandpreciousmetalcontent.

*Q.2. Whataretheobjectivesoffinancialmanagement? [5]

Ans: Accordingto KuchalS.C., FinancialManagementdealswithprocurementoffundsandtheir
effectiveutilizationinbusiness.
Thebasicobjectivesoffinancialmanagementarestatedasfollows:
ProfitMaximization:
Itisconsideredasthebasicprincipleofanybusinessactivity.
Accordingtothisprinciple,allfunctionsofbusinessaimatprofit.
The concept of profit maximization is traditional in nature and is based on the assumption
thatprofitisatoolofmeasuringthesuccessofanybusinessfirm.
Profitmaximizationisconsideredtobethemostimportantbusinessobjectivesince,
itisdifficultforanybusinessfirmtosurvivewithoutprofit;
successcanbemeasuredwiththeprofitearningcapacityofanorganization;
highprofitresultsinbetterreturns(i.e.dividend)toshareholders;
increase in profitability of an organization allows the use of surplus funds for the future
expansionofthefirm;and
ithastobeachievedforsocioeconomicwelfare.
WealthMaximization:
According to Prof. Soloman Ezra, the ultimate goal of financial management should be
maximizationofownerswealth.
Wealthmaximizationisalsoknownasvaluemaximizationi.e.maximizingnetpresentvalue
ofafirm.
The focus of financial management must be on wealth maximization of the owners
i.e.,equityshareholders.
3
 Std.XII:Commerce
Thewealthofshareholderscanbereflectedinmarketvalueofshares.
Itcanbesaidthat,thewealthofequityshareholdersismaximizedonlywhenmarketvalueof
equitysharesismaximized.
SocialSatisfaction:
Businessfirmsnowadaysnot
GoodtoKnow:
onlythinkaboutinvestors,but
Asapartofitscorporate
also consider welfare of
social responsibility
peopleingeneral.
initiative, Aamby Valley
As the business firms operate
City planted 1,25,2576
in society, they are
treesinaspanof6hours
responsible towards the
35 minutes with the
society.
active help and support
They do so by protecting the
of1,400volunteers.
interests of suppliers,
ForthisnobleinitiativeitwasfeaturedintheGuinness
customers, creditors,
BookofWorldRecordson5thJune1998.
employees of the company

andgovernment.
Theshareholders expect highrateof dividend,customerswant productsofgoodqualityat
reasonable prices, society requires effective and efficient use of scarce resources of
production and government insists on compliance of rules and regulations and regular
paymentoftaxes.Abusinessfirmhastofulfillallsuchsocialresponsibilities.
Thus,alongwithprofitmaximizationandwealthmaximization,socialsatisfactionisanequally
importantobjectiveofanybusinessfirm.

FinancialPlanning
MeaningofFinancialPlanning:
Thetermfinancialplanningreferstoassessmentoffinancialrequirementsandarrangingthe
sourcesofcapital.
Itisrequirednotonlytoincreaseprofitbutalsoforsurvivalofthefirm.
Itcanbeimplementedwithaneffectivefinancialplan.
Thefinancialplanincludesinformationabouttheeconomicenvironmentinwhichthebusiness
operates.
Itestablishestargetsofsalesandprofitsandpromotescoordinationofresourcesandefforts
toreachthesetargets.
To sum up, financial planning is an advance programming of all plans of financial
management.
DefinitionofFinancialPlanning:
According to J.H. Boneville, The financial plan has two fold aspects, it refers not only to
capital structure of the corporation but also to the financial policies which corporation has
adoptedorintendstoadopt.
*Q.3. WhatisFinancialPlanning?StatetheimportanceofFinancialPlanning.[5]
Ans: Thetermfinancialplanningreferstoassessmentoffinancialrequirementsandarrangingthe
sourcesofcapital.
The finance manager gets entire information about his firms activities and on that basis, he
preparesafinancialplan.
Thefinancialplansopreparedbecomescrucialwithrespecttodecisionmaking.
Theimportanceoffinancialplanningisasbelow:
i. EliminationofWaste:
Through financial planning, several factors such as change in government policy (on taxes),
fluctuatinginterestratesetc.canbeanticipatedanddulytackled.
44
 Chapter01:BusinessFinance
Ifthereislackofproperfinancialplanning,theorganizationmaysufferhugeirreversibleand
uncompensablelossesduetowastefulexpenditure.
ii. Coordination:
Proper financial planning is the key for smooth functioning of the organizational activities
suchasproduction,distribution,marketingandpersonnel.
Theseactivitieswillhamperifnotsupportedbyproperfinancialplanning.
Finance manager brings about coordination among all departmental heads of the
organization.
iii. Dynamism:
A dynamic finance manager would take initiative and face various changing financial
situations/challengesasandwhentheyarise.
Proper and effective financial planning helps the finance manager to forecast the future
trends.
Suchforecastinghelpstheorganizationtoundertakeonlyprofitableprojects andavoidthe
unprofitableones.
iv. Communication:
Properfinancialplanninghelpsthefinancemanagertocommunicatethevariousaspectsof
financialplantotheexecutivesofotherdepartments.
Thisfurther helpstoeliminatethewastage oftime,goodwillandfinancial resourcesofthe
company.
v. DecisionMaking:
Financial planning helps a firm to take appropriate and timely decisions to achieve its
objectives.
Thus, to implement any scheme, there must be a budgetary provision in the financial
planning.
vi. Integration:
Aproperfinancialplanprovidesafairlygoodideatothefirmaboutitsavailableresources.
Financial planning is to be completed in full consultation and cooperation of other
departments,whichinturn,promotesteamspiritamongalltheexecutivesofthecompany.
Thus,financialplanningassistsinintegrationoffirmsactivities.
vii. Futuristic:
Financialplanningtakesintoaccountnotonlythepresentbutalsothefuturedevelopments.
Thisfuturisticelementoffinancialplanninghelpsforadvanceprogramming.
*Q.4. Writeashortnoteon:ObjectivesofFinancialPlanning. [5]
Ans: Thetermfinancialplanningreferstoassessmentoffinancialrequirementsandarrangingthe
sourcesofcapital.
Objectivesoffinancialplanninginclude:
i. ProperUtilizationofFunds:
Maximumusageoftheavailablefinancialresourcesisthebasicaimoffinancialplanning.
Itisimportanttoensurethatadequatefundsareraisedatnoextracost.
ii. AdequateSupplyofFunds:
Financialplanningincludesforecastingthefirmsfinancialneeds.
It is important to have sufficient supply of funds to ensure smooth functioning of the
organization.
Theremustbeenoughfundssothatthefirmdoesnotfaceanyfinancialdistress.
iii. EfficientUseofFunds:
Itisimportanttomanagefundswisely.
Financialplanningaimsatsupervisingtheusageoffundsbecausethefundssogeneratedare
notonlyforearningprofitbutalsoforthesurvivalofthefirm.
5
 Std.XII:Commerce
iv. EliminationofWastefulExpenditure:
Financialplanningensuresthatnoexcessfundisraisedbythefirm.
Itisimportantthatthefirmgenerateorprocureonlythatmuchamountwhichisneeded.
Anyextracostmustnotbeincurredwhileraisingthefundsandthefundssoraisedshouldbe
properlyutilizedaspertherequirementofthefirm.
Anysurplussogeneratedneedstobemonitored,soastoavoiditsmisuse.

CapitalStructure
*Q.5. Writeashortnoteon:CapitalStructureanditscomponents.[Mar16,Oct15][5]
Ans: MeaningofCapitalStructure:
CapitalStructureconstitutestwowordsi.e.CapitalandStructure.
The word Capital refers to the investment of funds in business while Structure means
arrangementofdifferentcomponentsinproperproportion.
Acompanycanraiseitscapitalfromdifferentsourcesi.e.ownedcapital,borrowedcapitalor
both.
Todecidecapitalstructuremeanstodecideupontheratioofownedcapital(i.e.equityshare
capital, preference share capital, reserves & surplus) to borrowed capital (i.e. debentures,
loans,etc).
Accordingto JohnH.Hampton,Afirmscapitalstructureistherelationbetweenthedebt
andequitysecuritiesthatmakesupthefirmsfinancingofitsassets.
AccordingtoR.H.Wessel,capitalstructureisthelongtermsourcesoffundsemployedina
businessenterprise.
According to WestonandBringham, capital structure is the permanent financing of firm
representedbylongtermdebt,preferredstockandnetworth.
The term capital structure means financing mix. It refers to the proportion of different
securitiesraisedbyafirmforlongtermfinance.
ComponentsofCapitalStructure:
ThecomponentsofCapitalStructureareasfollows:
i. EquityShareCapital:
Equitysharecapitalisprovidedbyequityshareholdersanditisthebasicsourceoffinancing
activitiesofbusiness.
Theholdersofsuchsharesbearultimateriskassociatedwiththeownership.
Equitysharescarrydividendatafluctuating rate,dependingupontheprofitsearnedbythe
company.
ii. PreferenceShareCapital:
Preference shares carry dividend at a fixed rate and enjoy preferential right over equity
sharesforreturnofcapitalincaseofwindingupofthecompany.
Unlikeequityshareholders,preferenceshareholdershavelimitedvotingrights.
iii. RetainedEarnings:
Thepartoftheprofitretained
by the company for meeting GoodtoKnow:
future financial needs and for The retained earnings of a
expansion of the firm is few corporate entities for
knownasretainedearnings. the financial year ended
In simple words, it is March, 2015 are as given
ploughingbackofprofits. below:
(AmountinCrores)
HindustanUnileverLtd.=` 1,812.99

InfosysLtd.=` 37,403.00
GodfreyPhilipsIndiaLtd.=` 1,031.08

66
 Chapter01:BusinessFinance
iv. BorrowedCapital:
Itconsistsofthefollowing:
Debentures:
A debenture is a certificate of loan evidencing the fact that the company is liable to pay a
specifiedamountwithinterestatanagreedrate.
TermLoans:
Termloansareprovidedbybanksandotherfinancialinstitutionsatafixedrateofinterest.
Fore.g.
BalancesheetofSunriseCompanyLimitedason31stMarch2012
Amount Amount
Liabilities Assets
` `
ShareCapital FixedAssets
5000EquityShares Building 2,00,000
of`10eachfullypaid 50,000 Plant&Machinery 80,000
1000,10%Preference
Sharesof100each CurrentAssets
fullypaid 1,00,000 Cashinhand 14,000
Reserves&Surplus Cashatbank 24,000
General&Surplus 20,000 SundryDebtors 12,000
Liabilities Inventories 10,000
1000,12%Debenturesof
`100eachfullypaid 1,00,000
SundryCreditors 40,000
BankOverdraft 20,000
Billspayable 10,000
3,40,000 3,40,000
CapitalStructure =Equityshares+Preferenceshare+Reserves+Debentures
=50,000+1,00,000+20,000+1,00,000
=2,70,000
*Q.6. WhatisCapitalStructure?WhataretheinternalandexternalfactorsinfluencingCapital
Structure? [10]
Ans: CapitalStructureconstitutestwowordsi.e.CapitalandStructure.Thewordcapitalrefersto
the investment of funds in business while structure means arrangement of different
components in proper proportion. Capital structure means financing mix. It refers to the
proportionofdifferentsecuritiesraisedbyafirmforlongtermfinance.
FactorsinfluencingCapitalStructure:
The factors which play a vital role in determining the capital structure are divided into two
categoriesviz.InternalFactorsandExternalFactors.
2
A. InternalFactors:[Mnemonic:SCRAP TAG]
i. SizeandNatureofBusiness:
Thesizeofbusinesshasgreatimpactonitscapitalstructure.
Tradingconcernsraisecapitalbyissueofequityaswellaspreferencesharesastheyrequire
moreworkingcapital.
Smallcompanieshavelimitedcapacitytoraisefundsfromexternalsources.
Large companies possess huge investments; hence they can issue debentures by offering
securitiesoffixedassetssuchasland,building,machineryetc.
Suchcompaniesprefertoraisefundsbyissuingequitysharesalongwithdebentures.

7
 Std.XII:Commerce
ii. CapitalGearing:
Theratiobetweendebtcapital(fixedinterest)andequitycapital(variabledividend)iscalled
capitalgearing.
It is high gearing when the proportion of debt capital is high than the equity share capital
while it is low gearing when the proportion of debt capital is low than the equity share
capital.
Inordertoprotecttheinterestofequityshareholders,thecompanyusuallyusespropermix
ofvarioustypesofsecuritiesinitscapitalstructure.
iii. RequirementofCapital:
In the initial stages of business, a company cannot issue varieties of securities as there is
considerableriskinvolvedandhence,itispreferabletoraisecapitalthroughequityshares.
Later on for expansion or modernization, the company may issue other types of securities
suchasdebentures,publicdepositsetc.
iv. AdequateEarningsandCashPosition:
Developed companies with stable earnings (stable cash flow) utilize large amount of debt
capitalintheircapitalstructureastheycanpayafixedrateofinterest.
Companieswithunstableearnings(unpredictablecashflow)shouldnotoptfordebtintheir
capitalstructureastheymayfacedifficultyinpayingthefixedamountofinterest.
v. FuturePlansandDevelopment:
Capital structure is designed by the management keeping in mind the future development
andexpansionplans.
Equitysharescanbeissuedintheinitialstageswhereasdebenturesandpreferenceshares
maybeissuedinfuturetofinancedevelopmentalplans.
vi. PeriodofFinance:
While framing capital structure, the period for which finance is needed must also be
considered.
If funds are required on regular basis, the company should raise it through issue of equity
shares.
Forashorterperiod,fundscanberaisedthroughissueofdebenturesorpreferenceshares.
vii. TradingonEquity:
TheuseofborrowedcapitalforfinancingafirmisknownasTradingonEquity.
Iftherateofinterestondebtislowerthantherateofearningsofthecompany,theequity
shareholdersgetadditionaldividend.
Thisincreasesthecreditworthinessofthecompanyandthecompanyisabletoraisefurther
loanatalowerrateofinterest.
Ontheotherhand,ifthecompanysearningsarenotsufficient,itmayleadtofinancialcrisis
astheinterestondebthastobepaidevenincaseofloss.Theentireearningsmayexhaustin
paymentofinterest.Inthiscase,nodividendcanbedeclaredbythecompany.
If no dividend is paid on equity shares, it adversely affects the creditworthiness of the
company.
Thus,tradingonequityisdoubleedgedsword.Itmayincreasetheincomeoftheshareholder
if things head in a proper direction. On the other hand, it increases the risk of loss under
unfavourableconditions.
viii. AttitudeofManagement:
Capitalstructureisinfluencedbytheattitudeofthepersonsinthemanagement.
If the management wishes to have exclusive control, they raise capital through preference
sharesanddebtcapital.
Sincetheholderofsuchsharesdonotenjoyanyvotingrights,therebycannotinterfereinthe
managementofthecompany.
88
 Chapter01:BusinessFinance
ix. GrowthofBusinessFirm:
Capitalrequirementofafirmdependsuponthestageofdevelopment.
Attheinitialstage,thesourceoffinanceismostlyequitysharesandshorttermloans.
As the stage progresses, the requirement increases and funds are procured by issuing
debenturesandpreferenceshares.
B. ExternalFactors:[Mnemonic:MAGICCAT]
i. MarketConditions:
Various methods of financing should be considered depending upon the prevailing market
conditions.
If the share market is in a declining situation, the company should raise funds by issuing
debts.
Ontheotherhand,duringtheperiodofboominthesharemarket,thecompanyshouldraise
fundsbyissuingequityshares.
ii. AttitudeofInvestors:
Attitudeofinvestorsalsoplaysanimportantroleindeterminationofcapitalstructure.
Iftheinvestorsprefertotakeriskandexpecthigherreturns,theyinvestinequityshares.
Iftheinvestorsprefertoearnsafeandassuredincomeandarenotreadytotakerisk,they
investinpreferencesharesand/ordebentures.
iii. GovernmentRulesandRegulations:
AccordingtoSEBI,thenormaldebtequityratiois2:1.
However,incaseoflargecapitalintensiveprojects,thepermittedratiois3:1.
Government provides aid and concessions to small industrial projects to raise more debt
capital.
iv. RateofInterest:
Capitalstructuredependsupontherateofinterestprevailinginthemarket.
Iftherateofinterestishigher,firmsdelaydebtfinancing.
Conversely,iftherateofinterestislower,firmswilloptfordebtfinancing.
v. Competition:
Thecompanywhichfacescutthroatcompetitionshouldraisefundsbyissuingequityshares
astheirearningsarenotcertainandadequate.
However,thecompanywhichhasamonopolypositioninthemarketmayissuedebtcapital
becauseofcertaintyofearnings.
vi. CostofCapital:
Costofcapitalistheminimumreturnexpectedbyitssupplier/investor.
Theexpectedreturndependsuponthedegreeofrisk.
In case of debt holder, rate of interest is fixed and the loan is repaid within the prescribed
period.
Ahighdegreeofriskisassumedbyequityshareholdersthanthedebtholders.
Incaseofshareholders,rateofdividendisnotfixedandtheircapitalisrepaidonlywhenthe
companyisliquidated.Thus,debtisacheapersourceofcapitalthanequity.
Thepreferencesharecapitalisalsocheaperbutnotcheapasdebt.
However,thecompanycannotminimizecostofcapitalbyemployingonlydebt.
As debt becomes more expensive beyond a particular point due to the increased risk of
excessivedebt.
vii. AttitudeofFinancialInstitutions:
Attitudeoffinancialinstitutionsistobeconsideredwhiledeterminingcapitalstructure.
If financial institutions prescribe high terms of lending, then the company should move to
othersourceoffinancing.
However,iffinancialinstitutionsprescribeeasytermsoflending,thecompanyshouldobtain
fundsfromsuchinstitutions.
9
 Std.XII:Commerce
viii. Taxation:
Interestpaidagainstdebtistaxdeductableexpenditurewhereasdividendisnotconsidered
astaxdeductableexpenditureforthecompany.
Hence,issueofdebtcapitalismorepreferablethanissueofsharecapital.
Thecompanieswithhighertaxesemploydebtcapitalasitisataxdeductableexpense.
Q.7. Writeashortnoteon:SoundCapitalStructure. [5]
Ans: Capitalstructurereferstothecompositionofcapitalandratioofdifferentsecuritiesintotal
capital.
Itcomprisesofnetworth(equity+reserves)andlongtermliabilities.
Acompanycanraiseitscapitalfromdifferentsourcesi.e.ownedcapitalorborrowedcapital
orcombinationofboth.
Different proportions of various sources are used in capital structure as per business
requirement.
The organization is said to have a sound capital structure when the ratio of securities
i.e.debttoequity,isfavourable.TheidealratioprescribedbySEBIis2:1.
Balancedcapitalstructureisanoptimalmixtureofdebtandequity.
Thereisnoidealpatternofcapitalstructure.However,thereshouldbeanappropriatemixof
securitiesinthecapitalstructuresothatEPSi.e.earningspershareismaximized.
Fore.g.SunriseCompanyLtd.hassharecapitalof` 2,00,000dividedin20,000equityshares.
Thiscompanyhasanexpansionprogrammerequiringaninvestmentofanother` 1,00,000.
Themanagementisconsideringalternativesasfollows:
Issueof10,000equitysharesof` 10/each
Issueof10,00012%preferencesharesof` 10/each.
Issueof100010%debenturesof` 100/each.
Let us calculate EPS assuming the earning of company is ` 50,000 before interest and tax
(i.e.EBIT)andtaxrateat50%.
PresentandProjectedEarningpershare
Presentcapital
Proposedcapitalstructure
structure
Particulars
Equity+ Equity+
AllEquity AllEquity
Preference Debt.
Earningbeforeinterest 50,000 50,000 50,000 50,000
andtax
LessInterest 10,000
LessTax@50% 50,000 50,000 50,000 40,000
25,000 25,000 25,000 20,000
LessPref.Dividend 12,000
Profit 25,000 25,000 13,000 20,000
No.ofEquityshare 20,000 30,000 20,000 20,000
EPS 1.25 0.83 0.65 1.00
Theabovetableindicatestheequity&debtmodelisthemostsuitablecapitalstructure.
FixedCapitalandWorkingCapital

*Q.8. WhatisFixedCapital?StatefactorsaffectingrequirementofFixedCapital.[5]
Ans: MeaningofFixedCapital:
Fixed capital is that portion of total capital which is invested in fixed assets such as, land,
building,equipments,machineryetc.
Itmaybeheldinbusinessfor5,10or20yearsormore.Thereafteritmaybesoldorreused.

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 Chapter01:BusinessFinance
Investorsinvesttheirmoneyinfixedcapitalhopingtomakefutureprofit.
TheconceptofFixedCapitalwasfirsttheoreticallyanalyzedbyeconomistDavidRecardo.
In National Accounts, fixed asset is defined as the stock of tangible, durable fixed assets
ownedorusedbyresidententerprisesformorethanoneyear.Thisincludesbuilding,plant,
machinery,vehicle,equipment,etc.
According to Karl Mark, Fixed capital also circulates, except that the circulation time is
muchlonger.[Itmeansthatthefixedcapitalremainsinbusinessforalongerperiodoftime.
Whereas,investmentinassetssuchasrawmaterialscanbereadilyconvertedincash]
The European system of National and Regional Accounts includes intangible assets such as
computersoftware,copyright,etc.withinthedefinitionoffixedassets.
FactorsaffectingFixedCapitalRequirement:
Thefactorsaffectingfixedcapitalrequirementareasfollows:
i. NatureofBusiness:
Thenatureofbusinessplaysavitalroleindeterminingfixedcapitalrequirement.
For e.g. Rail, roads and other public utility services have large fixed investment. Their
workingcapitalrequirementsarenominalastheysupplyservicesandnotproducts.
Theymainlydealincashsalesonly.
Ontheotherhand,tradingorganizationslikeretailersrequirelessoffixedcapitalastheydo
notneedlargefundsforland,building,plantsandmachineries.
ii. SizeofBusiness:
Biggerthebusiness,higheristheneedoffixedcapital.
Hence,thesizeofafirm,eitherintermsofitsassetsorsalesaffectstheneedoffixedcapital.
iii. GrowthandExpansion:
In order to manage growing production and turnover, a growing firm may need to invest
moreinfixedassets.
iv. StageofDevelopmentofBusiness:
Therequirementoffixedcapitalforanewlyestablishedorganizationismorethanthatofan
establishedorganization.
v. BusinessCycle:
Whenthereisaboomperiodinaneconomy,theorganizationinvestsmoreinfixedassetsso
astoincreaseitsproductioncapacity.
However,duringrecession,theorganizationavoidsundertakinghugeprojects,andhence,it
maynotrequiremoreoffixedcapital.

*Q.9. WhatisWorkingCapital?Statefactorsaffectingrequirementofworkingcapital.[10]
Ans: MeaningofWorkingCapital:
Workingcapitalmeanscurrentassetsorcirculatingcapital.
Expertsdefineworkingcapitalinboth,narrowaswellasbroadsense.
In the narrow sense, it is defined as the difference between current assets and current
liabilities.
According to Gerstenbergh, working capital is the excess of current assets over current
liabilities.However,Gerstenberghpreferstocallworkingcapitalascirculatingcapital.
Inabroadersense,workingcapitalhasbeendefinedasfollows:
Accordingto WesternandBrigham,workingcapitalreferstoafirmsinvestmentinshort
termassetssuchascash,shorttermsecurities,accountreceivableandinventories.
AsperMead,BakerandMallot,workingcapitalmeanscurrentassets.
AsperJ.S.Mill,thesumofcurrentassetsisworkingcapitalofabusiness.
Ittakesintoaccountallcurrentresourcesofthecompany.Itreferstogrossworkingcapital.

11
 Std.XII:Commerce
FactorsaffectingWorkingCapitalRequirement:[Mnemonic:BabluRESPECTSVAN]
Thefactorsaffectingworkingcapitalrequirementareasfollows:
i. BusinessCycle:
When there is boom in the economy, sales will increase, which will lead to an increase in
investmentinstock.
Hence,additionalworkingcapitalwouldberequired.
During recession period, sales would decline and the need of working capital would also
decrease.
ii. RequirementofCash:
Therequirementofworkingcapitaldependsuponthecashrequiredbytheorganizationfor
variouspurposes.
If the requirement of cash is more, then company requires more working capital and vice
versa.
iii. GrowthandExpansionActivities:
Theworkingcapitalrequirementincreaseswiththegrowthoffirm.
Itneedsfundscontinuouslytosupportlargescaleoperation.
iv. SeasonalFluctuations:
Therequirementofworkingcapitaldependsupontheseasonalfluctuations.
Itstatesthat,ifthedemandfortheproductisseasonal,theworkingcapitalrequiredinthat
seasonwillbemore.
Fore.g.Thedemandforsweatersismoreinwinter.Sweatermanufacturingcompaniesneed
more working capital before winters to make the goods available in the market before the
seasonstarts.
v. ProductionCycle:
Theprocessofconvertingrawmaterialintofinishedgoodsiscalledproductioncycle.
Afirmrequiresmoreworkingcapitalwhentheproductioncycleislongerandviceversa.
vi. ExternalFactors:
If the financial institutions and banks provide funds to the firm as and when required, the
needofworkingcapitalwillbereduced.
vii. CreditControl:
Volume and terms of credit sales, collection policy etc. are the important factors of credit
control.
Sound credit policy improves cash flow and hence the firms making cash sales require less
workingcapital.
Liberalcreditpolicyincreasestheriskofbaddebtsandhencethefirmssellingoneasycredit
termsmayrequiremoreworkingcapital.
viii. TermsofPurchaseandSales:
If the credit terms of purchases are favourable and terms of sales are less liberal then the
requirementofworkingcapitalwillreduceastherequirementofcashwillbeless.
On the other hand, if the firm does not get proper credit for purchase and adopts liberal
creditpolicyforsales,itwillrequiremoreworkingcapital.
ix. SizeofBusiness:
Thesizeofbusinesshasagreatimpactontherequirementofworkingcapital.
Largescalefirmsrequirelargeamountofworkingcapital.
x. VolumeofSale:
Thevolumeofsaleisdirectlyproportionaltothesizeofworkingcapital.
If the volume of sale increases, there is an increase in amount of working capital and vice
versa.
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 Chapter01:BusinessFinance
xi. ManagementAbility:
The requirement of working capital will reduce if there is proper coordination between
productionanddistributionofgoods.
Lackofcoordinationbetweendifferentdepartmentsmayresultinheavystockingoffinished
andsemifinishedgoods,whichultimatelyleadstoanincreaseintherequirementofworking
capital.
xii. NatureofBusiness:
Thenatureofbusinesshighlyinfluencestherequirementofworkingcapital.
Industrial and manufacturing enterprises, trading firms, big retail stores etc. need a large
amount of working capital as they have to satisfy varied and continuous demands of
consumers.
MultipleChoiceQuestions
I. Select the correct answer from the possible choices given below and rewrite the
statements: [1markeach]
*1. Businessfinancedealswith_______activitiesofbusiness.
(A) manufacturing (B) selling (C) financial

2. _______referstomanagementofbusinessfunds.
(A) Financialmanagement (B) Strategicmanagement
(C) Inventorymanagement

3. _______iscalledasResourceManagement.
(A) Inventorymanagement (B) Datamanagement
(C) Financialmanagement
4. Financial management has become an important aspect in the business environment of
_______countries.
(A) developed (B) developing (C) underdeveloped

*5. Abusinessfirmisbasically_______organization.
(A) profitoriented (B) serviceoriented (C) Nonprofit
*6. Normally_______givesadvicetoBoardofDirectorsinrespectoffinancialmatters.
[Mar16,Oct14]
(A) Auditor (B) Secretary (C) FinanceManager

7. Wealthmaximizationisalsoknownas_______maximization.
(A) value (B) source (C) manpower

*8. Wealthmaximizationofownermeansmaximizationof_______ofshares.
(A) facevalue (B) marketvalue (C) issuevalue

9. The financial plan must include information about _______ environment in which business
operates.
(A) economic (B) social (C) cultural

*10. Dueto_______planningitispossibletoeliminatewastefulexpenditure.
(A) Financial (B) Sales (C) Production

*11. The_______meansmixupofvarioussourcesoffundsindesiredproportions.
(A) Capitalstructure (B) Termloan (C) Retainedprofit

12. Capital structure is the _______ financing of firm represented by long term debt, preferred
stockandnetworth.
(A) temporary (B) permanent (C) balanced
13
 Std.XII:Commerce
13. Theidealstructurefornewcompanyistoraisecapitalthrough_______.
(A) Debentures (B) Preferenceshares (C) Equityshares

*14. Largemanufacturingcompanieshave_______investmentsinfixedassets.
(A) huge (B) small (C) moderate

*15. The_______concernscanacquirefundsfromvarioussources.
(A) wellestablished (B) newlyestablished (C) smalltrading

16. If funds are required on regular basis, the company should raise funds through issue of
_______.
(A) Equityshares (B) Preferenceshares (C) Debentures

*17. Tradingonequitymeansuseof_______capitalforfinancingafirm. [Mar14]

(A) equity (B) preference (C) borrowed

*18. Duringtheperiodofboominsharemarket,_______areissuedtoraisecapital.
(A) bonds (B) debentures (C) equityshares

*19. Theinvestorswhoarereadytotakeriskprefer_______sharesforinvestment.
(A) preference (B) equity (C) bonus

*20. Ifsharemarketisdepressedacompanyshouldissue_______capital.
(A) debt (B) owned (C) mix

*21. TheSEBIhasprescribeddebtequityrationormof_______.
(A) 1:1 (B) 2:1 (C) 2:2

*22. The_______isconsideredastaxdeductableexpenditure.
(A) dividend (B) bonus (C) interest
*23. The_______capitalstayinbusinessalmostpermanently.
(A) fixed (B) working (C) debt

*24. Thedifferencebetweencurrentassetsandcurrentliabilitiesis_______capital.
(A) debt (B) fixed (C) working

*25. Bigretailstoresrequirelargeamountof_______capital. [Mar15,Oct15]

(A) fixed (B) working (C) loan

*26. Ifthevolumeofsalesincreases,thereis_______inamountofworkingcapital.
(A) anincrease (B) adecrease (C) nochange

27. Ifcreditpolicyis_______,itispossibleforthecompanytoimproveitscashflow.
(A) sound (B) liberal (C) just

*28. Afirmsellingoncredittermsrequires_______workingcapital.
(A) more (B) medium (C) less

*29. Afirmmakingcashsalesrequires_______workingcapital.
(A) less (B) more (C) no

14
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 Chapter01:BusinessFinance

MatchthePairs
II. Matchthecorrectpairs: [1markeachpair]
*1.
GroupA GroupB
i. Financialmanagement a. Minimisemarketvalueofequityshares
[Mar15]
ii. Wealthmaximization b. Investmentinfixedassets
iii. Financialplan[Mar16] c. Ratioofbuyingandselling
iv. Capitalstructure d. Managementofbusinessfunds
v. Fixedcapital[Mar14] e. Adhocprogrammingoffinance
f. Investmentincurrentassets
g. Managementofbusinessactivities
h. Maximisemarketvalueofequityshares
i. Ratioofdifferentsecuritiesincapital
j. Advanceprogrammingoffinancialmanagement
Ans: (id),(iih),(iiij),(ivi),(vb).
2.
GroupA GroupB
i. FinanceManager a. Useofequitycapitalforfinancingbusiness.
ii. Debtequityratio b. Taxdeductableexpenditure
iii. Tradingonequity c. Ratiobetweenincomeandexpenditure.
iv. Interest d. Nontaxdeductableexpenditure
v. Capitalgearing e. Providesadvicetosecretaryonfinancialmatters.
f. 2:1
g. Doubleedgedsword
h. 1:2
i. ProvidesadvicetoBoardofDirectorsonfinancial
matters.
j. Ratiobetweendebtcapitalandequitycapital.

Ans: (ii),(iif),(iiig),(ivb),(vj).

OneWord
III. Write a word or a term or a phrase which can substitute each of the following
statements: [1markeach]
*1. Afunctionconcernedwithraisingoffinanceanditseffectiveutilizationinbusiness.
*2. Thebasicprincipleofbusinessactivitiesthataimsatprofit. [Oct14]
*3. Theprinciplewhichmeansmaximizationofmarketpriceofequityshares.
*4. Anadvanceprogrammingofallplansoffinancialmanagement.
*5. Amixupofvarioussourcesoffundsindesiredproportion.
6. Capitalorfundsprovidedbyequityshareholders.
7. Loansprovidedbybankandotherfinancialinstitutions.
*8. Theuseofborrowedcapitalforfinancingbusinessfirm.[Oct15]
*9. Theratiobetweendebtcapital(fixedinterest)andequitycapital(variabledividend).
*10. Theportionoftotalcapitalwhichisinvestedinfixedassets.
*11. Thesumofcurrentassetsofthebusiness.
*12. Thedifferencebetweencurrentassetsandcurrentliabilities.
15
 Std.XII:Commerce
Ans: 1. Financialmanagement 2. Profitmaximization
3. Wealthmaximization 4. Financialplanning
5. Capitalstructure 6. Equitysharecapital
7. Termloans 8. Tradingonequity
9. Capitalgearing 10. Fixedcapital
11. Workingcapital 12. Networkingcapital

DistinguishBetween

*IV. Distinguishbetween:FixedCapitalandWorkingCapital.[Mar15,Oct14][5]
Ans:

Sr.No. FixedCapital WorkingCapital

Meaning
1. Fixed capital is that portion of total Working capital refers to a firms
capital which is invested in fixed investment in short term assets such as
assets such as land, building, cash, short term securities, account
equipments,machineryetc. receivableandinventories.
Nature
2. It may be held in business for 5, 10, Itremainsinthebusinessforashortperiod
20yearsormore. oftimeandcirculatesintothebusiness.
Purpose
3. Fixedcapitalisinvestedinlongterm It is invested in short term assets to fulfil
assets for the growth and expansion workingcapitalneeds.
ofafirm.
Sources
4. It is generated by issuing shares, It is accumulated through trade credits,
debentures,borrowingofloansetc. shorttermloans,publicdepositsetc.
Objective
5. Investors invest their money in fixed Investors invest in working capital for
capitalforbetterfuturereturns. immediatereturns.
RisksInvolved
6. Risk involved in the investment of Risk involved in the investment of working
fixedcapitalishigh. capitalislowascomparedtofixedcapital.
Authority
7. Generally, Top level management Middle level or lower level managers can
decides on matters related to fixed decideonmattersrelatedtoworkingcapital
capitalinvestment. needs.
FactorsAffecting
8. Need of fixed capital depends upon Need of working capital depends upon
various factors such as: size of various factors such as: seasonal
business, nature of machinery fluctuation, production cycle, requirement
required,expansionetc. ofcashetc.

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 Chapter01:BusinessFinance

TrueorFalse
V. Statewithreasons,whetherthefollowingstatementsareTrueorFalse:[5markseach]
*1. Financialmanagementisessentialforalltypesoforganizations.[Mar14,15]
Ans: ThisstatementisTRUE.
Reasons:
All types of organizations, whether profit making or nonprofit making, need financial
management as it plays a crucial role in making effective and optimum use of financial
resources.
Theseorganizationsrequirefundsfortheirdevelopmentandexpansion.
Financialmanagementreferstomanagementoffundsandismainlyconcernedwithraising
offinanceanditseffectiveutilization.
It also deals with planning, organizing, directing, coordinating and controlling financial
activities.
Financial management helps in maximizing profit of the company which results in
maximizationoftheownerswealth.
Hence,financialmanagementisessentialforalltypesoforganizations.

2. Financial management has become subject of considerable importance in developed

countries.
Ans: This statement is FALSE. [Financial management is a matter of great concern in developing
countries]
Reasons:
Financialmanagementreferstomanagementoffundsandismainlyconcernedwithraising
offinanceanditseffectiveutilization.
Financial management is a subject of considerable importance in developing countries like
India.
In such countries, the existence of business entity depends upon the savings of the people
whicharemeageringeneral.
These scarce savings should be utilized to the maximum efficiency through wellmanaged
financialactivities.
Routine and executive functions of financial management help a finance manager to make
optimumuseoffinancialresources.
Thus,financialmanagementisamatterofgreatconcernindevelopingcountries.

*3. Theproperaimoffinancialmanagementiswealthmaximization.
Ans: ThisstatementisTRUE.
Reasons:
Financialmanagementreferstomanagementoffundsandismainlyconcernedwithraising
offinanceanditseffectiveutilization.
The shareholders invest their funds in a company or an organization with a motive to
increasetheinvestment.
Thewealthofsuchshareholdersisreflectedinmarketvalueofshares.
Ifthemarketvalueofequitysharesincreases,wealthofshareholdersalsoincreases.
The share price of a company, quoted in share market index, is a reflection of its earning
capacity,dividendandretentionpolicy.
Thus,theproperaimoffinancialmanagementismaximizingmarketvalueofequitysharesof
thecompany.
17
 Std.XII:Commerce
*4. Maximizationofprofitisrealandcompletemotive.
Ans: ThisstatementisFALSE.[Maximizationofprofitisnottherealandcompletemotive]
Reasons:
Profitisatoolofmeasuringthesuccessofanybusinessfirmi.e.highlevelprofitabilityresults
in better return (dividend) to the shareholders which in turn increases their earnings per
share(EPS).
Insimpleterms,thebusinessfirmshouldundertakeonlysuchactivitiesthatincreaseprofit
andthoseactivitieswhichdecreaseprofitshouldbeavoided.
Maximizationofprofitisimportantinregardtovariousfactorssuchas:togeneratefundsfor
futureexpansion,betterdividendtotheshareholders,increaseinthecreditworthinessofthe
firmetc.
However,itisnottheonlyfactorimportantforfinancialmanagement.
Theproperaimoffinancialmanagementiswealthmaximizationofitsequityshareholders.
Moreover,businessfirmsnowadaysaimatsocialsatisfactionandsocialwelfare.
Therefore,profitmaximizationalongwithwealthmaximizationandsocialsatisfactionarethe
importantobjectivesoffinancialmanagement.
Thus,Maximizationofprofitisnottherealandcompletemotive.

*5. Itisnotpossibletogoaheadwithoutfinancialplan.[Mar16,Oct15]
Ans: ThisstatementisTRUE.
Reasons:
FinancialPlanningisanimportantfunctionoffinancialmanagement.Itpredictsthefinancial
requirementandarrangesforthesourcesofrequiredfunds.Itisacontinuousprocessinday
todayadministrationofbusiness.
Financialplanningisnotonlyrequiredforprofitmakingbutevenforsurvivalofafirm.The
financialplanmustincludeinformationabouteconomicenvironmentinwhichthebusiness
operates.Financialplanningservesasaguideforoverallactivitiesoftheorganization.
The information provided in the financial plan assists in decision making of a firm. It
establishestargetsofsalesandprofitsandpromotescoordinationofresourcesandefforts
toreachthesetargets.Itisanadvanceprogrammingofallplansoffinancialmanagement.
Thus,itisnotpossibleforfinancemanagertogoaheadunlesshepreparesasoundfinancial
plan.

*6. Thereishardandfastrulefortheproportionofownedfundsandborrowedfunds.
Ans: Thisstatementis FALSE. [Theproportionofownedfundsandborrowedfundsmaydifferfrom
organizationtoorganizationdependinguponcertainfactorsviz.internalandexternalfactors]
Reasons:
Thepatternofcapitalstructureofvariousfirmsvarieswidely.Hencetodeterminethebest
possible pattern of capital structure i.e. proportion of owned funds and borrowed funds,
manyfactorsaretobeconsideredviz.internalandexternalfactors.
Manyinternalfactorsinfluencecapitalstructureviz.requirementofcapital,sizeandnature
of business, growth of business, cash position, period of finance, trading on equity,
developmentofthefirmetc.
On the other hand, external factors such as market conditions, cost of capital, attitude of
investorsandfinancialinstitutions,governmentpoliciesandregulationsetc.influencecapital
structure.
Also,itisimportanttomaintainapropermixofvarioustypesoffinanceincapitalstructure,
sothattheinterestofequityshareholdersisprotected.
Thus,theabovestatementisfalse.
18
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 Chapter01:BusinessFinance

AdditionalQuestionsforRevision
Q.1. Writeshortnoteson: [5markseach]
*i. RoleofFinancialManagement.
Ans: ReferQ.1.RoleofFinancialManagement.

*ii. ImportanceofFinancialPlanning. [Mar14]

Ans: ReferQ.3.
Q.2. State,withreasons,whetherthefollowingstatementisTrueorFalse:[5markseach]
i. Modernmanagementlaysagreatemphasisonadetailedfinancialplan.
Ans: ThisstatementisTRUE.
Reasons:
ReferV.(5).
*ii. Tradingonequityisadoubleedgedsword.
Ans: ThisstatementisTRUE.
Reasons:
ReferQ.6.(A)(vii).

*iii. Requirementofworkingcapitaldoesnotdependuponanyfactor.[Oct14]
Ans: ThisstatementisFALSE.[Requirementofworkingcapitaldependsuponmanyfactors]
Reasons:
ReferQ.9.[Any5points].

QUICKRECAP

FinancialManagement

Functions
Objectives

Routine Executive i. Profit

Maximization
[Mnemonic: [Mnemonic: ii. Wealth
KFCCD] CARDIP] Maximization
i. RecordKeeping i. Checking and iii. SocialSatisfaction

andReporting Analysis of
ii.Preparationof Financial
VariousFinancial Performance
ii. Advising Board of
Statements
Directors
Cashplanning
iii.
iii. Forecasting
iv.Credit Financial
Management Requirements
v. Providing iv. Deciding Sources
Information to ofFunds
BoardofDirectors v. Investment
Decisions
vi. DividendPolicy

19
 Std.XII:Commerce
CapitalStructure

Components InfluencingFactors

Owned / Owed / Borrowed Internal Factors External Factors

ShareholdersFunds Funds
i. Equity share i. Debentures [Mnemonic: [Mnemonic:
capital ii. Termloans SCRAP2TAG] MAGICCAT]
ii. Preference share i. Size and Nature i. Market
capital Business Conditions
iii. Retained ii. CapitalGearing ii. Attitude of
earnings iii. Requirement of Investors
Capital iii. Government
iv. Adequate Rules and
earnings and Regulations
CashPosition iv. RateofInterest
v. Future Plans v. Competition
and vi. CostofCapital
Development vii. Attitude of
vi. Period of Financial
Finance Institutions
vii. Trading on viii. Taxation
Equity
viii. Attitude of
Management
ix. Growth of
BusinessFirm

TypesofCapital

FixedCapital WorkingCapital

FactorsaffectingFixed FactorsaffectingWorking
CapitalRequirement CapitalRequirement
i. Natureofbusiness [Mnemonic:BabluRESPECTSVAN]
ii. Sizeofbusiness
i. BusinessCycle
iii. Growthandexpansionofbusiness
ii. RequirementofCash
iv. Stageofdevelopmentofbusiness iii. GrowthandExpansionActivities
v. Businesscycle iv. SeasonalFluctuations
v. ProductionCycle
vi. ExternalFactors
vii. CreditControl
viii. TermsofPurchaseandSales
ix. SizeofBusiness
x. VolumeofSale
xi. ManagementAbility
xii. NatureofBusiness

20
20