Balbharti Maharashtra State Board Class 12 Secretarial Practice Important Questions Chapter 1 Introduction to Corporate Finance Important Questions and Answers.
Maharashtra State Board 12th Secretarial Practice Important Questions Chapter 1 Introduction to Corporate Finance
1A. Select the correct answer from the options given below and rewrite the statements:
Question 1.
__________ said that money is an arm or leg – use it or lose it.
(a) Henry Hoagland
(b) Henry Ford
(c) Henry Fayol
Answer:
(a) Henry Hoagland
Question 2.
Investing decision is also called as __________
(a) corporate finance
(b) capital requirement
(c) capital budgeting
Answer:
(c) capital budgeting
Question 3.
Manufacturing industries have to invest __________ amount of funds to acquire fixed assets.
(a) huge
(b) less
(c) minimal
Answer:
(a) huge
Question 4.
Equity Share Capital carry __________ rate of dividend.
(a) fluctuating
(b) fixed
(c) economical
Answer:
(a) fluctuating
Question 5.
Preference Share Capital carry __________ rate of dividend.
(a) fluctuating
(b) fixed
(c) economical
Answer:
(b) fixed
Question 6.
Retained earnings is __________ source of financing.
(a) external
(b) internal
(c) capital
Answer:
(b) internal
Question 7.
__________ is acknowledgement of loans raised by company.
(a) Share Capital
(b) Corporate Finance
(c) Debentures
Answer:
(c) Debentures
1B. Match the pairs.
Question 1.
| Group ‘A’ | Group ‘B’ |
| (1) Finance | (a) Fixed rate of dividend |
| (2) Equity Share Capital | (b) Acknowledgment |
| (3) Preference Share Capital | (c) Fluctuating rate of dividend |
| (4) Retained Earnings | (d) Term Loan |
| (5) Borrowed Capital | (e) Financing Decision |
| (f) Money and Money Management | |
| (g) Ploughing back of profits | |
| (h) Investing Decision | |
| (i) Day-to-day transactions | |
| (j) Raising and Utilisation of finance |
Answer:
| Group ‘A’ | Group ‘B’ |
| (1) Finance | (f) Money and Money Management |
| (2) Equity Share Capital | (c) Fluctuating rate of dividend |
| (3) Preference Share Capital | (a) Fixed rate of dividend |
| (4) Retained Earnings | (g) Ploughing back of profits |
| (5) Borrowed Capital | (d) Term Loan |
1C. Write a word or a term or a phrase that can substitute each of the following statements.
Question 1.
The firms are concerned with buying and selling without altering the physical form of goods.
Answer:
Merchandising firms
Question 2.
Indirect cost or expenses required to run a business.
Answer:
Overheads
Question 3.
They maintain small working capital because of continuous cash flow from customers.
Answer:
Public utility firms
Question 4.
Firms dealing with these products require a huge amount of working capital.
Answer:
Luxurious product firms
Question 5.
A contract by which one person grants possession of some of his property like land, building, machinery to another for a certain period of time.
Answer:
Lease
1D. State whether the following statements are true or false.
Question 1.
A Firm needs less working capital with a longer period of the production cycle.
Answer:
False
Question 2.
If the manufacturing cycle is long a firm requires less working capital.
Answer:
False
Question 3.
Capital structure is a security mix.
Answer:
True
Question 4.
A short manufacturing cycle requires less working capital.
Answer:
True
1E. Find the odd one.
Question 1.
Railways, Reliance, Tata power.
Answer:
Reliance
Question 2.
Debenture, Term Loans, Retained earnings.
Answer:
Retained earnings
1F. Complete the sentences.
Question 1.
The proportion of different sources of funds raised by a firm for long term finance is called __________
Answer:
capital structure
Question 2.
The acquisition and use of capital by business corporations is dealt by __________
Answer:
corporate finances
Question 3.
To decide upon the ratio of different types of capital means to decide __________
Answer:
capital structure
Question 4.
__________ bear ultimate risk associated with ownership.
Answer:
Equity shareholders
1H. Answer in one sentence.
Question 1.
What has retained earnings?
Answer:
Retained earnings are an internal source of financing. It is nothing but ploughing back of profit.
Question 2.
What are term loans?
Answer:
Term loans are borrowed capital, that carries a fixed rate of interest and is usually provided by banks and other financial institutions.
1I. Correct the underlined word and rewrite the following sentences.
Question 1.
Working Capital refers to the investment in current liabilities.
Answer:
Working Capital refers to the investment in current assets.
2. Explain the following terms/concepts.
Question 1.
Equity Share Capital
Answer:
It is the basic source of business finance that carries no preference regarding the rate of dividend, i.e. its fluctuating, and repayment of capital during winding up. They bear the ultimate risk with ownership and have a residual claim during winding up.
Question 2.
Preference Share Capital
Answer:
Preference Shares Carry preferential right as to payment of dividend and have priority over equity shares for return of capital during liquidation (winding up). These shares carry dividends at a fixed rate.
Question 3.
Debenture
Answer:
It is borrowed capital, an acknowledgment of a loan raised by the company. The company has to pay interest on debentures at an agreed rate.
3. Study the following case/situation and express your opinion.
1. Pilatus company manufactures sophisticated airplanes whereas whitewood company produces plastic items, stationery products, packed food items, etc., and is labour intensive.
Question (a).
Determine their amount and composition of capital requirement.
Answer:
Pilatus company being a manufacturer of sophisticated products like aeroplanes it will need more fixed capital. Firms that make use of sophisticated products, technology require a huge investment in fixed assets.
Question (b).
Whitewood company being labour intensive, will it need more of working capital?
Answer:
Companies that are labour intensive which do not make use of the latest technology may require less investment in plant and machinery, fixed assets. They require more working capital to pay salaries and other related expenses.
Question (c).
Does the type of product manufactured and technology used, determine fixed capital or
working capital requirement.
Answer:
Yes, the type of product and technology used to determine fixed capital. Firms manufacturing sophisticated items like aeroplanes definitely require more fixed capital compared to those companies who produce plastic items, stationery products, etc.
2. Peach line is an online seller of apparel and Caramel is a manufacturing firm manufacturing tableware and exclusive dinnerware. What are their capital needs?
Question (a).
Being an online seller, will it need more or less working capital.
Answer:
Online sellers may require a limited amount of employees and inventory and therefore it may require a lower amount of working capital.
Question (b).
Caramel being a manufacturer of tableware will it need more fixed capital?
Answer:
Caramel being a manufacturing firm of tableware may require more working capital as it has to pay wages to several employees and also make payments to suppliers, maintenance of machines, rent, and other overheads.
Question (c).
Does the nature of business determine the working capital requirement?
Answer:
Yes. Peach line an online seller is selling routine consumption products like apparel would need relatively less working capital compared to Caramel, dealing in luxurious tableware products, it requires huge working capital as the sale of such items are not frequent.
4. Answer in brief.
Question 1.
Write a short note on Capital Requirements.
Answer:
Capital Requirement is the funds required to start or run the business.
The following points are to be taken into consideration:
(i) Draft a financial plan:
While drafting the financial plan, the present and future requirements of the business should be taken into consideration. A comparison of an estimated and past financial plans will help the business in future financial requirements.
(ii) Volume of capital required:
The capital required to run the business may be small or big according to the nature and size of the business. The capital required may be of the following type:
(iii) Fixed Capital:
The capital required to purchase the assets of the company is called Fixed Capital. It is the permanent capital of the business as it stays for a longer period of time. The sources of fixed capital are shares, debentures, bonds or long-term loans, etc.
(iv) Working Capital:
Working Capital is the circulating capital of the business. It stays for a short period of time. Cash is the most reliable source for all business firms when working capital is required. It helps to meet the unexpected expenses of the business.
Question 2.
Write a short note on Working Capital.
Answer:
There are two concepts related to working capital:
- Gross Working Capital – The sum total of all current assets of a business concern is termed as Gross Working Capital.
- Net Working Capital = Current Assets – Current Liabilities.
- It is the fund that is needed to run the day-to-day operations.
- It is used to purchase raw materials, payment of wages and expenses, and payment of dividends and interest to the investors.
- Working Capital enhances liquidity, solvency, creditworthiness, and reputation of the enterprise.
- Working Capital is needed for the efficient use of fixed assets.
- Working capital provides necessary funds to meet unforeseen contingencies and thus helps the enterprise run successfully during a crisis.
- It is also called “Circulating Capital”.
5. Justify the following statements.
Question 1.
Corporate finance deals with the raising and using of finance by a business corporation.
Answer:
- Business organisations require finance to start or expand their business.
- The finance manager should ensure the finance required by the firm.
- The right sources of fund should be identified that has minimum cost.
- The funds raised must be utilized effectively.
- Thus, it is rightly said that corporate finance deals with the raising and using of finance by a business corporation.
Question 2.
Working Capital is also called circulating capital.
Answer:
- Working capital is required by the business to carry out day-to-day transactions.
- Working capital helps the firm to maintain sufficient stock of raw material stock and finished goods.
- Working capital can be funded with short-term loans, deposits, trade credit, etc.
- It also helps the business to meet unexpected expenses. Thus, it is rightly said that Working Capital is also called circulating capital.
6. Answer the following questions.
Question 1.
What is Fixed Capital? Discuss the factors determining fixed capital requirements.
Answer:
Fixed capital is the capital that is used for buying fixed assets. Fixed Capital or Fixed assets stay in the business for a longer period of time. These assets are not meant for resale. It stays in the business almost permanently.
e.g. Capital used for purchasing land and building, furniture, plant, and machinery, etc.
Factors determining fixed capital requirements are:
(i) Nature of business:
The nature of business certainly plays a role in determining fixed capital requirements. They need to invest a huge amount of money in fixed assets.
e.g. Rail, road, and other public utility services have large fixed investments.
(ii) Size of business:
The size of a business also affects fixed capital needs. A general rule applies that the bigger the business, the higher the need for fixed capital. The size of the firm, either in terms of its assets or sales, affects the need for fixed capital.
(iii) Scope of business:
Some business firms that manufacture the entire range of their production would require a huge investment in fixed capital. However, those companies that are labour intensive and who do not use the latest technology may require less fixed capital and vice versa.
(iv) Extent of lease or rent:
Companies who take their assets on a lease basis or on a rental basis will require less amount of funds for fixed assets. On the other side, firms which purchase assets will naturally require more fixed capital in the initial stages.
(v) Arrangement of sub-contract:
If the business wants to sub-contract some processes of production to others, limited assets are required to carry out the production. It would minimize the fixed capital requirement of the business.
(vi) Acquisition of old assets:
If old equipment and plants are available at low prices, then it would reduce the need for investment in fixed assets.
(vii) Acquisition of assets on concessional rate:
With the view to foster industrial growth at the regional level, the government may provide land and building materials at concessional rates. Plants and equipment may also be made available on an installment basis. Such facilities will reduce the requirement of fixed assets.
(viii) International Conditions:
This factor is very significant particularly in large organizations carrying business at an international level. For example, companies expecting war, may decide to invest large funds to expand fixed assets before there is a shortage of materials.
(ix) Trend in the economy:
Economic trends also influence fixed capital requirements. During the recession, companies do not undertake expansion projects, therefore the company may not require much of fixed capital. But in anticipation of a bright future company would require additional fixed capital for expansion and modernization.
(x) Population trend:
When the population is increasing at a high rate, certain manufacturers find this as an opportunity to expand the business. For example, the Automobile industry, electronic goods manufacturing industry, ready-made garments, etc. which asks for a huge amount of fixed capital.
(xi) Consumer preference:
Industries providing goods and services which are in good demand will require a large amount of fixed capital e.g.: Mobile phone manufactures as well as mobile network providers.
(xii) Competition:
This factor is a prime element in fixed capital requirement decisions. If one competitor shifts to automation, the other companies in the same line of activity usually follow that competitor.