✓ Board-verified
Business Studies · 2022 · 5 marks
CBSE 2022 · Region 5 · Set 3 · Q12
(a) Ananta Ltd. is a company dealing in ready-made garments from last many years. Recently the profit of the company have started increasing. The…
(a)
Ananta Ltd. is a company dealing in ready-made
garments from last many years. Recently the profit of the
company have started increasing. The finance manager
decided to retain the profit instead of distributing it among
shareholders.
(i)
Identify and state the financial decision taken by
finance manager in the above case.
(ii)
State any three factors affecting the decision
identified in (i) above.
Ravi has joined as a finance manager in MTA Ltd.
He had to arrange funds of rupees one crore for the
company. The Chief Executive Officer of the company
wants to arrange the funds by a public issue whereas the
finance manager wants to have a mix of debt and equity
as this will determine the overall cost of capital and the
financial risk of the enterprise.
(i)
Identify and give the meaning of the financial
decision suggested by the finance manager in the
above case.
(ii)
State any three factors affecting the decision
identified in (i) above.
Marking-scheme solution
(i)
Dividend Decision
Dividend decision is concerned with the decision about how
much of the profit earned by company is to be distributed to the
shareholders and how much of it should be retained in the
business.
(i)
Factors affecting dividend decision are :
(a)
Amount of earnings: Earnings is a major determinant of
the decision about dividend as dividends are paid out of
current and past earnings.
(b)
Stability of Earnings: A company which has stable
earnings is in a better position to declare higher dividends
in comparison of those companies with unstable earnings.
(c)
Stability of Dividends: The companies having policy of
stabilizing dividend per share, do not alter if the change in
earnings is small or seen to be temporary in nature.
(d)
Growth Opportunities: Companies having good growth
opportunities retain more money out of their earnings to
finance the required investment, therefore, the dividend in
growth companies is smaller than that in the non–growth
companies.
(e)
Cash Flow position: Availability of enough cash in the
company is necessary for declaration of dividend because
a company may be profitable but short on cash.
(f)
Shareholders Preference: While declaring dividends,
managements must keep in mind the preferences of the
shareholders in this regard and if the shareholders in
general desire that at least a certain amount is paid as
dividend, the companies are likely to declare the same.
(g)
Taxation Policy: If tax on dividend is higher, it is better
to pay less by way of dividends, whereas higher
dividends may be declared if tax rates are relatively
lower.
(h)
Stock Market Reaction: The possible impact of
dividend policy on the equity share price is one of the
important factors considered by the management while
taking a decision about it as investors, view an increase
in dividend as good news and stock prices react
positively to it.
Access to the capital market: Large and reputed
companies which have easy access to the capital market,
depend less on retained earnings to finance their growth
and, thus, tend to pay higher dividends than smaller
companies which have relatively low access to the
market.
(j) Legal constraints: Certain provisions of the Companies
Act place restrictions on payouts as dividend which must
be adhered to while declaring the dividend.
(k) Contractual constraints: The companies are required to
ensure that the payment of dividend does not violate the
terms of any contract entered by the company.
Financing Decision.
The Financing Decision is concerned with the decisions about
the quantum of finance to be raised from various long-term
sources.
(a)
Factors affecting Financing Decision :
The cost of raising funds through different sources are
different and a prudent financial manager would
(b)
normally opt for a source which is the cheapest.
The risk associated with each of the sources is different
(c)
as debt is riskier than equity.
(d)
Higher the floatation cost, less attractive the source.
A stronger cash flow position may make debt financing
(e)
more viable than funding through equity.
If a business has high fixed operating costs, it must
reduce fixed financing costs, thus, lower debt financing
(f)
is better.
Issue of more equity may lead to dilution of
management’s control over the business while debt
(g)
financing has no such implication.
State of the capital market may also affect the
choice of source of fund as during the period when stock
market is rising, more people invest in equity, whereas
depressed capital market may make issue of equity
shares difficult for any company.
More from Financial Management
- Which of the following is NOT a factor affecting capital structure of a company?2023 · asked 2×
- State any three points of importance of Financial Planning. OR State any three factors that determine the requirement of fixed capital of a company.2023 · asked 2×
- Read the following statements carefully: Statement I: Higher fixed operating costs result in higher business risk. Statement II: If the firm’s…2026
- Match the factors affecting fixed capital requirements given in the Column-I with their explanations given in Column-II: Column – I Column - II A…2023
- 'Payal Ltd.' plans to start manufacturing solar panels which will require a significant amount of investment in machinery. The machinery which they…2025
- State any four factors that affect the decision related to how much profit is to be distributed and how much profit is to be retained in the business.2023
- The risk related to inability to meet fixed financial charges like interest payment and other repayment obligations is known as:2025
- ‘Ratan Ltd.’ and ‘Lara Ltd.’ are two companies with each having a capital employed of ₹ 20,00,000. ‘Ratan Ltd.’ had raised funds by issuing shares…2026
CBSE Class 12 Business Studies past-paper question from the 2022 board exam, with the answer as CBSE’s own marking scheme gives it. Where our answers come from.