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Business Studies · 2022 · 5 marks
CBSE 2022 · Region 1 · Set 1 · Q12
Anurag Tiwari is a famous news reader. He has recently started a news company 'Axis Media Corporation Ltd.'. The aim of this company is to launch a…
Anurag Tiwari is a famous news reader. He has
recently started a news company 'Axis Media
Corporation Ltd.'. The aim of this company is to
launch a $\displaystyle 24$-hour Hindi news channel to broadcast
latest news from India and around the world.
For this new venture, the company will have to
decide how to invest funds in different assets. The
purchase of few assets like equipment, computers,
vehicles, etc. will involve committing the finance on a
long-term basis. It will affect earning capacity of the
business in the long run. Therefore, the company
needs to take the decision to invest in such assets with
utmost care.
(a)
Identify and state the type of investment decision
discussed in the above paragraph.
(b)
State any three factors which affect the decision
identified in (a) above.
'Reliable Labs Ltd.' is a trusted name in diagnostic
services with seven branches spread across the city of
Pune. The directors of this company have projected
that with the rise in health consciousness in the
society and the rising burden of chronic diseases, the
demand for diagnostic tests is expected to grow in
future. Considering this, they decided to open
branches of their diagnostic labs in Ahmedabad.
It was estimated that it will require ₹$\displaystyle 100$ crore of
additional funds. The directors have to take the
decision about how much funds should be raised
from equity capital and how much from debt. It will
affect the overall cost of capital and the financial risk
of the company.
(a)
Identify and state the financial decision
discussed in the above paragraph.
(b)
State any three factors that should be kept in
mind by the Board of Directors of 'Reliable Labs Ltd.',
while taking the decision identified in above.
Marking-scheme solution
(a)
Long Term Investment Decision/Capital
Budgeting:
A long-term investment decision
(also called capital budgeting) involves committing funds on a long-term
basis and affect its earning capacity in the long run.
Factors affecting long-term Investment
Decision/Capital Budgeting decision:
(i)
The amount of cash flows of the project should be
carefully analysed before considering a capital
budgeting decision, which may be in the form of a series
of cash receipts and payments over the life of an
investment.
(ii)
The expected rate of return from each proposal and
the assessment of risk involved are important factors
while taking capital budgeting decisions.
(vii)
Several investment criteria may be used to evaluate
investment proposals regarding the amount of
investment, interest rate, cash flows and rate of return,
etc., before taking the decision to invest in a particular
project.
Financing decision
Financing decision involves decision about the quantum
of finance to raise from various long-term sources.
(b)
Factors that should be kept in mind by the Board
of Directors of ‘Reliable Labs Ltd’ while taking
the above decision :
(i)
The cost of raising funds through different sources
are different and a prudent financial manager would
normally opt for a source which is the cheapest.
(ii)
The risk associated with each of the sources is
different.
(iii)
Higher the floatation cost, less attractive the source.
(iv)
A stronger cash flow position may make debt
financing more viable than funding through equity.
(v)
If a business has high fixed operating costs, it must
reduce fixed financing costs, thus, lower debt
financing is better.
(vi)
Issues of more equity may lead to dilution of
management’s control over the business while debt
financing has no such implication.
(vii)
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.
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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.