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Business Studies · 2022 · 5 marks
CBSE 2022 · Region 1 · Set 2 · Q11
Anurag Tiwari is a famous news reader. He hasrecently started a news company 'Axis MediaCorporation Ltd.'. The aim of this company is to launcha $\displaystyle 24$-hour Hindi news channel to broadcast latest newsfrom India and around the world.For this new venture, the company will have to decidehow to invest funds in different assets. The purchase offew assets like equipment, computers, vehicles, etc. willinvolve committing the finance on a long-term basis. Itwill affect earning capacity of the business in the longrun. Therefore, the company needs to take the decisionto invest in such assets with utmost care.(a)Identify and state the type of investment decisiondiscussed in the above paragraph.(b)State any three factors which affect the decisionidentified in (a) above.'Reliable Labs Ltd.' is a trusted name in diagnosticservices with seven branches spread across the city ofPune. The directors of this company have projected thatwith the rise in health consciousness in the society andthe rising burden of chronic diseases, the demand fordiagnostic tests is expected to grow in future.Considering this, they decided to open branches of theirdiagnostic labs in Ahmedabad.It was estimated that it will require ₹$\displaystyle 100$ crore ofadditional funds. The directors have to take the decisionabout how much funds should be raised from equitycapital and how much from debt. It will affect theoverall cost of capital and the financial risk of thecompany.(a)Identify and state the financial decision discussed inthe above para- graph.(b)State any three factors that should be kept in mind bythe Board of Directors of 'Reliable Labs Ltd.', whiletaking the decision identified in (a) above.
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 para- graph.
(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 (a) 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.
(iii)
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 2022board exam, with the answer as CBSE’s own marking scheme gives it. Where our answers come from.