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Business Studies · 2024 · 6 marks
CBSE 2024 · Region 3 · Set 2 · Q32
(a) Explain the following factors affecting choice of capital structure of a company: (i) Return on Investment (ii) Floatation Costs (iii) Flexibility
(a)
Explain the following factors affecting choice of capital structure of
a company :
(i)
Return on Investment
(ii)
Floatation Costs
(iii)
Flexibility
OR
(b)
Explain the following factors affecting working capital requirement
of a company :
(i)
Nature of business
(ii)
Business cycle
(iii)
Inflation
Marking-scheme solution
(i)
Return on Investment
Return on Investments an important determinant of the
company’s ability to use Trading on equity in the capital
structure.
If the ROI of the company is higher, it can choose to use
trading on equity to increase its earning per share i.e., its
ability to use more debt in its capital structure.
(ii)
Floatation Costs
Process of raising resources like shares and debentures from
public issue involves some cost. Getting a loan from a
financial institution may not cost so much.
These considerations may also affect the choice between debt
and equity and hence the capital structure.
(iii)
Flexibility
While deciding a capital structure, if a firm uses its debt
potential to the full, it loses its flexibility to issue further
debt.
To maintain flexibility, it must maintain some borrowing
power to take care of unforeseen circumstances.
Explain the following factors affecting working capital
requirement of a company:
(i)
Nature of business
(ii)
Business cycle
(iii)
Inflation
(i)
Nature of business
A trading organisation usually needs a smaller amount of
working capital compared to a manufacturing organisation.
This is because there is usually no processing.
Service industry require less working capital.
(ii)
Business Cycle
In case of a boom, the sales as well as production are likely to
be larger and, therefore, larger amount of working capital is
required.
As against this, the requirement for working capital will be
lower during the period of depression as the sales as well as
production will be small.
(iii)
Inflation
The working capital requirement of a business becomes
higher with higher rate of inflation.
The actual requirement shall depend upon the rates of
price change of different components
(e.g. raw material, finished goods, labour cost).
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CBSE Class 12 Business Studies past-paper question from the 2024 board exam, with the answer as CBSE’s own marking scheme gives it. Where our answers come from.