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Business Studies · 2024 · 6 marks
CBSE 2024 · Region 3 · Set 1 · Q32
(a) Explain the following factors affecting the requirement of fixed capital of a company: (i) Choice of technique (ii) Financing alternatives (iii)…
(a)
Explain the following factors affecting the requirement of fixed
capital of a company :
(i)
Choice of technique
(ii)
Financing alternatives
(iii)
Growth prospects
OR
(b)
Explain the following factors affecting choice of capital structure of
a company :
(i)
Cost of equity
(ii)
Control
(iii)
Stock market conditions
Marking-scheme solution
Factors affecting the Requirement of Fixed Capital:
(i)
Choice of Technique:
A capital-intensive organisation requires higher investment
in plant and machinery as it relies less on manual labour.
Labour intensive organisations on the other hand require
less investment in fixed assets. Hence, their fixed capital
requirement is lower.
(ii)
Financing Alternatives:
When an asset is taken on lease, the firm pays lease rentals
and uses it. By doing so, it avoids huge sums required to
purchase it.
Availability of leasing facilities, thus, may reduce the
funds required to be invested in fixed assets, thereby
reducing the fixed capital requirements.
(iii)
Growth Prospects:
Higher growth of an organisation generally requires higher
investment in fixed assets.
When such growth is expected, a company may choose to
create higher capacity in order to meet the anticipated
higher demand quicker. This entails larger investment in
fixed assets and consequently larger fixed capital.
Q. Explain the following factors affecting choice of capital
structure of a company
(i)
Cost of equity
(ii)
Control
(iii)
Stock market conditions
(i)
Cost of Equity:
When a company increases debt, the financial risk faced by
the equity holders increases, so their desired rate of return
may increase. It is for this reason that a company cannot use
debt beyond a point.
If debt is used beyond that point, cost of equity may go up
sharply and share price may decrease inspite of increased
earning per share (EPS)
(ii)
Control:
Debt normally does not cause a dilution of control.
A public issue of equity may reduce the management’s
holding in the company and make it vulnerable to takeover.
(iii)
Stock market conditions:
If the stock markets are bullish, equity shares are more
easily sold even at a higher price.
During a bearish phase, a company, may find raising of
equity capital more difficult and it may opt for debt.
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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.