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Business Studies · 2022 · 5 marks
CBSE 2022 · Region 3 · Set 1 · Q12
NB Ltd. is India's largest manufacturer of cement. Its operations are spread throughout the country with 17 modern cement factories. It has a work…
NB Ltd. is India's largest manufacturer of
cement. Its operations are spread throughout the
country with $\displaystyle 17$ modern cement factories. It has a
work force of $\displaystyle 9,000$ persons.
Since its inception, the company has been a
trendsetter for the cement industry. The
company is planning to grow in the long-run and
wants to double its capacity in the next 3years.
For this the Finance Manager has to decide
about the quantum of finance to be raised from
various long-term sources. For this he needs to
identify various available sources of funds and
the proportion of funds from each source.
(i)
Identify the financial decision to be taken by the
Finance Manager.
(ii)
State any four factors which would affect the
decision identified in (i) above.
Myra Ltd., manufacturing televisions, is
planning to expand its business and requires ₹$\displaystyle 250$
crore for the same. A number of projects are
available to the company to invest in and each
project has to be evaluated carefully. The Finance
Manager of the company, has assessed the projects
in terms of the rate of return from each project
and wanted to select the one with the higher rate
of return. But before selecting the project he has to
take into consideration other factors also.
(i)
Identify and state the financial decision
discussed in the above para graph.
(ii)
Explain two other factors that the Finance
Manager should consider before selecting the
project.
Marking-scheme solution
Financing decision
(a)
Factors affecting financing decision :
(b)
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.
(c)
The risk associated with each of the sources is
different.
(d)
Higher the floatation cost, less attractive the
source.
(e)
A stronger cash flow position may make debt
financing more viable than funding through equity.
(f)
If a business has high fixed operating costs, it must
reduce fixed financing costs, thus, lower debt
financing is better.
(g)
Issues of more equity may lead to dilution of
management’s control over the business while debt
financing has no such implication.
(h)
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.
Investment decision
The investment decision relates to how the firm’s
funds are invested in different assets.
(ii)
Two other factors that Dheeraj needs to consider
before selecting / rejecting any project:
Cash flows of the project
Investment criteria involved
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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.