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Business Studies · 2022 · 5 marks
CBSE 2022 · Region 4 · Set 1 · Q11
(a) ‘Technology upgradation’ and ‘Level of collaboration’ affect one of the types of capital requirements of the company. Identify the type of…
‘Technology upgradation’ and ‘Level of
collaboration’ affect one of the types of capital
requirements of the company. Identify the type of capital
requirement affected with reference to the above statement.
Also, explain any other two factors, apart from the ones
stated above affecting the type of capital requirement
identified.
When the ‘Return on Investment’ of the company is
higher than the ‘Interest Rate on debt’, it can use more
debt in the capital structure of the company in order to
increase its ‘Earning Per Share’. Explain the given
situation with the help of a suitable example.
Marking-scheme solution
(a)
Fixed capital requirement.
Other factors affecting fixed capital requirement are:
Factors affecting the requirements of fixed capital:
(i)
Nature of business
(ii)
Scale of operations
(iii)
Choice of technique
(iv)
Technology upgradation
(v)
Higher growth prospects
(vi)
Availability of financing alternatives
(vii)
Level of Collaboration
(viii)
Diversification
When the Return on Investment of the company is higher
than rate of interest on debt, it can use more debt to increase its
Earning Per Share as not only does debt carry fixed amount of
interest but is also tax deductible.
Example: Suppose a company has a Capital Employed of ₹$\displaystyle 60$
$\displaystyle 12$ Q. lakhs and assuming the Tax rate is $\displaystyle 50$%.
Situation I: The company has a Debt of ₹$\displaystyle 20$ lakhs @$\displaystyle 10$% p.a.
and Return on Investment of $\displaystyle 8$%.
Situation II: The company has a Debt of ₹$\displaystyle 20$ lakhs @$\displaystyle 10$% p.a.
and Return on Investment of $\displaystyle 15$%
Situation III: The company has a Debt of ₹$\displaystyle 30$ lakhs @$\displaystyle 10$% p.a.
and a Return on Investment of $\displaystyle 15$%.
EBIT-EPS analysis
| Situation I (₹) | Situation II (₹) | Situation III (₹) | |
| Share Capital | $\displaystyle 40,00,000$ | $\displaystyle 40,00,000$ | $\displaystyle 30,00,000$ |
| Debt | $\displaystyle 20,00,000$ | $\displaystyle 20,00,000$ | $\displaystyle 30,00,000$ |
| Total Capital Employed | $\displaystyle 60,00,000$ | $\displaystyle 60,00,000$ | $\displaystyle 60,00,000$ |
| Earning before Interest and Tax | $\displaystyle 4,80,000$ | $\displaystyle 9,00,000$ | $\displaystyle 9,00,000$ |
| Less: Interest @ $\displaystyle 10$% p.a. | $\displaystyle 2,00,000$ | $\displaystyle 2,00,000$ | $\displaystyle 3,00,000$ |
| Earning before Tax | $\displaystyle 2,80,000$ | $\displaystyle 7,00,000$ | $\displaystyle 6,00,000$ |
| Less: Tax @$\displaystyle 50$% | $\displaystyle 1,40,000$ | $\displaystyle 3,50,000$ | $\displaystyle 3,00,000$ |
| Earning after Tax | $\displaystyle 1,40,000$ | $\displaystyle 3,50,000$ | $\displaystyle 3,00,000$ |
| No. of shares of (₹$\displaystyle 100$ each) | $\displaystyle 40,000$ | $\displaystyle 40,000$ | $\displaystyle 30,000$ |
| Earning Per Share | $\displaystyle 3.5$ | $\displaystyle 8.75$ | $\displaystyle 10$ |
No. of shares of
(₹$\displaystyle 100$ $\displaystyle 40,000$ $\displaystyle 40,000$ $\displaystyle 30,000$ each)
In Situation II, where the Return on Investment ($\displaystyle 15$%) is higher
than Situation I ($\displaystyle 8$%) with a rate of interest on debt ($\displaystyle 10$% p.a.),
$\displaystyle 13$ Q. the Earning per share is higher in the former.
In Situation III, where the company uses more debt (₹$\displaystyle 30$ lakhs),
the Earning per Share further increases to ₹$\displaystyle 10$ per share.
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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.