BST CH-9

1) state two objectives of financial planing

Ensuring Availability of Funds: Financial planning aims to ensure that the

right amount of funds are available at the right time. This helps in meeting
both short-term and long-term financial needs, facilitating smooth
operations and growth of the business.
Optimum Utilization of Funds: Financial planning ensures that the funds are
used efficiently and not wasted. It involves allocating resources effectively
to maximize returns while minimizing costs, which helps in achieving
financial stability and profitability for the business.

2)what do you mean by financial risk

financial risk is defined as the possibility that a company may not be able to
cover its fixed financial costs, such as interest payments on loans or fixed
dividends on preference shares. This inability can lead to financial instability
and, in severe cases, bankruptcy.
Key aspects of financial risk include:
1. Default Risk: The risk that a company may fail to pay its debt obligations,
which can harm its creditworthiness and ability to raise funds in the future.
2. Increased Cost of Financing: High financial risk can lead to higher interest
rates on future borrowings, as lenders may see the company as a risky
investment.

3) FINANCIAL MGT IS BASED IN THREE FINANCIAL DECISION WRITE THERE

NAMES
Financial Management is based on three key financial decisions:
1. Investment Decision: This decision involves choosing where to allocate funds,
particularly in long-term assets (capital budgeting) and short-term assets, to
ensure profitable returns for the business.
2. Financing Decision: This decision focuses on determining the sources of funds,
such as equity, debt, or a mix of both, and deciding the appropriate capital
structure for the business.
3. Dividend Decision: This decision relates to the distribution of profits to
shareholders. It involves determining how much profit should be retained for
future growth and how much should be distributed as dividends.
 4) WHAT DO YOU MEAN BY FLOTATION COST
Flotation Cost is defined as the cost incurred by a company when it raises funds by
issuing new securities, such as equity shares, preference shares, or debentures.
These costs may include underwriting fees, brokerage, legal fees, registration fees,
and other expenses related to the issuance process.
In essence, flotation costs are the expenses associated with acquiring new funds,
and they reduce the effective amount of capital available to the company from the
issue.
5) WRITE THE OTHER INVESTMENT DECISION
Investment Decisions are classified into two main types:
1. Capital Budgeting Decision: This involves deciding on investments in long-term
assets or fixed assets, such as purchasing new machinery, buildings, or technology.
These decisions are crucial because they have long-term implications on the
company’s profitability and growth. Capital budgeting decisions require careful
evaluation of the expected returns and risks associated with large investments.
2. Working Capital Decision: This focuses on managing the company’s short-term
assets and liabilities, such as inventory, cash, accounts receivable, and accounts
payable. Working capital decisions ensure that the business has sufficient liquidity
to meet its day-to-day operational expenses, enabling smooth operations without
interruptions.

6) WHAT DO YOU MEAN BY FINANCIAL MGT

Financial Management is defined as the process of planning, organizing, directing,
and controlling the financial activities of an organization to achieve its financial
goals. It involves making crucial financial decisions to ensure that funds are
procured, allocated, and utilized effectively and efficiently.
The primary objectives of financial management in Class 12 are:
1. Ensuring Availability of Adequate Funds: Ensuring that the business has enough
funds to meet its financial needs.
2. Wealth Maximization: Aiming to increase the value of the firm and maximize
shareholders’ wealth.
3. Efficient Utilization of Funds: Making sure that the available funds are used in the
best possible way to generate maximum returns.
The three main financial decisions that financial management is based on are:
Investment Decision
Financing Decision
Dividend Decision
 7) WHAT IS THE OBJECTIVE OF FINANCIAL MGT
The objectives of Financial Management according to Class 12 Business Studies are:
1. Wealth Maximization: The primary goal of financial management is to maximize the
wealth of shareholders. This is done by increasing the value of the company’s shares
in the market, focusing on long-term growth rather than short-term profits.
2. Profit Maximization: Financial management aims to maximize profits for the
organization, ensuring that the company earns sufficient returns to sustain and
expand its operations.
3. Ensuring Adequate Liquidity: It is essential to ensure that the business has enough
liquidity to meet its short-term financial obligations, such as paying suppliers, wages,
and other operational costs, while avoiding unnecessary liquidity.
4. Optimum Utilization of Funds: Financial management ensures that the available
financial resources are utilized efficiently to achieve the business's objectives, avoid
wastage, and maximize returns.

8)WHAT ARE THE MAIN SOURCE OF FUND

the main sources of funds for a business are categorized into two types:
1. Owner's Funds (Equity Capital)
Equity Capital: Funds raised by issuing shares to the owners (shareholders)
of the company. This is the primary source of long-term capital, and it
represents the ownership stake in the business.
Retained Earnings: Profits that are not distributed as dividends to
shareholders but are kept in the business for reinvestment. This is also
known as plowing back profits.
2. Borrowed Funds (Debt Capital)
Debentures: Long-term debt instruments issued by the company to raise
funds from the public. Debenture holders do not have ownership rights but
are entitled to fixed interest payments.
Loans: Borrowed capital from banks or financial institutions that need to be
repaid over time, often with interest. These can be short-term or long-term
loans.
Trade Credit: Credit extended by suppliers allowing businesses to buy
goods or services and pay for them later. This is a short-term source of
finance.
Public Deposits: Funds raised by inviting deposits from the public for a
fixed period at a specified interest rate.
9) WHAT DO YOU MEAN BY SHORT TERM INVESTMENT DECSION

Short-Term Investment Decisions refer to the decisions made regarding the

management of a company's short-term assets and liabilities. These
decisions are typically focused on ensuring that the business has enough
liquidity to meet its day-to-day operational needs while also optimizing the
returns on the short-term investments.
Key Points of Short-Term Investment Decisions:
1. Working Capital Management: Short-term investments are primarily
related to managing the company's working capital—the funds needed
for daily operations. This involves deciding on investments in current
assets such as cash, inventory, and receivables, while managing short-
term liabilities like accounts payable.
2. Balancing Liquidity and Profitability: The goal is to strike a balance
between ensuring sufficient liquidity (cash to meet immediate
obligations) and making short-term investments that generate returns.
For example, a company might invest excess cash in short-term
marketable securities that offer a return while still being easily
accessible when needed.
3. Cash Management: It includes decisions about how much cash the
business should hold at any given time and how to use excess cash
effectively to earn returns.
10) WHAT DO YOU MEAN BY DIVIDEND DECISION
Dividend Decision refers to the decision made by a company regarding the
distribution of its profits to shareholders in the form of dividends. It is one
of the key financial decisions in Financial Management according to Class
12 Business Studies.
Key Aspects of Dividend Decision:
1. Amount of Dividend: This decision involves determining how much
profit should be distributed as dividends and how much should be
retained in the business for reinvestment or to strengthen the
company's financial position.
2. Retention vs Distribution: A company must decide whether to retain
earnings for future growth or distribute them to shareholders. Retaining
earnings can support expansion, pay off debt, or invest in new projects,
while distributing dividends rewards shareholders and maintains their
confidence in the company.
3. Types of Dividends:
Cash Dividends: Cash payments made to shareholders.
Stock Dividends: Additional shares issued to shareholders instead of
cash.
4. Factors Influencing Dividend Decision:
 Profitability: The ability of the company to generate profits affects
its capacity to pay dividends.
Liquidity: Even if a company is profitable, it must have sufficient
liquid assets (cash) to pay dividends.
Growth Prospects: Companies with high growth opportunities may
prefer retaining earnings for reinvestment rather than paying
dividends.
Debt Obligations: Companies with heavy debt might prefer retaining
earnings to reduce their debt burden.

LONG QUESTION
1) WHY CAPITAL BUDGETING DECISION IS IMPORTANT
Capital Budgeting Decisions are crucial for a company’s long-term
growth and profitability. These decisions involve evaluating potential
investment projects to determine whether they are worth pursuing.
Here are eight reasons why Capital Budgeting Decisions are important:
1. Long-Term Impact: Capital budgeting decisions have long-term
consequences on the company’s operations, profitability, and
financial health. These decisions help determine which projects or
assets will contribute to the company's future success.
2. Large Investments: These decisions usually involve significant
amounts of money, and therefore, careful evaluation is needed to
ensure the company’s funds are invested wisely and generate
satisfactory returns.
3. Resource Allocation: Capital budgeting helps allocate the
company’s limited resources (funds) to the most profitable and
strategic projects, ensuring the best use of available financial
resources.
4. Maximization of Shareholder Wealth: Capital budgeting helps in
selecting projects that will increase the market value of the
company and, in turn, maximize the wealth of shareholders.
5. Risk Management: These decisions involve analyzing the risks
associated with different investment opportunities. By assessing
the risk of each project, the company can make informed choices
that minimize the potential for loss.
6. Ensures Efficient Use of Funds: Proper capital budgeting ensures
that funds are not wasted on low-return projects and are invested
in those that will generate maximum returns, ensuring the business
remains financially stable.
7. Helps in Planning: Capital budgeting decisions help in long-term
financial planning. By forecasting future financial needs and
returns, the company can prepare for funding, growth, and
expansion.
 8. Improves Financial Stability: Investing in profitable projects can
enhance a company’s revenue streams and overall financial
position, ensuring its ability to meet financial obligations and
maintain stability.

2) EXPLAIN THE FACTORS AFFECTING INVESTMENT DECISON

factors affecting investment decisions are:

1. Risk:
Risk refers to the uncertainty involved in an investment.
Investments that offer higher returns typically come with higher
risk. A company must assess the level of risk it is willing to take and
the potential rewards it expects from an investment.
2. Return on Investment (ROI):
The expected return is one of the most significant factors in
investment decisions. A business evaluates the potential return
from the investment and compares it with other options to
determine if the return justifies the investment's risk and cost.
3. Time Horizon:
The duration of the investment is crucial. Investments can be
short-term or long-term, and the company must decide whether it
needs quick returns (short-term) or is willing to wait for higher
returns over a longer period (long-term).
4. Cost of Investment:
The initial cost involved in making the investment affects the
decision. The business needs to assess whether it has sufficient
funds to make the investment and if the cost aligns with the
expected returns.
5. Liquidity:
Liquidity refers to how easily an investment can be converted into
cash without significant loss of value. Investments that are more
liquid are preferred, as they allow businesses to access cash when
needed for other purposes.
6. Economic Conditions:
The overall economic environment influences investment
decisions. Factors like interest rates, inflation, and economic
stability play a role in determining the attractiveness of an
investment.
7. Government Policies:
Government regulations, such as taxation policies, subsidies, and
legal constraints, significantly affect investment decisions.
Favorable policies may encourage investment, while restrictive
policies may discourage it.
8. Market Conditions:
The demand and supply conditions in the market influence
investment decisions. If demand is expected to rise, the
investment is more likely to be profitable. Understanding market
conditions helps businesses decide whether the investment will
meet customer needs.
9. Technological Changes:
Technological advancements can make certain investments more
attractive, as they may improve productivity and lower costs.
Businesses need to assess whether the investment involves
adopting new technologies and whether those technologies will
remain relevant in the future.
10. Social and Environmental Factors:
Social responsibility and environmental concerns are becoming
increasingly important. Investments in projects that are
environmentally friendly or socially responsible may be preferred,
especially with growing public awareness of sustainability.
11. Company’s Financial Position:
A company’s financial strength impacts its investment decisions. If
the company has strong cash flow and profits, it is more likely to
invest in long-term projects. A weak financial position may lead to
more cautious decisions, favoring lower-risk investments.

4) WRITE THE IMPORTANCE OF FINANCIAL DECISION

1. Ensuring Proper Use of Funds:
Financial decisions help businesses allocate their funds efficiently.
By making sound financial decisions, a company ensures that its
capital is invested in the right areas to achieve maximum returns
and growth.
2. Maximizing Profit:
The primary aim of financial decisions is to maximize profit. Sound
financial decisions, such as choosing the right investment projects
and managing costs, contribute to the overall profitability of the
business.
3. Maintaining Liquidity:
Financial decisions ensure that the business has enough liquidity
to meet its short-term obligations, such as paying wages, bills, and
other operational costs. Without proper liquidity management, the
company might face difficulties in running its day-to-day
operations.
4. Capital Structure Management:
Financial decisions help businesses determine the mix of debt and
 equity in their capital structure. An optimal capital structure
lowers the cost of capital and ensures that the business has
adequate financial resources to fund its operations.
5. Long-term Growth:
Proper financial decisions are essential for the long-term growth
and expansion of the company. Investment decisions, for instance,
help identify profitable opportunities that can drive the company’s
future success.
6. Risk Management:
Every financial decision involves some level of risk. By making
informed decisions, companies can manage and minimize financial
risks such as market fluctuations, interest rate changes, and
operational risks.
7. Dividend Decisions:
Financial decisions regarding the distribution of profits in the form
of dividends help companies maintain a balance between retaining
earnings for reinvestment and providing returns to shareholders.
This contributes to shareholder satisfaction and long-term
investor confidence.
8. Shareholder Wealth Maximization:
The ultimate objective of financial decisions is to maximize
shareholder wealth. Effective financial decisions lead to increased
profits, higher stock prices, and, ultimately, greater returns for
shareholders.
9. Business Stability:
Financial decisions contribute to the stability of the business. By
managing finances effectively, a company can avoid liquidity
crises, prevent insolvency, and ensure smooth operations over the
long term.
10. Compliance with Legal and Regulatory Requirements:
Financial decisions also ensure that the business adheres to legal
and regulatory requirements, such as tax payments and financial
reporting standards. This helps avoid legal issues and ensures the
company operates transparently.