Subject Enrichment Material Class XII BUSINESS STUDIES

whichwasintheknowledgeoftheProductionManager,Varun
Sharma.Theworkershadinternaldifferences.Timeandagain,there
weremisunderstandingsbetweenthemanagementandtheworkers.
Keepingtheproblemsinmind,VarunSharmaappointed,Siyaram
Singhwhohad14yearsofexperienceofworkingwiththeactualwork
forceandpassingoninstructionsofthemiddlemanagementtothe
workers.Siyaram SinghmetVarunSharmatounderstandwhatthe
managementwanted.Thereafterhemettheworkersandconveyed
theideasofmanagementtothem.Healsopromisedtheworkersto
conveytheirproblemstothemanagement.Inthisway,heclearedthe
misunderstandingbetweenthemanagementandtheworkers.

Healsosortedoutinternaldifferencesandwasabletounitethe
workerswithinamonthofhisjoining.Hisworkwasacknowledged
andhewasgivenacertificateofgoodperformancealongwith10%
increaseinsalary.

(i)Siyaram Singhperformedsomeofthefunctionswhicharerequired
tobeperformedatthepositionheisworkingat.Stateanyfiveother
functionsSiyaram Singhisexpectedtoperform.

(ii)NametheincentivesprovidedtoSiyaram Singh.

Q.NO. ANSWERS MARK
ANSWER S
1
1 Oneway 1
2 BehaviourandStyles 1
3 Satisfied 1
4 Noise

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5 Directing 1
6 False 1
7 False 1
8 True 1
9 False 1
10 True 1
11 A 1
12 C 1
13 A 1
14 C 1
15 C 1
16 B 1
17 C 1
18 A 1
19 D 1
20 B 1
21 B 1
22 C 1
23 JobEnrichmentandcareeradvancementopportunitywith 1.5+1.
5=3
explanation 3
24 TwospecificbarrierstocommunicationinLakhan’se-mailwere:

(i)Faultytranslations

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(ii)Technicaljargon

Measurestoovercomecommunicationbarriers:(Anytwo)

(i)Lakhanshouldcommunicateaccordingtotheneeds,education
andunderstandinglevelsofsubordinates.

(ii)Heshouldtakeaproperfeedbacktoimprovethecommunication
processandmakeitmoreresponsive.

(iii)Heshouldregularlyfollowupcommunicationandreviewthe
instructionsgiventosubordinates.

(iv)Heshouldbeawareoflanguages,toneandcontentofthe
messagetomakeitunderstandabletothereceiver.

25 (a)FaultyTranslationanditsmeaning 1+1+2
(b)SemanticBarriers =4
(c)wordswithdifferentmeaning,Unclarrifiedassumption/
Technicaljargon 4

26 (a)ThefollowingaretheassumptionsofMaslow’sNeedHierarchy
theoryotherthantheonediscussedabove:

(i) People’sneedsareinhierarchicalorder,startingfrom basic
needstootherhigherlevelneeds.

(ii) Asatisfiedneedcannolongermotivateaperson;onlynext
higherlevelneedcanmotivatehim.

(iii) Apersonmovestothenexthigherlevelofthehierarchy
onlywhenthelowerneedissatisfied.

(b)NeedsofKunalwhicharebeingsatisfiedthroughpromotionare:

(i)Esteem Needswhichrefertotheneedforselfrespect,autonomy
status,recognitionandattention.

(ii)Selfactualisationneedswhichrefertothedrivetobecomewhat
oneiscapableofbecoming.Theseneedsincludegrowth,self-

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fulfillmentandachievementofgoals.

27 (a)Formalcommunication 2+3=5

‘WhentheGeneralManagercametoknowaboutit,heorderedfor
fumigationinthecompanypremisesandcleanlinessofthe
surroundings.

Informalcommunication

Oneofhiscolleaguessentatextmessageaboutittohisimmediate
superior‘Mr.Narain’.

OR

‘Mr.Narain’inturnsentatextmessagetotheemployeesofthe
organisationrequestingthem todonatebloodforArun’.

(b)FeaturesofInformalcommunication:(Anytwo)

(i)Ittakesplacewithoutfollowingtheformallinesofcommunication.

(ii)Itarisesoutofsocialneedsoftheemployees

(iii)Itspreadsrapidly.

28 Featuresofmotivation: 5

(a)Itisaninternalfeelingastheurges,drivesorneedsofhuman
beingswhichinfluencehumanbehaviourareinternal.

(b)Itproducesgoaldirectedbehaviourasitstimulatespeopleto
accomplishdesiredgoals.

(c)Itcanbepositiveintheform ofpositiverewardsornegativelike
punishment,stoppingincrementsetc.

(d)Itisacomplexprocessasanytypeofmotivationmaynothavea
uniform effectonallthemembers.

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29 (a)Financialandnon-financialincentivesdiscussedbythethree 3+3=6
friendsintheaboveconversation.

(i)Financialincentives

Retirementbenefits,Perquisites

(ii)Non-Financialincentives

Jobsecurity,Careeradvancementopportunity,Organizationalclimate

Status

(b)Othernon-financialincentiveswhichwerenotdiscussedbyany
oneofthem (Anythree)

Jobenrichment,Employeerecognition,Employeeparticipation

Employeeempowerment

30 (i)FiveotherfunctionsSiyaram Singhisexpectedtoperform are: 6

(a)Maintainingdaytodaycontactandfriendlyrelationswiththe
workers.Heshouldactasafriend,philosopherandaguidetothe
workers.

(b)Providinggoodonthejobtrainingtotheworkerstobuildan
efficientteam.

(c)Buildinguphighmoraleamongworkersthroughgoodleadership.

(d)Givingfeedbacktotheworkersafteranalyzingtheirworkand
suggestingwaysofdevelopingtheirworkskills

(e)Ensuringperformanceofworkaccordingtothetargetsset.

(f)Tooverseetheeffortsoftheworkforce.

(g)Toensurethatthequalityofoutputismaintainedandwastageof
materialisminimized.

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(h)Toensuresafetystandardsaremaintained
(ii)IncentivesprovidedtoSiyaram Singhare:
(a)Payandallowances/FinancialIncentive
(b)EmployeeRecognitionProgrammes/NonFinancialIncentive.

CHAPTER:CONTROLLING

Q.NO. QUESTION MARKS

1 Planningisperspectivewhereascontrollingis___________. 1

2 Controllingcreatesanatmosphereof_____and_______inthe 1
organization.

3 Controllingcanbeusedto_______theperformanceofemployees. 1

4 Agoodcontrolenablesthemanagementtoverifywhetherthe 1
standardssetare________and____________.

5 ______functionofmanagementhelpsinformulationoffutureplans 1
inthelightoftheproblemsthatwereidentifiedinthepast.

6 Criticalpointcontrolfocuseson___________ 1

(a)Everytask

(b)Financialareas

(c)Keyresultareas

(d)Planningareas

7 Measurementofemployees’performancecanbedoneby 1
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______________. 1
(a)Increasingthemarketshareofthecompany 1
(b)Grossprofitratio 1
(c)Returnoninvestment
(d)Performancereport

8 Whichoneofthefollowingisnotthestepintheprocessof
controlling?
(a)Measurementofactualperformance.
(b)Establishingreportingrelationship.
(c)Settingperformancestandards.
(d)Takingcorrectiveaction.

9 Amongthefollowing,whichonestandardcanbemaintainedin
Marketing?
(a)Cost
(b)FlowofCapital
(c)AdvertisingExpenditure
(d)Liquidity.

10 “Controllingisrequiredatallthelevelsofmanagement”.Which
featureishighlightedintheabovestatement?
(a)Dynamic
(b)Contingent
(c)Pervasive
(d)Continuous
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11 Whichofthefollowingisthefunctionprerequisiteforcontrolling? 1

(a)Staffing 1

(b)Organising 1
1
(c)Planning 1
1
(d)Directing 1
1
12 Chiefbasisofstandardis__________

(a)Quantity

(b)Quality

(c)Time

(d)Alloftheabove

13 Controllingisrelatedtoresults.(Yes/No)

14 Controllingintheabsenceofplanningisblind.(True/False)

15 Managementbyexceptiondifferentiatesbetweenactualand
plannedperformance.(True/False)

16 Standardsarethebenchmarkstomeasurefutureperformance.
(True/False)

17 Clarityinworkingrelationshipisnotanimportanceofcontrolling?
(True/False)

18 KansalSweetsisarenownednameforqualitysweetssince1955.
Somesh,theownerofKansalSweetswasworriedasthesaleshad
declinedduringthelastthreemonths.Whenheenquiredfrom the
salesmanager,thesalesmanagerreportedthatthereweresome
complaintsaboutthequalityofsweets.ThereforeSomeshordered
forsamplecheckingofsweets.
IdentifythesteptakenbySomeshthatisrelatedtooneofthe
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functionsofmanagement.

19 IshaMachineswasarenownednameforqualitysewingmachines 1
since1960.MrSuresh,theownerofIshaMachineswasworriedas
theproductionhaddeclinedduringthelastthreemonths.He
directedtheproductionManagertofindoutthereason.The
productionManagerorderedthedifferentsupervisorstopreparea
performancereportoftheworkersworkingunderthem.

IdentifythesteptakenbytheproductionManagerthatisrelatedto
oneofthefunctionsofmanagement.

20 Givethemeaningof‘ManagementbyException.’ 1

21 SonakshiLtd.producessafetypinsonamassscale.Thecompany’s 1
policyisthatmaximum 2.5%ofthedailyproductioncouldbe
defective.Overathreemonthsperiod,ithasbeenobservedthat8%-
10%oftheproductionisdefective.Thecauseofdeviationfoundis
defectivemachinery.Whatcorrectiveactionshouldbetakenbythe
management?

22 YouarethemanagerofNFLPetroChemicalsLtd.itisreportedto 1
youthatpostalexpenseshaveincreasedby10%overstandardrates
andcostofrawmaterialshasincreasedby2%.Whichofthetwo
deviationswillbemorecriticaltoyou?

23 IshaMachinesisengagedinmanufacturingmachinecomponents. 2+1=3
Thetargetproductionis200unitsdaily.Thecompanyhadbeen
successfullyattainingthistargetuntiltwomonthsago.Overthelast
fewmonthsithasbeenobservedthatdailyproductionvaries
between150-170units.

Identifythepossiblecausesforthedeclineinproductionandthe
steptobetakentoachievethedesiredtargets.

24 Ifanythinggoeswrongwiththeperformanceofkeyactivities,the 3

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entireorganizationsuffers.Therefore,theorganizationshouldfocus
onthem’.Explainthestatementwithsuitableexample.

25 RajeevandSanjeevaremanagersinthesameorganisationheading 4
differentunits.Whilediscussingaboutthefunctionsof
management,Rajeevsaysthat‘Planningislookingaheadwhereas
controllingislookingback.’ButSanjeevsays,‘Youarewrong
becauseplanningislookingbackwhereascontrollingislooking
ahead.’Botharegivingreasonsinfavouroftheirstatements.Explain
thepossiblereasonsgivenbybothandjustifywhoiscorrect. 

26 VinberLtd.setupamanufacturingunitatBhiwadiatHimachal 4
Pradeshtomanufactureelectricgeysersandsupplythem todealers
alloverthecountry.Theirproductiontargetwas500geysersper
week.Itwasdecidedbythemanagementthatvariationinproduction
upto10unitswouldbeacceptable.

Attheendofthefirstweek,theproductionwas450geysers.The
nextweek,productionincreasedto470geysers.Aweeklater,
productionwas460geysers.Oninvestigation,itwasfoundoutthat
fluctuationinproductionwasduetoirregularsupplyofelectricity.

(a)Theaboveparadiscussessomeofthestepsofoneofthe
functionsofmanagement.Explainthesteps.

(b)Also,statethestep(s)notdiscussedintheabovepara.

27 Acriticalpointcontrol(CPC)approachisfollowedbyMcDonaldin 1+2+2=

thecookingandhandlingprocesssothatanyfoodsafetythreatcan 5

beprevented,eliminated,orreducedtoanacceptablelevel.Hence,

continuousmonitoringofactivitiesareundertakentoensurethatthe

processisrightateachcriticalpointcontrol.Themainprinciple

followedforcookingatMcDonaldis“lessamountmanytime”which

canensurethehighqualityandhighfreshlevelofthefood.For

instance,ifyourhamburgershavetobemade,aworkercannotcook

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allthefourhamburgersatonetime.Thetimefiguredoutformaking 5
onehamburgerisonehundredandforty-fiveseconds.Moreover,
nearlyallfoodsintheMcDonaldhavethespecificholdingtime,the
holdingtimeforhamburgersistenminutesandforFrenchfriesis
sevenminutes.Ifitisnotsoldwithinthattimeitisthrownaway.
Also,thetemperatureofthemilksentbythesuppliermustbeunder
40c,otherwise,itwillbereturned.

Incontextoftheabovecase:

1.Namethestepsinvolvedinthecontrollingprocesswhichare
beingdiscussedintheabovelines.

2.Whatdoyouunderstandby‘criticalpointcontrol’?Explain.

3.Howdoesthecontrollingfunctionofmanagementhelpin
accomplishing

organizationalgoalsandensureefficientuseofresources?

28 VikaswastheChiefOperatingOfficerof‘YaletLtd.’,acompany
providingadvancedsoftwaresolutionstoIndianDefenceServices.
Theyhadbeencarryingonbusinesssuccessfullyforthelasttwelve
yearsandearningenoughprofits.Butfrom thelastoneyear,they
realisedthatthoughthebusinessisgettingbigorderswhichare
beingfulfilledintime,eventhentherevenueskeptondecreasing.
Vikaswas

notabletofindoutwheretheproblem was.Hestartedkeepinga
closecheckontheprogressofactivitiesashecouldsensethat
somethingwaswrong.Hewantedtotakesomeactionbeforeany
majordamagecouldbedonetothebusiness.Vikasappointeda
cybersecurityexpertwhomonitoredthecompany’sprocessesand
foundoutthatthecomputeroperatorwasdeletingtheentriesfrom
thecomputersandpocketingtherevenues.Hewascaughtand

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handedovertothepolice.Thiscreatedanatmosphereoforderand
disciplineintheorganisationandhelpedinminimizingdishonest
behavioronthepartoftheEmployees.

(a)Identifythefunctionofmanagementhighlightedintheabove
paragraph.

(b)Explainanyfourotherwaysinwhichthisfunctionof
managementmayhelptheorganisation.

29 ‘JollyLtd.’isacompanyknownformanufacturinggoodquality 2+4=6

confectioneryproducts.Theautomatedsystem ofproduction

ensuresuniformityinproductionandqualitymaintenance.The

qualityassuranceteam conductsstringentchecksatallstages,

recordsandanalysesthedeviationsandtakesthenecessary

correctiveactionsrightfrom theprocurementofrawmaterialtoits

processing,productionandpackaging.Thecompanyhasawell-

equippedin-housequalityinspectioncellwhereconfectionery

productsaretestedonvariousparametersofqualitybytheteam of

experiencedqualitystaff.

Incontextoftheabovecase:

1 Identifyandexplainthefunctionofmanagementbeing
performedbythequalityassuranceteam of‘JollyLtd.’

2 Explainthestatement,“recordsandanalysesthedeviations
andtakesthenecessarycorrectiveactions”.

30 Airtech Ltd.is manufacturing mobile phones both fordomestic 6
Indianmarketaswellasforexport.Ithasenjoyedasubstantial
marketshareandalsohadaloyalcustomerfollowing.Butlatelyit
hasbeenexperiencingproblemsbecauseitstargetshavenotbeen
metwithregardtosalesandcustomersatisfaction.Also,mobile
marketinIndiahasgrowntremendouslyandnewplayershavecome
withbettertechnologyandpricing.Thisiscausingproblemsforthe

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company.Itisplanningtorevampitscontrollingsystem andtake
otherstepsnecessarytorectifytheproblemsitisfacing.Italso
decidestoofferitsbasismodelsofmobilephonesat50%discount
tothepoorpeople.

1. Stateanytwobenefitsthecompanywillderivesfrom agood
controlsystem.

2.How canthecompanyrelateitsplanningwithcontrolinthisline
ofbusinesstoensurethattheirplansareactuallyimplementedand
targetsattained.

3. Givethestepsthatthecompanyshouldfollow toremovethe
problemsitisfacing.

Q.NO. ANSWERS MARKS
1 Evaluative ANSWER 1
2 Orderanddiscipline 1
3 Appraise 163/190 1
4 Accurate,objective 1
5 Controlling 1
6C 1
7D 1
8B 1
9C 1
10 C 1

11 C 1

12 D 1

13 Yes 1

14 True 1

15 False 1

16 False 1

17 False 1

18 Measurementofactualperformance 1

19 Measurementofactualperformance 1

20 ManagementbyExceptionisatechniqueofmanagerialcontrol 1
whichinvolvesidentifyingonlysignificantdeviationswhichgo
beyondthepermissiblelimitandbringingthem tothenoticeof
themanagement.

21 Repairexistingmachineorreplacethemachineifitcannotbe 1
repaired

22 Increaseincostofrawmaterialsby2%ismorecritical.(Critical 1
PointControl)

23 Thepossiblecausesfordeclineinproductionarelistedbelow: 2+1=3

 Theworkersarenotwellversedwiththeproduction
process.

 Theworkingenvironmentisnotconducivetoefficient
working.

 Therawmaterialsandotherequipmentarenotavailableon
time.

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 Themachineryisdefectiveorhasbecomeobsolete. 3
4
Thedeviationsrequireimmediatemanagementattentionsothat
-theydonotreoccurinfuture.Therefore,themanagershould
takeappropriatecorrectiveactionafteranalyzingthesituation
likeprovidingtrainingtoworkers,improvingthework
environment,ensuringtimelyavailabilityoftherawmaterials
andotherequipmentorreplacingthemachinery.

24 Thegivenstatementreferstotheimportanceof‘CriticalPoint
Control’inordertoensureeffectiveperformanceofkey
activitiesinanorganisation.
CriticalPointControl: itmaybeneithereconomicalnoreasyto
monitoreachandeveryactivityintheorganisation.Therefore,
everyorganisationidentifiesandstatesitsspecificKeyResult
Areas(KRAs)orcriticalpointswhichrequiretightcontroland
arelikelytohaveasignificanteffectontheworkingofthe
business.Anydeviationsonthesepointsareattendedto
urgentlybythemanagement.Forexample,ifinanorganisation,
theexpenditureonstationerygoesupby10%,itcanbeignored
butiftheproductioncostgoesupby5%,itmaycallfor
managerialaction

25 BothRajeevandSanjeevarecorrectintheirstatementsas
explainedbelow:

 Planningisconsideredasaforwardlookingfunctionby
Rajeevasplansaremadeforfuture.

 Planningmaybeconsideredasabackwardlookingfunction
bySanjeevbecausethequalityofplanningcanbeimproved
withthehelpofvaluableinformationprovidedbycontrolling
intermsofresultsachieved.

 Controllingisconsideredasabackwardlookingfunctionby

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Rajeevasitislikethepostmortem ofthepastactivitiesto
ascertainthedeviationsifany.

 Controllingisconsideredasaforwardlookingfunctionby
Sanjeevasithelpstoimprovethefutureperformanceby
providingguidancefortakingcorrectiveactionsothat
deviationsdonotreoccurinfuture.

26 (a)Stepsintheprocessofcontrollingdiscussedintheabove 4
case:

(i)Settingperformancestandards

(ii)Measuringactualperformance

(iii)Comparingactualperformancewithstandardsand
Analysingdeviations

(b)Stepnotdiscussedintheabovepara:

Takingcorrectiveactionifdeviationsgobeyondtheacceptable
limits.

27 1.Analyzingdeviationandtakingcorrectiveactionarebeing 1+2+2=
discussedintheabovelines. 5

2.Sinceitmayneitherbeeconomicalnoreasytomonitoreach
andeveryactivityintheorganization,thereforevery
organizationidentifiesandstatesitsspecifickeyresultarea
(KRAs)orcriticalpointswhichrequiretightcontrolarelikelyto
haveasignificant

effectontheworkingofthebusiness.Anydeviationsonthese
pointsareattendedtourgentlybythemanagement.

3.Explanationoffollowingpointsofimportanceofcontrolling
function:

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1.Accomplishingorganizationalgoals

2.Makingefficientlyuseofresources

28 (a)Controlling. 5

(b)Otherwaysinwhichthisfunctionmayhelptheorganization:
(Anyfour)

(i)Accomplishingorganisationalgoals.

(ii)Makingefficientuseofresources.

(iii)Improvingemployeemotivation.

(iv)Judgingaccuracyofstandards.

(v)Facilitatingco-ordinationinaction.

29 1.Controllingisthefunctionofmanagementbeingperformed 2+4=6
bythequalityassuranceteam of‘JollyLtd.’
Controllingistheprocessofensuringthateventsconform
toplans.

2.Thestatement“recordsandanalysesthedeviationsand
takesthenecessarycorrectiveactions”referstothe
followingstepsinvolvedintheprocessofcontrolling:

 Comparingtheactualperformancewiththestandards:
Theactualperformanceiscomparedwiththestandards
anddeviations,ifany,arerecorded.

 Analysingdeviations:Oncethedeviationsareidentified,
itisimportanttoanalyzethem through:

 Criticalpointcontrol: Allthedeviationsmaynotbe
significant.Moreover,itmaynotbeeithereconomicalor
easytomonitoreachandeveryactivityinthe
organisation.Therefore,everyorganisationidentifies

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andstatesitsspecifickeyresultareas(KRAs)orcritical
pointswhichrequiretightcontrolastheyarelikelyto
haveasignificanteffectontheworkingofthebusiness.
Anydeviationsonthesepointsareattendedtourgently
bythemanagement.Likeintheabovecase,ifthe
expenditureonrefreshmentofworkersgoesupby10%
itcanbeignoredbutiftheproductioncostgoesupby
5%itmaycallformanagerialaction.

 Managementbyexception: Managementbyexception
istheprincipleofmanagementcontrolwhichisbased
onthebeliefthatifyoutrytocontroleverything,you
mayendupcontrollingnothing.Therefore,only
significantdeviationswhichgobeyondthepermissible
limitsshouldbebroughttothenoticeofthe
management.Likeintheabovecase,theoutput
defectsupto2%maybeconsideredacceptablebutifit
goesupby5%,itmaycallformanagerialaction.

30 1.Twobenefitswhichthecompanywillderivefrom agood 6
controlsystem are:

a)Accomplishingorganizationalgoalsofincreasingmarket
shareandcustomersatisfaction.

b)Makingefficientuseofresourcesbycontrollingwastage
andspoilageofresources;andensuringthateachactivityis
performedaccordingtothepredeterminedstandards.

2.a)Controlling willimprove future planning by providing
informationtothecompanyderivedfrom pastexperiencethat
itstargetswere notmetwith regard to salesand customer
satisfaction.

b)Thecompanyshouldundertaketechnologicalupgradation

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ofmachinery,andmodifytheexistingprocesssothatcostis
reducedandthecompanycansetlowerpriceforitsmobile
phonestobetitscompetitors.

Chapter9FINANCIALMANAGEMENT
Marks(unit9&unit10carries15marks)

ImportantPoints
Cluewordsinthecasestudy

 Decisionaffectingliquidityandprofitabilityofabusiness-Shortterm
investmentdecision/Workingcapitaldecisions

 Decisionaffectingfinancialriskandprofitabilityofabusiness-capital
structuredecisions

 Decisionsthatrelatestofundrequirementsbothintermsofthequantum as
wellasthetiming-financialplanning

 Concernedwithquantum offinancetoberaisedfrom variouslongterm
sources-FinancingDecisions

 DecisionsaffectingGrowth,Financialriskandprofitabilityofabusiness-
capitalbudgetingdecisions

Pointstoberememberforsolvingthecasestudies
 Alwaysreadthequestionfirstwhatthequestionwant
 Importantlineandpointsshouldbeunderlinedatthetimeofreadingthecase
 Inthischapteryoujustrememberfivemajordecisions-capitalbudgeting
decisions,financingdecision,dividenddecision,workingcapitalandfixed
capitaldecisionsandconcepts-financialplanning,tradingonequityetc.

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 Numericalquestionsalsoaskedinthischapter

1 Thecheapestsourceoffinanceis: 1

(a)Debenture
(b)Equitysharecapital
(c)Preferenceshares
(d)Retainedearnings

2 Otherthingsremainingthesame,anincreaseinthetaxrateoncorporateprofits 1

will:

(a)Makethedebtrelativelycheaper
(b)Makethedebtrelativelythedearer
(c)Havenoimpactonthecostofdebt
Wecan’tsay

3 Financialleverageiscalledfavourableif: 1

(a)Returnoninvestment(ROI)islowerthanthecostofdebt
(b)ROIishigherthanthecostofdebt
(c)Debtiseasilyavailable
(d)Ifthedegreeofexistingfinancialleverageislow

4 Higherdebt-equityratioresultsin: 1
(a)Lowerfinancialrisk
(b)Higherdegreeofoperatingrisk
(c)Higherdegreeoffinancialrisk
(d)HigherEPS

5 Currentassetsarethoseassetswhichgetconvertedintocash: 1
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(a)Withinsixmonths 1
(b)Withinoneyear
(c)Betweenoneandthreeyears
Betweenthreeandfiveyears
6 Financialplanningarrivesat:

(a)Minimisingtheexternalborrowingbyresortingtoequityissues
(b)Enteringthatthefirm alwayshavesignificantlymorefundthan
requiredsothatthereisnopaucityoffunds
(c)Ensuringthatthefirm facesneitherashortagenoraglutof
unusablefunds.
(d)Doingonlywhatispossiblewiththefundsthatthefirmshasatits
disposal
7 Afixedassetshouldbefinancedthrough: 1

(a)Along-term liability 1
(b)Ashort-term liability’
(c)Amixoflongandshort-term liabilities
8 Currentassetsofabusinessfirm shouldbefinancedthrough:

(a)Currentliabilityonly
(b)Long-term liabilityonly
(c)Bothtypes(i.e.longandshort-term liabilities)

9 Long-term investmentdecisionsarealsocalledas 1
(a)Workingcapitaldecisions
(b)Capitalbudgetingdecisions
(c)Dividenddecision
(d)Financingdecisions

10 Thisdecisionaffectstheliquidityandshortterm profitsofthecompany 1
(a)Longterm investmentdecision 1
(b)Workingcapitalinvestmentdecision
(c)Financingdecision
Alltheabove

11 Financialriskofacompanyincreasesbecauseof
(a)Highoperatingcost
(b)Highfixedcostcharges
(c)Highrateofdividends
(d)Highdebt-equityratio

12 Debtsfinancingisbetterthanequityif 1
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(a)Companyhasstrongcashflow
(b)Companyhasweakcashflow
(c)Cashflowpositiondoesnotmatter
(d)Noneoftheabove
13 The size ofassets,the profitability and competitiveness are affected by 1
___________decision.

14 Dividendisthatportionof_________whichisdistributedamongshareholders. 1

15 Shortterm investmentdecisionisalsoknownas______________decision. 1

16 __________decisiondeterminestheoverallcostofcapital. 1

17 ______________techniquesofevaluatinginvestmentproposals. 1

18 __________decisiontakeninfinancialmanagementwhichaffectstheliquidityas 1
wellasprofitabilityofbusiness.

19 Themainobjectiveoffinancialmanagementis___________. 1

20 Higheramountofdebtindicates_________interestexpenseinfuture. 1

21 Investmentforlongterm iscalled_______________decisions. 1

22 __________decisiontakeninfinancialmanagementrelatedtoacquireanew & 1
modernplantandtoupgradeanoldone.

23 Workingcapitaldecisionisadecisiontoacquireanewandmodernplantto 1
upgradeanoldone.(true/false)

24 TradingonequitytakesplacewhenROIismorethantherateofinterestondebt. 1
.(true/false)

25 Debtcomponentofcapitalstructuredeterminestheoverallfinancialrisk..(true 1
/false)

26 Longterm investmentdecisionsfacilitatessmoothdaytodayoperationsofthe 1
business.(true/false)

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27 Workingcapitalistheexcessofcurrentassetsovercurrentliabilities..(true 1
/false)

28 Themainobjectiveoffinancialmanagementistomaximizeprofit..(true/false) 1

29 Financialmanagementistheconceptwhichlinkthepresentwiththefuture. 1
.(true/false)

30 Dividend is the portion of retained earnings which is distributed to 1
shareholders.(true/false)

31 Matchthecolumns 1

1.

(A) (B)
1.Decisionaffectingliquidityandprofitabilityofabusiness (a)Financial
planning

2.Decisionaffectingfinancialriskandprofitabilityofabusiness (b)capital
budgeting

decisions

3.Decisionsthatrelatestofundrequirementsbothintermsofthe (c)
workingcapital

quantum aswellasthetiming decisions

4.DecisionsaffectingGrowth,Financialriskandprofitabilityofa (d)Capital
structure

business

32 Matchthecolumns 1

(A) (B)

1.ROIismorethantheRateofinterestonde (a)Unfavourablefinancial
leverage

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2.ROIislessthantherateofinterestondebt (b)Tradingonequity

3.Objectiveoffinancialmanagement (c)Fundsavailableatright
time

4.ObjectiveofFinancialplanning (d)Maximizeshareholder’s
wealth

CaseStudies

S.NO. QUESTIONS MARKS
1
1 Inthepaintindustry,variousraw materialsaremixedin
differentproportions with petroleum formanufacturing
differentkindsofpaints.Onespecificraw materialisnot
readilyand regularavailableto thepaintmanufacturing
companies.BonlerPaints Companyis also facing this
problem andbecauseofthisthereisatimelagbetween
placingtheorderandtheactualreceiptofthematerial.But,
onceitreceivestheraw materials,ittakeslesstimein
converting it into finished goods.Identify the factor
affectingtheworkingcapitalrequirementsofthisindustry.

2 AarohanLtd.Anautomobilemanufacturerwasdiversifying 1
intomanufacturingtwo-wheelers.Theyknew thatIndiais 1
onagrowthpathandanewbreedofconsumeriseagerfor
afirstvehicle.Themarketrespondedverywelltothenew
product.Thecompanydidnothavetoallowcredit,asithad
advanceordersfrom fourtosixmonthswithdepositspaid.
Also,dueto efficiencyin managing theiroperationsas
soonasavehiclewasofftheassemblyline,itwasoutto
thedealers.Giveanyonereasondiscussedabovewhich
helpedthefirm inmanagingitsworkingcapitalefficiently.

3 Ravi,afterleavinghisjob,wantedtostartaPrivateLimited
Companywithhisson.Hissonwaskeenthatthecompany
maystartmanufacturingmobile-phoneswithsomeunique

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features.Ravifeltthatmobilephonesarepronetoquick 1
obsolescenceandaheavyfixedcapitalinvestmentwould 1
be required regularly in this business.Therefore,he 3
convincedhissontostartafurniturebusiness.
3
Identify the factoraffecting fixed capitalrequirements
whichmadeRavichoosethefurniturebusinessovermobile
phones.

4 AmarisdoinghistransportbusinessinDelhi.Hisbusesare
generally used fortourists going to Jaipurand Agra.
Identifytheworking capitalrequirementsofAmar.Give
reasonstosupportyouranswer.

5 Abankmayuseanother’sATM orsomeofthem mayjointly
establishaparticularfacility.Namethefactoraffectingthe
fixedcapitalrequirementsofeachbank.

6 Shyam wantedtostartabusinessofsellinghandicraftsby
gettingintouchwiththecraftsmenintheruralareasof
Bengal.Hewantstomakealowinvestmentinfixedcapital.
Advice him in taking suitable decisions regarding the
Nature ofBusiness,Scale ofoperations and Financing
Alternatives(inadevelopedfinancialmarket)thatheneeds
totakeforthepurpose.

7 Yogesh,a businessman is engaged in purchasing and
selling of Ice-creams. Identify the working capital
requirementofManishgivingreasonsinsupportofyour
answer.Explainanytwofactorsthatwillaffecthisfixed
capitalrequirements.

8 PinnacleLtd.dealsinthesaleofstationeryandoffice 3
furniture.Theysourcethefinishedproductsfrom reputed
brandswhogavethem fourtosixmonthscredit.

Seeingthedemandforelectronicitems,theyarealso
planningtomarkettheseitemsbyopeningoutlets
throughtoutIndia.Forthis,theyhavedecidedtojoinhands
withaJapaneseelectronicgoodsmanufacturer.

Identifyandstateanytwofactorsthatwouldaffectthe
fixed capitalrequirementofpinnacle Ltd.asdiscussed

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above.

9 Saksham Ltd.a firm manufacturing textiles,wished to 4
diversifytheirbusiness.Theywereconsideringtwooptions, 4
either to diversify into manufacturing tooth-paste or
switches.Theywantedtoinvestinthepurchaseofland,to
setup a manufacturing unitin the backward areas of
Gujarat,which would also lead to the generation of
employmentopportunities in the area,butonly after
fulfillingalllegalrequirementsandtakingappropriatesteps
to ensure thatthe environmentwas notpolluted.The
financemanagerofthecompany,Mr.Ramakantwasasked
bythemanagementto prepareareportonthefactors
which should be considered while making the above
investmentdecision.

(A)StateanytwofactorsthatMr.Ramakantwouldgive
inhisreport.

(B)Alsostateanyonereasonwhichmakesitimportant
fortheabovedecisiontobemadecarefully.

10 Somnath Ltd.is engaged in the business ofexportof
garments.Inthepast,theperformanceofthecompanyhad
been upto the expectations. In line with the latest
technology,thecompanydecidedtoupgradeitsmachinery.
Forthis,the Finance Manager,Dalmia estimated the
amountoffundsrequiredandthetimings.Thiswillhelpthe
company in linking the investmentand the financing
decisionsonacontinuousbasis.Dalmiatherefore,began
withthepreparationofasalesforecastforthenextfour
years.Healsocollectedtherelevantdataabouttheprofit
estimatesinthecomingyears.Bydoingthis,hewantedto
besureabouttheavailabilityoffundsfrom theinternal
sourcesofthe business.Forthe remaining fundshe is
tryingtofindoutalternativesourcesfrom outside.

Identifythefinancialconceptdiscussedintheabovepara.
Also statetheobjectivesto beachievedbytheuseof
financialconcept,soidentified.

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11 A businessthatdoesn’tgrow dies”,saysMr.Shah,the 6
ownerofShahMarbleLtd.withglorious36monthsofits 6
grandsuccesshavingacapitalbaseofRs.80crores.Within
ashortspanoftime,thecompanycouldgeneratecash
flowwhichnotonlycoveredfixedcashpaymentobligations
butalsocreatesufficientbuffer.Thecompanyisonthe
growthpathandanewbreedofconsumersiseagertobuy
theItalianmarblesoldbyShahMarbleLtd.Tomeetthe
increasing demand ,Mr.Shah decided to expand his
businessbyacquiringamine.Thisrequiredaninvestment
ofRs.120crores.Toseekadviceinthismatter,hecalled
hisfinancialadvisorMr.Sethwhoadvisedhim aboutthe
judiciousmixofequity(40%)andDebt(60%).Mr.Sethalso
suggestedhim totakeloanfrom afinancialinstitutionas
thecostofraisingfundsfrom financialinstitutionsislow.
Thoughthiswillincreasethefinancialriskbutwillalso
raisethereturntoequityshareholders.Healsoapprised
him thatissueofdebtwillnotdilutethecontrolofequity
shareholders.Atthesametime,theinterestonloanisatax
deductibleexpenseforcomputationoftaxliability.After
duedeliberationswithMr.Seth,Mr.Shahdecidedtoraise
fundsfrom afinancialinstitution.

(a)Identify and explain the concept of financial
managementasadvisedbyMr.Sethintheabove
situation.

(b)State the fourfactors affecting the conceptas
identified in part (a) above which have been
discussedbetweenMr.Shah&Mr.Seth.

12 Shalini,afteracquiringadegreeinHotelmanagementand
Business Administration, took over her family food
processingcompanyofmanufacturingpickles,jamsand
squashes.Thebusinesshadbeenestablishedbyhergreat
grandmotherandwasdoingreasonablywell.However,the
fixedoperatingcostsofthebusinesswerehighandthe
cashflow positionwasweak.Shewantedtoundertake
modernizationoftheexistingbusinessto introducethe
latestmanufacturing processes and diversify into the
market of choclates and candies. She was very
enthusiasticandapproachedafinanceconsultant,whotold
herthatapproximatelyRs.50lakhwouldberequiredfor
undertakingthemodernizationandexpansionprogramme.

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Healso informed herthatthestockmarketwasgoing 6
throughabullishphase. 6

(a)Keepingtheaboveconsiderationsinmind,namethe
source offinance Shalinishould notchoose for
financingthemodernizationandexpansionofher
food processing business.Give one reason in
supportofyouranswer.

(b)Explain anytwo otherfactors,apartfrom those
statedintheabovesituation,whichShalinishould
keepinmindwhiletakingthisdecision.

13 ‘SarahLtd’isacompanymanufacturingcottonyarn.Ithas
beenconsistentlyearninggoodprofitsformanyyears.This
yeartooithasbeenabletogenerateenoughprofit.Thereis
availability ofenough cash in the company and good
prospectforgrowth in future.Itis a wellmanaged
organisation believes in quality, equal employment
opportunities and good remuneration practices.Ithas
manyshareholderswhoprefertoreceivearegularincome
from theirinvestments.IthastakenaloanofRs40lakh
from IDBIand is bound bycertain restrictions on the
paymentofdividendaspertermsofloanagreement.
Theabovediscussionaboutthecompanyleadstovarious
factorswhichdecidehow muchoftheprofitshouldbe
retained and how much aboutto bedistributed bythe
company.
Quotingthelinesfrom theabovediscussionIdentifyand
explainanyfoursuchfactors.

14 WellbeingLtd.isacompanyengagedinproductionof
organicfoods.Presently,itsellsitsproductsthrough
indirectchannelsofdistribution.But,consideringthe
suddensurgeinthedemandfororganicproducts,the
companyisnowinclinedtostartitsonlineportalfordirect
marketing.Thefinancialmangersofthecompanyare
planningtousedebtinordertotakeadvantageoftrading
onequity.Inordertofinanceitsexpansionplans,itis
planningtoraiseadebtcapitalofRs.40lakhsthrougha
loan@ 19%from anindustrialbank.Thepresentcapital
baseofthecompanycomprisesofRs.9lakhequityshares
ofRs.10each.Therateoftaxis30%.

Incontextoftheabovecase:

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(a)Whatarethetwoconditionsnecessaryfortaking
advantageoftradingonequity?

(b)Assumingtheexpectedrateofreturnoninvestment
tobesameasitwasforthecurrentyeari.e.15%,do
youthinkthefinancialmanagerswillbeabletomeet
theirgoal.Showyourworkingsclearly.

Answers

Multiplechoicequestions
Ans.1(a)
Ans.2(a)
Ans.3(b)
Ans.4(c)
Ans.5(b)
Ans.6(c)
Ans.7(a)
Ans.8(c)
Ans.9(b)
Ans.10(b)
Ans.11(d)
Ans.12(a)
Fillintheblanks

(i) Capitalbudgeting
(ii) Profit
(iii) Workingcapital
(iv) Financingdecisions
(v) Capitalbudgetingtechniques
(vi) Workingcapital
(vii) Maximizeshareholder’swealth

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(viii) High
(ix) Capitalbudgeting
(x) Longterm investmentdecision

True/False
1.False
2.True
3.True
4.False
5.True
6.False
7.False
8.False

Match
1.1-(c).2-(d),3-(a),4-(b)
2.1-(b),2-(a),3-(d),4-(c)

CaseStudies

Ans. Answers
No.

1 Availabilityofrawmaterial

2 Creditallowed

3 Technologicalupgradation

4 WorkingcapitalrequirementsofAmarwillberelativelylessasheis
engagedinprovidingtransportserviceswhereinthereisnoneedto

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maintaininventory.
5 Levelofcollaboration
6 Shyam shouldtakeintoaccountthefollowingpointswhiletaking

decisionsalongthefollowingfactors:
(a)NatureofBusiness:itisadvisablethatshyam startsatrading
concernandengagesinbuyinghandicraftsfrom thecraftsmenand
sellingthem directlytotheprospectivebuyers.Heshouldnotplan
tosetupamanufacturingunitashewantstomakealow
investmentinfixedcapital.
(b)Scaleofoperations:itisadvisablethatinitiallyshyam carriesout
hisbusinessonasmallscale.
(c)Financingalternatives:Itisadvisablethatshyam mayoptfor
procuringfixedassetsonleaseinsteadofpurchasingthem ash
wishestomakealowinvestmentinfixedcapital.Moreoverina
developedfinancialmarketleasingfacilitiesareeasilyavailable.

7 Workingcapitalwillbelessasheisengagedintradingbusiness.
Factorsaffectingfixedcapital
Levelofcollaborationandfinancialalternativesavailable

8 Diversificationandlevelofcollaboration
9 (a)Alongterm investmentdecisionisalsocalledacapitalbudgeting

decision.Thefactorsthatshouldbekeptinmindbythecompany
whilemakingtheinvestmentdecisionareasfollows:
(A)Cashinflowsfrom theproject
(B)Rateofreturn
(b)Duetothefollowingonereasontheabovedecisionistobemade
carefully:
Itaffectstheoveralllevelofbusinessriskoftheorganizationandits
growthandprofitabilityofbusinessinfuture.

10 FinancialPlanning
Objectives:
(a)Toensureavailabilityoffundswheneverrequired
(b)Toseethatthefirm doesnotraiseresourcesunnecessarily.

11 (a)Capitalstructure
(b)Factors:
(i) Cashflowposition
(ii) Riskconsideration

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(iii) Taxrate
(iv) Control
12 Debtbecauseofhighfixedoperatingcostandweakcashposition

Othertwofactors:

Riskandflexibility

13 Anyfivefactors:

Growthopportunities,Stabilityofdividend,Legalrestictions,Restrictionsin
loansagreement,liquidity,stabilityofearningsetc.

14 (a)Thetwoconditionsnecessaryfortakingadvantageoftradingon
equityare:

(i) Therateofreturnoninvestmentshouldbemorethantherateof
interest.

(ii) Theamountofinterestpaidshouldbetaxdeductible.
(b)

Sources Situation1 Situation2
Equityshres 90,00,000 90,00,000
10%Debentures NIL 40,00,000
Totalcapital 90,00,000 1,30,00,000
EBIT 13,50,000 19,50,000
Less:Interest --------- (4,00,000)
EBT 13,50,000 15,50,000
Less:Tax@ 30% (4,05,000) (4,65,000)
EAT 9,45,000 10,85,000
No.ofsharesofRs.10 9,00,000 9,00,000
each
EPS 1.05 1.21

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CHAPTER:FINANCIALMARKET

S.NO. QUESTION MARKS
1
1 Whichofthefollowinghelpstoeliminatetheuseofstock
certificatesbyplacingstocktransactionsoncomputer? 1

(a)Demataccount 1
(b)Securitiesexchangecommission
(c)Depositorytrustcompany
(d)Federaldepositoryinsurancecorporation
2 Thelaststepinthetradingprocedureonastockexchangeis:

(a)Placinganorder
(b)Executingtheorder
(c)Settlementofaccount
(d)Selectionofabroker
3 ThefunctionsofSEBIare:

(a)Regulatoryfunctions
(b)Developmentfunctions
(c)Protectivefunctions
(d)Alloftheabove

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4 Eliminationofproblemsontransferofsharessuchasloss,theft 1
anddelayisthebenefitof...................account.

5 Whatistheminimum amountoftreasurybill? 1

(a)Rs25,000 1
(b)Rs10,000 1
(c)Rs15,000
(d)Rs20,000
6 .......................referstotheprocessinwhichsecuritiesareallotted
totheinstitutionalinvestorsandsomeselectedindividuals.

7 Financialmarketprovideliquiditytofinancialassets(True/False)

8 Prem has500sharesofL&T.L&Tcomesoutwithafreshissue 1
ofsharesandPrem receivedanoffertobuy1shareofL&Tfor 1
every5sharesheldbyhim.Whichmethodoffloatingnewissue
isindicatedinthiscase?

9 Shivwantstoinvesthissavingsinsharemarket.Whatisthe
mostimportantrequirementforthis?

10 Nametheprominentstockexchangeenjoyingnationwide 1
coverage

11 Newissuemarketisalsoknownas: 1
(a)Stockmarket 1
(b)Moneymarket 1
(c)Primarymarket
(d)Capitalmarket

12 Atreasurybillisbasically:
(a)Aninstrumenttoborrowshortterm funds
(b)Aninstrumenttoborrowlongterm funds
(c)Aninstrumentofcapitalmarket
(d)Noneoftheabove

13 ThesettlementcycleinNSEis:
(a)T+5

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(b)T+3 1
(c)T+2 1
(d)T+1
14 Whichofthefollowingismoneymarketinstrument?

(a)Share
(b)Debenture
(c)Commercialpaper
(d)Bond
15 ..........................providescontinuousmarketforpurchaseandsale
ofsecurities.

16 Depositoryparticipantisanagentbetweendepositoryand 1
investor.(True/False)

17 Increaseinthecallratemakestheothershortterm sourcesof 1
fundsdearer.(True/False)

18 Primaryandsecondarymarkets: 1
(a)Competewitheachother 1
(b)Complementeachother
(c)Functionindependently
(d)Controleachother

19 NametheindicesofBSEandNSE

20 “SEBIconductsresearchandpublishesinformationwhichare 1
usefultoallthoseparticipantswhodealatcapitalmarket’.Name
thefunctionperformedbySEBI.

21 Listtheinitialfourstepsinthetradingprocedure: 1
(A)Connecttomainexchange
(B)Placementoforder
(C)Openingaccount
(D)Approacharegisteredbroker

Optionsare:

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(a)A,C,D,B 1
(b)C,D,B,A
(c)D,C,B,A
(d)B,C,D,A
22 Whatisfinancialintermediation?

23 ABCLtd.issuedprospectusforthesubscriptionofitsshares 1
for Rs.500croresin2008.Theissuewasoversubscribedby20
times.Thecompanyissuedsharestoalltheapplicantsonpro-
ratabasis.LaterSEBIinspectedtheprospectusandfoundsome
misleadingstatementaboutthemanagementofthecompanyin
it.SEBIimposedapenaltyof Rs.5croresandbanneditsthree
executivedirectorsfordealinginsecuritiesmarketforthree
years.IdentifythefunctionanditstypeperformedbySEBIinthe
abovecase. 

24 Reshu’sfatherhasgiftedherthesharesofalargecement 1
companywithwhichhehadbeenworking.Thesecuritieswerein
physicalform.Shealreadyhasabankaccountanddoesnot
possessanyotherformsofsecurities.
Shewishedtosellthesharesandapproachedaregisteredbroker
forthepurpose.Mentiononemandatorydetailwhichshewill
havetoprovidewiththebroker

25 SEBI2yearsagocalledforinformationandissuedashowcause 1
noticetoNSEandits14officialsseekingexplanationonthe
preferentialaccessallegationsattheexchange’sco-location
facility.

StatethefunctionthatSEBIperformedbydoingso.

26 KetanwonacashprizeofRs.20,000intheNationallevel 3
RoboticsCompetition.Ontheadviseofhisfather,hevisitsa
nearbybanktoopenaFixeddepositaccountinhisnamewiththe
prizemoney.HissisterSuhasiniaccompaniedhim tothebank.
Onreachingthebank,henoticesbigbannerswhichareplaced
withinthepremisescontaininginformationaboutthevarious
arrangementsthroughwhichorporatemayraisetheircapital

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throughthebank.Beingafinancegraduate,Suhasiniexplainsto
Ketanthatbanksplaytheroleofthefinancialintermediaryby
helpingintheprocessofchannelizingthesavingsofthe
householdsintothemostprofitablebusinessventures.
Incontextoftheabovecase:.

1.Nameanotherfinancialintermediarythathelpsinthe 3
processofchannelizingthesavingsofthehouseholdsinto
themostproductiveuse.

2.Also,outlineanytwofunctionsofanotherfinancial
intermediaryasidentifiedinpart(1).

27 Sumitaisaprofessorinareputedbusinessinstitute.While
explainingtheprocedureofstockexchangetrading,sheshared
withherstudentsthatmanyyearsbackshehadbought200
sharesofaleadingautomobilescompany.Asperthesettlement
procedureshepaidforthesharesandreceivedtheshare
certificatesinphysicalform.However,whenshehadsentthose
certificatestothecompanytogetthem endorsedinhername,
shewasinformedbythecompanythatthosecertificateswere
duplicate.Therefore,inordertoprotecttheinvestorsfrom many
suchmalpractices,nowonlyscreen-basedtradingisdoneand
dematerialisationiscompulsory.Incontextoftheabovecase:

1.Whatisscreenbasedtrading? 3
2.Givethemeaningof‘dematerialisation’.Stateanytwoofits

advantages.

28 Thestockmarketregulator,SecuritiesandExchangeBoardof
India(SEBI),hasinitiatedacertificationprogrammeforallmarket
intermediaries.Underthisprogramme,peopleassociatedwith
stockmarketsinanyway,willhavetoobtainaqualifying
certificatefrom theregulator.TheNationalInstituteofSecurities
Market(NISM),atrustformedbySEBI,istaskedwiththe
certificationprogramme.
Inthecontextoftheabovecase:

1.IdentifythetypeoffunctionperformedbySEBI. 4
2.OutlineanytworeasonsforsettingupSEBI.

29 MakeGoodTechnologiesLtd.isoneofthetopsuppliersof

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securitysoftwareproductsandsolutionsinIndiawithamarket
shareofover20%intheretailsegment.Itscustomersincludes
peopleallsectionsofthesocietyi.e.bothhouseholdsand
corporates.Itsuniquethreatdetectionsystem workstodetect
securitythreatsincludingvirusattacksinrealtimetoprotect
users’ITassetsacrossvariedplatformsanddevices.The
companyhasanestablishedtrackrecordofgrowthandfinancial
performance.Atpresentthecompanyoperatesonlythroughits
website.Thecompanynowintendstolauncharangeof
computeraccessoriesandplanstomarketitbyopeningitsown
retailoutlets.So,theboardofdirectorsofthecompanyhave
decidedtoonlyraisecapitalforthefirsttimethroughanissueof
shares,butatthesametimetheydonotwishtogetintothe
hasslesoflaunchingapublicissueofshares.
Incontextoftheabovecase:

1.Nameandexplainthewaythroughwhichthecompanycan 4
raisefinancebyallottingsecuritiestoselectiveindividuals
andinstitutionsonly.

2.Canthecompanyalsoraisecapitalthrougharightissue?
Whyorwhynot?Giveareasontojustifyyouranswer.

30 RagunathAhujaisoneofthePromoter-DirectorofVishwasLtd.
Thecompanyisengagedintherealestatesector,whichhas
recentlywitnessedasteadyfallinitsrevenueandthevalueofits
assetsduetoadownwardtrendpersistinginthemarketin
specificandtheeconomyingeneral.Theperiodicalfinancial
resultsofthecompanyweretobedeclaredinafortnighttime.
RagunathAhuja,beinganinsider,hadaccesstounpublished
pricesensitiveinformationrelatedtoit.Consequently,hesellsa
majorportionofhisholdingsinananticipationofafallinthe
marketpriceofthesharesoftheCompanysubsequenttothe
announcementofperiodicalfinancialresultsofthecompany.
Moreover,hedoesn’tinform TheSecuritiesandExchange
Commission(SEC)aboutthedealings.
Onconductingaprobe,SecuritiesandExchangeBoardOfIndia
(SEBI)findsRagunathAhujaguiltyofinsidertrading.Asperlaw,
companydirectors,officialsoranyindividualwithastakeof10%
ormoreinthecompanyareconsideredtobeinsidersandthey
arerequiredtoreporttheirinsidertransactionswithintwo
businessdaysofthedatethetransactionoccurred.

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Incontextoftheabovecase: 4

1.StatethepurposeofsettingupSEBI.
2.IdentifythetypeoffunctionperformedbySEBIbyquoting

linesfrom theparagraph.

31 RaguworksasawaiterinafivestarhotelinMumbai.While
servingthecustomerheoverhearshim atthetablesayingthat
thehehasmadeprofitshigherthanexpectedbyinvestingin
securitiesmarket.So,Ragualsodecidestomakeanominal
investmentfrom hissavingsinthestockmarketinpursuitof
highergains.Incontextoftheabovecase:Asafinancial
consultant,apprisehim ofthestepsinvolvedintheworkingofa
Dematsystem.

32 Duringnavratras,Varunfinalisesadealtobuyanewhouse.So, 4
hevisitsanearbybranchof‘SubhBank’towithdrawRs.10lakhs
from hisaccountinordertopaythetokenmoneytotheseller.In
thebankheobservesthatalargenumberofcustomersare
presenttomakecashwithdrawls,probablybecauseitisan
auspicioustimetomakepurchases.Aftersometime,he
overhearsoneofthebankstaffmemberstellinghiscolleague
that,“Today‘SubhBank’islikelytofallshortofcashandtomake
upforthedeficitandmaintainitscashreserveratioitwillhaveto
approachanotherbank.”
Incontextoftheabovecase:

1.Identifytheinstrumentthat‘SubhBank’willusetomeetits 4
shortterm requirementsoffunds.

2.Stateanythreefeatureoftheinstrumentasidentifiedin
part(1).

33 GaneshSteelLtd.isalargeandcreditworthycompanythat
manufacturessteelfortheIndianmarket.Itnowwantstocater
totheAsianmarketanddecidestoinvestinnewhi-tech
machines.Sincetheinvestmentislarge,itrequireslong-term
finance.Itdecidestoraisefundsbyissuingequityshares.The
issueofequitysharesinvolveshugefloatationcost.Tomeetthe
expensesoffloatationcost,thecompanydecidestotapthe
moneymarket.

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1.Nameandexplainthemoney-marketinstrumentthe 5
companycanusefortheabovepurpose.

2.Whatisthedurationforwhichthecompanycangetfunds
throughthisinstrument?

3.Stateanyotherpurposeforwhichthisinstrumentcanbe
used.

34 Incorporatedin1990,RajuDairyLtd.,isoneoftheleading
manufacturersandmarketersofdairy-basedbrandedfoodsin
India.Intheinitialyears,itsoperationswererestrictedonlyto
collectionanddistributionofmilk.But,overtheyearsithas
gainedareasonablemarketsharebyofferingadiverserangeof
dairybasedproductsincludingfreshmilk,flavouredyogurt,ice
creams,buttermilk,cheese,ghee,milkpowdersetc.Inorderto
raisecapitaltofinanceitsexpansionplans,RajuDairyLtd.has
decidedtoapproachcapitalmarketthroughamixofOfferfor
saleofRs.4croresharesandapublicissueofRs.2crore
shares.
Incontextoftheabovecase:

1.Nameandexplainthesegmentofcapitalmarketbeing 5
approachedbythecompany.

2.Identifythetwomethodsoffloatationusedbythecompany
toraisetherequiredcapital.Giveonedifferencebetween
them.

35 Afterdoingacourseinonlinetrading,Arshstartedanonline
portalforstocktradingunderthename‘InvestmentGuru’.He
methisschoolfriendAjayafteralongtimeinabankwhereAjay
hadcometoopenaD-Mataccount.ArshurgedAjaytoinvestin
theforthcomingIPOofabluechipcompanieswhereasAjaywas
inclinedtobuyexistingsecuritiesoftheothercompaniestobuild
hisinvestmentportfolio.

Incontextoftheabovecase:

1. Identifythetwodifferenttypesofcapitalmarketbeing
referredtobyquotinglinesfrom thepara.

2. Stateanyfourdifferencesbetweenthetwodifferenttypes

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ofcapitalmarketsasidentifiedinpart(1).

36 Madhav’sisoneoftheIndia’smosttrustedbrandsinIndian 5
sweetsandsnackssegment.Thecompanyhasmanufacturing
plantsinKota,Kanpur,NewDelhi,andMumbai.Madhav’shasits
ownretailchainstoresandarangeofrestaurantsinthesecities.
Now,thecompanyplanstoextenditsbusinessin12morecities
inIndia.Inordertoraisethefunds,itsdirectorshavedecidedto
floatapublicissuethroughprospectus.Besides,itintendsto
raisemoneytomeetthefloatationcostsintermsofbrokerage,
underwritingcommission,advertisingetc.

Incontextoftheabovecase:

1.Whatistheothernameusedforthefundsrequiredtomeet
floatationcosts?

2.Describebrieflytheshortterm instrumentpopularlyusedby
thecompaniestoraiseforthefundsrequiredtomeetfloatation
costs.Whocanissuethem?

3.Distinguishbetweenthetwotypesoffinancialmarketsthat
thecompanyintendstoapproachtomeetitsfinancialneeds.

37 TheSEBIhasimposedapenaltyofRs.7,269.5croreonPearls 5
AgrotechCorporationLimited(PACL)anditsfourdirectors—
TarlochanSingh,SukhdevSingh,GurmeetSinghandSubrata
Bhattacharyawhohadmobilisedfundsfrom thegeneralpublic
throughillegalcollectiveinvestmentschemesinthenameof
purchaseanddevelopmentofagricultureland.Whileimposing
thepenalty,thebiggestinitshistory,SecuritiesandExchange
BoardofIndia(SEBI)saidthecompanydeserved“maximum
penalty”fordupingthecommonman.ItsPreventionof
FraudulentandUnfairTradePracticesRegulationsprovidesfor
“severetoseverepenalties”fordealingwithsuchviolations.As
perSEBInorms,itcanimposeapenaltyofRs.25croreorthree
timesoftheprofitmadebyindulginginfraudulentandunfair
tradepracticesandinthepresentcase,theregulatorhas
imposedafineequivalenttothreetimesoftheillicitgains.

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Inthecontextoftheabovecase:

1.StatetheobjectivesofsettingupSEBI.

2.IdentifythetypeoffunctionperformedbySEBIbyquotinglines
from theparagraph.

38 TheBombayStockExchange(BSE)isAsia’sfirststockexchange 6
andtheworld’s11thlargeststockexchange.Itbecamethefirst
stockexchangetoberecognizedbytheIndianGovernmentunder
theSecuritiesContractsRegulationAct.Itsautomated,screen-
basedtradingplatform calledBSEOn-LineTrading(BOLT)hada
capacityof8millionordersperday.TheBSEhasalsointroduced
acentralizedexchange-basedinternettradingsystem,
BSEWEBx.co.intoenableinvestorsanywhereintheworldto
tradeontheBSEplatform.
Incontextoftheabovecase:

1.Nametheorganisationthatregulatestheworkingofstock
exchangesinIndia.

2.Stateanythreefunctionsperformedbystockexchanges.
3.Giveanytwoadvantagesofscreen-basedtrading.

39 Supriya’sgrandmotherwho,wasunwell,calledherandgavehera 6
giftpacket.Supriyaopenedthepacketandsawmanycrumpled
sharecertificatesinside.Hergrandmothertoldherthattheyhad
beenleftbehindbyherlategrandfather.

Asnotradingisnowdoneinphysicalform,Supriyawantsto
knowtheprocessbyadoptingwhichsheisinapositiontodeal
withthesecertificates.

1.Identifyandstatetheprocess.

2.Also,giveanyfourreasonstoSupriyawhydealingwithshares
inphysicalform hasbeenstopped.

40 Incorporatedin1990,RajuDairyLtd.,isoneoftheleading 6
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manufacturersandmarketersofdairy-basedbrandedfoodsin
India.Intheinitialyears,itsoperationswererestrictedonlyto
collectionanddistributionofmilk.But,overtheyearsithas
gainedareasonablemarketsharebyofferingadiverserangeof
dairybasedproductsincludingfreshmilk,flavouredyogurt,ice
creams,buttermilk,cheese,ghee,milkpowdersetc.Inorderto
raisecapitaltofinanceitsexpansionplans,RajuDairyLtd.has
decidedtoapproachcapitalmarketthroughamixofOfferfor
saleofRs.4croresharesandapublicissueofRs.2crore
shares.

Incontextoftheabovecase:

1.Nameandexplainthesegmentofcapitalmarketbeing
approachedbythecompany.

2.Identifyandexplainthetwomethodsoffloatationusedbythe
companytoraisetherequiredcapital.

3.Giveonedifferencebetweenthem.

Q.NO. MARKINGSCHEME MARKS
1 1
2 ANSWER 1
3 A 1
4 C 1
5 D 1
Demataccount
Rs25,000

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6 1
Privateplacement 1
1
7 1
True 1
1
8 1
Rightissue 1
1
9 1
PANcardforopeningDemataccount 1
1
10 1
NSE 1
1
11
C

12
A

13
C

14
C

15
Stockexchange

16
True

17
False

18
B

19
SensexandNifty

20
Developmentalfunction

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21 1
C

22 1
Itistheprocessbywhichbanksandfinancialmarket
allocatefundsavailabletothem

23 1
ProtectivefunctionhasbeenperformedbySEBIinthe
abovecase.AndthetypeofProtectivefunctionis
Prohibitionoffraudulentandunfairtradepractices.

24 1
ReshuwillhavetogiveherPermanentAccountNumber
(PAN)tothebrokerasitismandatoryasperlaw.

25 1
Regulatoryfunction

26 1+2=3
1.Financialmarketsistheotherfinancialintermediarythat
helpsintheprocessofchannelizingthesavingsofthe
householdsintothemostproductiveuse.
2.Thetwofunctionsoffinancialmarketareasfollows:

 Ithelpstodeterminethepriceforthefinancialassetin
aparticularfinancialmarketthroughthemarket
forcesofdemandandsupply.

 Itprovidesliquiditytothefinancialassetsbyproviding
readymarketswhereinthesecuritiescanbe
convertedintocashorviceversaeasily.

27 1+2=3
1.Screen-basedtradingreferstotheprocessofbuyingor

sellingsecuritiesonline.

2.Dematerialisationreferstotheprocessofholdingsecurities

inelectronicform.ThetwoadvantagesofDematerialisation

asfollows:

 Thesecuritiesinthedemataccountcanbeofferedas
securitytoraiseloans.

 Sincethesharescertificatesarenotheldinphysical

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form,thereisnodangerofloss,theftorforgery.

28 1+2=3
1.DevelopmentalfunctionisbeingcarriedoutbySEBIby

startingacertificationprogrammeforallmarket

intermediaries.

2.SEBIwassetupasaregulatorybodybythegovernmentfor

thefollowingreasons:

 Tocurbmalpracticesinthefinancialmarket.
 Toenhancetheconfidenceoftheinvestorsby

ensuringfair,efficientandtransparentdealings.

29 2+2=4
1.Thecompanycanraisefinancebyallottingsecuritiesto

selectiveindividualsandinstitutionsonlythroughPrivate

Placement.Itisarelativelyeconomicalwayofraising

moneyasithelpstosavetime,costandmoneyinvolvedin

theprocessofissuingsecurities.

2.No,thecompanycannotraisecapitalthrougharightissue

asitisissuingsecuritiesforthefirsttime.Arightsissueis

apre-emptiverightgivenonlytotheexistingshareholders

tosubscribetothesecuritiesofthecompanyasperits

termsandconditions.

30 1X3+1=
1.SEBIhastoberesponsivetotheneedsofthreegroups,
4
whichconstitutethemarketnamely:

 Theissuersofsecuritiessoastoprovidethem a
platform forraisingcapitalinaneasy,effectiveand
efficientmanner.

 Theinvestorssoastoprotecttheirinterestsin
securitiesbykeepingthem abreastaboutthe
developmentsthroughtrueandappropriate
information.

 Themarketintermediariesinordertoprovidethem a

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frameworksoastoenablethem perform their
functionseffectivelyandefficiently.
RegulatoryfunctionisbeingperformedbySEBI:“On
conductingaprobeSecuritiesandExchangeBoardofIndia
(SEBI)findsRagunathAhujaguiltyofinsidertrading.”

31 Raguwillhavetoinitiatethefollowingstepsfortradingthrougha 1X4=4
Dematsystem:

 HewillhavetofirstopenaDemataccountwithadepository
participant(DP)whomayeitherbeabank,brokeror
financialservicescompanybyfurnishingcertaindetailsand
informationabouthimselfincludingPANnumber,dateof
birth,bankaccountdetails,incomedetailsetc.

 Ifheplanstobuysharesthroughapublicofferhewillhave
togivedetailsofhisDemataccount,bankaccountetc.On
allotmenttheshareswillbedirectlycreditedtohisaccount.

 Ifhedecidestobuysharesotherwise,hewillhaveto
instructhisbrokerwiththedetailsaboutthenameofthe
company,numberofshares,priceetc.Thetransactionwill
beexecutedthroughthedepositoryparticipantandhewill
havetomakepaymentforthem withinT+2days.

 Oncontrary,wheneverhedecidestosellshares,hewill
havetoinstructhisbrokerwiththedetailsaboutthename
ofthecompany,numberofshares,priceetc.The
transactionwillbeexecutedthroughthedepository
participantandhisaccountwillbedebitedaccordingly.He
willreceivethepaymentinT+2days.

32 1+1X3=
1.Callmoneyistheinstrumentusedby‘SubhBank’tomeet
4
itsshortterm requirementsoffunds.

2.Threefeaturesofcallmoneyareasfollows:

 Callmoneyisaninstrumentthroughwhichonebank
mayborrowmoneyfrom anotherbanktomaintainthe
cashreserveratioaspertheguidelinesofRBI.

 Itsmaturityperiodmaybefrom asingledaytoa

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fortnight.
 Therateatwhichtheinterestispaidoncallmoneyis

calledcallrate.

33 2+1+1=
1.CommercialPaperscanbeusedforBridgefinancingby 4
GaneshSteelLtd.astheyareissuedbylargeandcredit

worthycompanies.Theinstrumentisintheform ofan

unsecuredpromissorynoteandisfreelytransferableby

endorsement.Itissoldatdiscountandredeemedatpar.

2.Itsmaturityperiodmayrangefrom afortnighttoayear.

3.Itisalsousedtomeettheshortterm seasonalandworking

capitalrequirementsofabusinessenterprise.

34 2+3=5
Primarymarketisthesegmentofcapitalmarketbeing
approachedbythecompany.Itisalsoknownasthenew
issuemarketasthesecuritiesareissuedforthefirsttime
bythecompaniesthroughthismarket.

1.Thetwomethodsoffloatationusedbythecompanyto
raisetherequiredcapitalare–Issuethroughprospectus
andOfferforsale.
Incaseofissuethroughprospectus,thecompany
approachesthemembersofthegeneralpublicdirectlyby
issuingaprospectuswhereasincaseofOfferforsale,the
companyapproachesmembersofthegeneralpublic
indirectlythroughintermediarieslikeissuinghouses,stock
brokersetc.

35 1+4=5
1. Thetwodifferenttypesofcapitalmarketbeing
referredtoare-

•PrimaryMarket:“ArshurgedAjaytoinvestinthe
forthcomingIPOofabluechipcompanies.”

•SecondaryMarket:“Ajaywasinclinedtobuyexisting
securitiesoftheothercompaniestobuildhisinvestment

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portfolio.”

DifferencesbetweenPrimaryMarketandSecondary
Market:

S. BASIS PRIMARYMARKET SECONDARY
No MARKET

1 Meanin Itisthenewissue Itisthemarket
g market. foroldsecurities.

2 Aspect Onlybuyingof Bothbuyingand

s securitiestakesplace. sellingof

securitiestakes

place.

3 Price Pricesofthesecurities Pricesofthe

aredeterminedbythe securitiesare

company. determinedby

theforcesof

demandand

supply.

4 Parties Itinvolvesdealings Itinvolves

involve betweenthecompany dealings

d andinvestors betweenthetwo

investors.

36 1+4=5
1. Bridgefinancingistheothernameusedforthe
fundsrequiredtomeetfloatationcosts.

2. CommercialPapersissuedbylargeandcredit
worthycompanies.Theinstrumentisintheform ofan

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unsecuredpromissorynoteandisfreelytransferableby
endorsement.Itissoldatdiscountandredeemedatpar.Its
maturityperiodmayrangefrom afortnighttoayear.Itis
alsousedtomeettheshortterm seasonalandworking
capitalrequirementsofabusinessenterprise.Forexample
itisusedforthepurposeofbridgefinancing.

S. Basis CapitalMarket MoneyMarket
No

1 Duration Itisamarketfor Itisamarketfor
longterm funds shortterm funds
whosematurity
periodisuptoone
year.

2 Participant Themain Themain

s participantsin participantsare

capitalmarket institutional

arebanks, investors.

financial

institutions,

corporatebodies,

foreigninvestors

andretail

investors.

3 Investment Since,thecostof Sincethecostof

outlay securitiesmaybe securitiesmaybe

low,investment high,investment

canbemadein inthemoney

thecapital marketrequires

marketcanbe hugecapital

withlesscapital. outlay.

4 Liquidity Thesecuritiesin Thesecuritiesin

capitalmarket moneymarket

enjoygood enjoyhighliquidity

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