WORKSHEET-39 BUSINESS STUDIES REVISION(CLASS 12)

QUESTION PAPER 2019 SET 1 

SECTION E[6 MARKS EACH]

1. ‘Determining the relative proportion of various types of funds depends upon various factors.’
Explain any six such factors.
Factors Affecting Financing Decisions

The financing decisions are affected by various factors. Important among them are as follows:

(a) Cost: The cost of raising funds through different sources are different. A prudent financial manager would normally opt for a source which is the cheapest. 

(b) Risk: The risk associated with each of the sources is different. 

(c) Floatation Costs: Higher the floatation cost, less attractive the source 

(d)Cash Flow Position of the Company: A stronger cash flow position may make debt financing more viable than funding through equity. 

(e) Fixed Operating Costs: If a business has high fixed operating costs (e.g., building rent, Insurance premium, Salaries, etc.), It must reduce fixed financing costs. Hence, lower debt financing is better. Similarly, if fixed operating cost is less, more of debt financing may be preferred. 

(f) Control Considerations: Issues of more equity may lead to dilution of management’s control over the business. Debt financing has no such implication. Companies afraid of a takeover bid would prefer debt to equity.

 OR 

Explain any six factors affecting the decision that determines the amount of profit earned to be distributed and to be retained in the business. Factors Affecting Dividend Decision How much of the profits earned by a company will be distributed as profit and how much will be retained in the business is affected by many factors. 

Some of the important factors are discussed as follows: 
(a) Amount of Earnings: Dividends are paid out of current and past earning. Therefore, earnings is a major determinant of the decision about dividend.

(b) Stability Earnings: Other things remaining the same, a company having stable earning is in a better position to declare higher dividends. As against this, a company having unstable earnings is likely to pay smaller dividend.

(c) Stability of Dividends: Companies generally follow a policy of stabilising dividend per share. The increase in dividends is generally made when there is confidence that their earning potential has gone up and not just the earnings of the current year. In other words, dividend per share is not altered if the change in earnings is small or seen to be temporary in nature.

(d) Growth Opportunities: Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. The dividend in growth companies is, therefore, smaller, than that in the non– growth companies.

(e) Cash Flow Position: The payment of dividend involves an outflow of cash. A company may be earning profit but may be short on cash. Availability of enough cash in the company is necessary for declaration of dividend.

(f) Shareholders’ Preference: While declaring dividends, managements must keep in mind the preferences of the shareholders in this regard. If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same. There are always some shareholders who depend upon a regular income from their investments.

(g) Taxation Policy: The choice between the payment of dividend and retaining the earnings is, to some extent, affected by the difference in the tax treatment of dividends and capital gains. If tax on dividend is higher, it is better to pay less by way of dividends. As compared to this, higher dividends may be declared if tax rates are relatively lower. Though the dividends are free of tax in the hands of shareholders, a dividend distribution tax is levied on companies. Thus, under the present tax policy, shareholders are likely to prefer higher dividends.

(h) Stock Market Reaction: Investors, in general, view an increase in dividend as a good news and stock prices react positively to it. Similarly, a decrease in dividend may have a negative impact on the share prices in the stock market. Thus, the possible impact of dividend policy on the equity share price is one of the important factors considered by the management while taking a decision about it.

(i) Access to Capital Market: Large and reputed companies generally have easy access to the capital market and, therefore, may depend less on retained earnings to finance their growth. These companies tend to pay higher dividends than the smaller companies which have relatively low access to the market.

(j) Legal Constraints: Certain provisions of the Companies Act place restrictions on pay outs as dividend. Such provisions must be adhered to while declaring the dividend.

(k) Contractual Constraints: While granting loans to a company, sometimes the lender may impose certain restrictions on the payment of dividends in future. The companies are required to ensure that the dividend does not violate the terms of the loan agreement in this regard. 

2. ‘VOICE’ is an important consumer organization. It organized workshops in the months of December in Delhi/NCR for consumers. The theme was ‘Organic Food – From Farm to Plate’, to spread awareness on the importance of organic farming and to encourage consumers to switch from conventional food, that contains chemicals and pesticides to organic food. Expert speakers from farmers’ community explained the harmful effects of usage of pesticides in farming and the importance of organic food. People were informed that the organization regularly tests samples to detect adulteration like presence of heavy metals or pesticides. The results of the tests are published in their monthly magazine ‘Consumer Voice’ to make people aware of quality of different products. It also provides aid and legal advice to the consumers in seeking a remedy. 

State the functions performed by the Consumer Voice for the protection and promotion of consumer interest by quoting lines from the above para. 

In India, several consumer organisations and non-governmental organisations (NGOs) have been set up for the protection and promotion of consumers’ interests. Non- governmental organisations are non- profit organisations which aim at promoting the welfare of people. They have a constitution of their own and are free from government interference. Some of the important consumer organisations and NGOs engaged in protecting and promoting consumers’ interests include the following.

(i) Consumer Coordination Council, Delhi
(ii) Common Cause, Delhi
(iii) Voluntary Organisation in Interest of Consumer Education (VOICE), Delhi

In the above question Voice an Voluntary organisation in their monthly magazine ‘Consumer Voice’ giving information regarding quality of different products. Such Consumer organisations and NGOs perform several functions for the protection and promotion of interest of consumers. These include:

(i) Educating the general public about consumer rights by organising training programmes, seminars and workshops. 

(ii) Publishing periodicals and other publications to impart knowledge about consumer problems, legal reporting, reliefs available and other matters of interest. 

(iii) Carrying out comparative testing of consumer products in accredited laboratories to test relative qualities of competing brands and publishing the test results for the benefit of consumers. 

(iv) Encouraging consumers to strongly protest and take an action against unscrupulous, exploitative and unfair trade practices of sellers. 

(v) Providing legal assistance to consumers by way of providing aid, legal advice etc. in seeking legal remedy. 

(vi) Filing complaints in appropriate consumer courts on behalf of the consumers. 

(vii) Taking an initiative to file cases in consumer courts in the interest of the general public, not for any individual.

3.   Pratap Singh is the Chief Executive Officer of Nissar Enterprises. It is an automobile parts manufacturing company. The enterprise has a functional structure, in which jobs of similar nature have been grouped together as Production, Finance, Marketing and Human Resource. Nissar Enterprises has its manufacturing unit at Manesar. The factory has been plagued with many problems for a long time which was in the knowledge of the Production Manager, Varun Sharma. The workers had internal differences. Time and again, there were misunderstandings between the management and the workers. Keeping the problems in mind, Varun Sharma appointed, Siyaram Singh who had 14 years of experience of working with the actual work force and passing on instructions of the middle management to the workers. 

Siyaram Singh met Varun Sharma to understand what the management wanted ? 

Thereafter he met the workers and conveyed the ideas of management to them. He also promised the workers to convey their problems to the management. In this way, he cleared the misunderstanding between the management and the workers. He also sorted out internal differences and was able to unite the workers within a month of his joining. His work was acknowledged by management and he was given a certificate of good performance along with 10% increase in salary. 

(i) Siyaram Singh performed some of the functions which are required to be performed at the position he is working at. State any five other functions Siyaram Singh is expected to perform.

Creating Cooperation: Siyaram is a middle level manager appointed to create Cooperation among different divisions to successfully achieve company’s objectives and this is done by middle level managers.

Other function of middle level managers are:

Motivating Employees:
Middle-level managers motivate their employees by various means so that they work most efficiently to achieve organisational objectives.

Issuing Instructions:
Departmental managers direct their subordinates about what to do and how they have to do it. Needful resources are made available to subordinates so that they can do the assigned jobs uninterrupted.

Appointing Employees:
Every departmental manager appoints employees to fulfill the activities of his department.

Preparing Organisational Set-up:
Every middle-level manager prepares outline of his respective department in accordance with the objectives of the organisation.

Interpreting Policies:
At this level, policies framed by top-level managers are interpreted. Like the marketing manager introduces his salesmen to the sales policy of the company that at no cost credit sales will be made.

(ii)Name the incentives provided to Siyaram Singh.

The incentive that is being given to Siyaram Singh are:

Non-financial incentive: 'Employee Recognition programmes as he was given a certificate of good performance and,

Financial incentive: 'Pay and allowances' as he was given a 10% increase in salary.