Class 12 Business Studies
Ch-9 Business finance
Answers to NCERT Questions
Short ans type (Page 265)
Q7 Discuss about working capital affecting both liquidity as well as profitability of a business
Ans
Working capital is excess of current assets over current liabilities.
More Investment in current assets helps in increasing the liquidity of business as compare to Fixed assets as these are converted in to cash or cash equivalents very quickly
Insufficient Investment in current assets make it more difficult for organisation to meet its payment obligations(decreases Liquidity)
But current assets provide little or no returns (they contribute less to profit)as compare to fixed assets
Conclusion: Balance need to be struck between liquidity and profitability as more working capital increases liquidity but decreases profitability
Long Answer Questions
Q2 Capital Structure decision is essentially optimisation of risk-return relationship.Comment
Ans
Capital structure policy involves a trade-off between risk and return.
· Using more debt raises the riskiness of the firms because payment of interest and return of principal amount is obligatory for business. Any default in meeting these commitments may force business to go in to liquidation
· But a higher propor-tion of debt generally leads to a higher expected rate of return for equity shareholders as EPS increases because of Tading on Equity
· We know that if debt is increased beyond a point , the higher risk associated with greater debt tends to lower the share price .
Therefore, the optimal capital structure is the one that strikes a balance between risk and return to achieve our ultimate goal of maximizing the price of the equity shares(Wealth maximisation)
