class 12 commerce bussiness studies study material
class 12 commerce bussiness studies study material:-the course in Business Studies at CBSE Class 12 level will prepare students to analyse, manage, evaluate and respond to changes which affect business. It provides a way of looking at and interacting with the business environment. It recognizes the fact that business influences and is influenced by social, political, legal and economic forces. It allows students to appreciate that business is an integral component of society and develops an understanding of many social and ethical issues.
class 12 commerce bussiness studies study material
class 12 commerce bussiness studies study material:-Business Studies : Business Finance and Marketing
class 12 commerce bussiness studies study material:-Chapter 1 – Financial Management
Capital structure refers to the combination of borrowed funds and owners’ fund that a firm uses for financing its fund requirements. Herein, borrowed funds comprise of loans, public deposits, debentures, etc. and owners’ fund comprise of preference share capital, equity share capital, retained earning etc. Generally, capital structure is simply referred as the combination of debt and equity that a firm uses for financing its funds. It is calculated as the ratio of debt and equity or the proportion of debt in the total capital used by the firm. Algebraically,
The proportion of the debt and equity used by the firm affects its financial risk and profitability. While on one hand, debt is a cheaper source of finance than equity and lowers the overall cost of capital but on the other hand, higher use of debt, increases the financial risk for the firm. Thus, the decision regarding the capital structure should be taken with utmost care. Capital structure is said to be optimal when the proportion of debt and equity used is such that the earnings per share increases.
objective of Financial Planning.
Financial Planning involves designing the blueprint of the financial operations of a firm. It ensures that just the right amount of funds are available for the organisational operations at the right time. Thereby, it ensures smooth functioning. Taking into consideration the growth and performance, through financial planning, firms tend to forecast what amount of fund would be required at what time. The following are the two highlighted objectives of financial planning.
i) Ensure Availability of Funds
Ensuring that the right amount of funds are available at the right time is one of the main objectives of financial planning. It involves estimating the right amount of funds that are required for various business operations in the long term as well for day to day operations. In addition, it also involves estimating the time at which the funds would be required. Thus, financial planning ensures that right amount of funds are available at the right time. Financial planning also points out the probable sources of funds.
ii) Proper Utilisation of Funds
Financial Planning aims at full utilisation of funds. It ensures that both inadequate funds as well as excess funds are avoided. Inadequate funds hinders the smooth operations and the firm is unable to carry its commitments. On the other hand, excess funds add to the cost of business and encourage unnecessary wasteful expenditure. Thus, financial planning ensures that the funds are properly and optimally utilised.
”Capital structure decision is essentially optimisation of risk-return relationship”. Comment.
Capital Structure refers to the combination of different financial sources used by a company for raising funds. The sources of raising funds can be classified on the basis of ownership into two categories as borrowed funds and owners’ fund. Borrowed funds are in the form of loans, debentures, borrowings from banks, public deposits, etc. On the other hand, owners’ funds are in the form of reserves, preference share capital, equity share capital, retained earnings, etc. Thus, capital structure refers to the combination of borrowed funds and owners’ fund. For simplicity, all borrowed funds are referred as debt and all owners’ funds are referred as equity. Thus, capital structure refers to the combination of debt and equity to be used by the company. The capital structure used by the company depends on the risks and returns of the various alternative sources.
Both debt and equity involve their respective risk and profitability considerations. While on one hand, debt is a cheaper source of finance but involves greater risk, on the other hand, although equity is comparatively expensive, they are relatively safe.
The cost of debt is less because it involves low risk for lenders as they earn an assured amount of return. Thereby, they require a low rate of return which lowers the costs to the firm. In addition to this, the interest on debt is deductible from the taxable income (i.e. interest that is to be paid to the debt security holders is deducted from the total income before paying the tax). Thus, higher return can be achieved through debt at a lower cost. In contrast, raising funds through equity is expensive as it involves certain floatation cost as well. Also, the dividends are paid to the share holders out of after tax profits.
Though debt is cheaper, higher debt raises the financial risk. This is due to the fact that debt involves obligatory payments to the lenders. Any default in payment of the interest can lead to the liquidation of the firm. As against this, there is no such compulsion in case of dividend payment to shareholders. Thus, high debt is related to high risk.
Another factor that affects the choice of capital structure is the return offered by various sources. The return offered by each source determines the value of earning per share. A high use of debt increases the earning per share of a company (this situation is called Trading on Equity). This is because as debt increases the difference between Return on Investment and the cost of debt increases and so does the EPS. Thus, there is a high return on debt. However, even though higher debt leads to higher returns but it also increases the risk to the company.
Therefore, the decision regarding the capital structure should be taken very carefully, taking into consideration the return and risk involved.
class 12 commerce bussiness studies study material:-Chapter 2 – Financial Markets
functions of a financial market
A financial market refers to the market where the creation and exchange of financial assets such as shares and debentures takes place. The following are the functions of a financial market.
i) Transfer of Savings and Alternatives for Investment
A financial market acts a link between the savers and the investors. It provides a platform for the transfer of savings from the households to the investors. It also provides savers with various alternatives for investment and thereby, directs the funds to the most productive investment.
ii) Establishes the Price
Similar to a commodity, the price of a financial asset is established through the forces of demand and supply for funds. Financial market provides a platform for the interaction of the demand of the funds (represented by the business firms) and the supply of funds (represented by the households). Thereby, it helps in determining the price of the asset being traded.
iii) Facilitates Liquidity
An asset or a security can be easily purchased and sold in a financial market. This renders liquidity to the assets. That is, through trading in the financial market assets can be easily converted into cash or cash equivalents.
iv) Reduced Cost of Transaction
By rendering information regarding the securities being traded, their price, availability, etc., a financial market helps in reducing the cost of transaction in terms of effort, money and time.
Money Market Instruments.
Money Market refers to the market where short term funds are traded. Herein, short term funds are in the form of monetary assets having a maturity period of maximum one year. The following are some of the common money market instruments.
(i) Treasury Bil (T-Bills)
Treasury Bill refers to a promissory note used for short term borrowing by the government. They are the most commonly used money market instrument. They are auctioned and issued by the Reserve Bank of India on behalf of the Central Government. T-bills are available for a minimum of Rs 25,000 and in multiples thereof. Generally, three types of treasury bills are issued 91-days, 182-days and 364-days. T-Bills are issued at a discount and redeemed at par. That is, they are issued at a price lower than their face value and at the time of redemption, the investor gets the amount equal to the face value. The difference between the value at which they are issued and the redemption value is the interest received on them. For example, if an investor purchases a 182-days treasury bill with a face value of Rs 56,000 for Rs 50,000. At the time of maturity, the investor will receive Rs 56,000. Thus, the difference of Rs 6,000 (56,000 – 50,000) is the interest receivable on the bill. T-Bills are also called Zero-Coupon Bonds. T-bills are highly liquid bonds. Moreover, as they are issued by the RBI, they have negligible risk and offer assured return.
(ii) Call Money
Call money is an instrument used for interbank transactions. Through call money, the banks borrow from each other to meet any shortage of funds required to maintain CRR. That is, any bank in shortage of funds borrows from other bank having surplus funds. Call money have a very short maturity period ranging from one day to fifteen days. Interest paid on such loans is known as call rate. Call rate is highly volatile and varies from day to day. There exists a negative relationship between call rate and other money market instruments such as Commercial Papers and Certificate of Deposits. That is, as the call rate rise, other instruments of money market become cheaper and their demand increases.
(iii) Commercial Paper (CPs)
Commercial paper is an unsecured short term money market instrument. It is a negotiable and transferable promissory note with a maturity period ranging from a minimum of 15-days to a maximum of one year. They were introduced in India in 1990. CPs are mainly issued by large and creditworthy companies to raise short-term funds. Large companies view Commercial Papers as an alternative to bank borrowings and borrowings through capital market. The rate of interest payable on Commercial Papers is lower than the market rates. Generally, companies use Commercial Papers for bridge financing. That is, to raise the funds required to meet the floatation cost incurred on long term borrowings in the capital market. For example, if a company wishes to raise finance from the capital market to purchase land. For this, it will have to incur floatation cost such as cost related to brokerage, commission, advertising, etc. To finance such floatation costs the company can issue Commercial Paper.
(iv) Certificate of Deposit (CDs)
Certificate of Deposits are time deposits which are negotiable and unsecured in nature. They are bearer instruments for a short and specified time period ranging from one month to more than five years. CDs are a secured form of investment, which are issued to individuals, corporations and companies by the commercial banks and development financial institutions. Herein, higher interests are offered for higher deposits. They are issued to meet the demand for credit in times of tight liquidity position. For example, when a person buys a CD by depositing a specific amount, he receives a certificate wherein the term of deposit, the interest rate applicable and the date of maturity is written. On the date of maturity, the individual gets entitled to receive the principle amount and the earned interest on it.
(v) Commercial Bill
Commercial bill also known as bank bill or bill of exchange refers to the instrument used to finance the working capital requirements of a firm. It is a short term negotiable instrument. Companies use Commercial Bills to finance their credit sales. For example, when an individual makes credit sales, the buyer becomes liable to make the payment on a specified future date. Herein, the seller draws a bill of exchange and gives it to the buyer mentioning a specific maturity period. Once the bill is accepted by the buyer it becomes a marketable instrument which can be discounted with a bank. For instance, if the seller requires funds before the maturity period, he can discount the bill with a commercial bank.
class 12 commerce bussiness studies study material
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