CBSE Sample Papers for Class 12 Business Studies Term 2 Set 1 with Solutions

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CBSE Sample Papers for Class 12 Business Studies Term 2 Set 1 with Solutions

Time allowed: 2 Hours
Maximum Marks: 40

General Instructions:

• This is a Subjective Question Paper containing 12 questions.
• This paper contains 4 questions of 2 marks each, 4 questions of 3 marks each and 4 questions of 5 marks each.
• 2 marks questions are Short Answer Type Questions and are to be answered in 30-50 words.
• 3 marks questions are Short Answer Type Questions and are to be answered in 50-80 words.
• 5 marks questions are Long Answer Type Questions and are to be answered in 80-120 words.
• This question paper contains Case/Source Based Questions.

Question 1.
Identify and explain the two sources of the source of recruitment which cannot be used when the existing staff is either insufficient or does not fulfill the eligibility criteria of the jobs to be filled. (2)
Answer:
Two sources of internal recruitment
(i) Promotion refers to shifting of an employee to a higher position, carrying higher responsibilities, facilities, status and pay. Transfer involves shifting of an employee from one job to another, one department to another, without substantive change in the responsibilities and status of the employee.

Explanation: The two sources of recruitment which cannot be used when the existing staff is either insufficient or does not fulfill the eligibility criteria of the jobs to be filled are promotion and transfer.

• Promotion: Shifting of an employee to a higher position is termed as promotion. It involves carrying higher responsibilities, facilities, status and pay.
• Transfer: The horizontal movement of an employees from one job to another, one department to another or from one shift to another, without a substantive change in the responsibilities and status is called transfer.

Question 2.
‘MYKAA Limited ‘is dealing in all types of cosmetic products. It is enjoying increased demand for its product during the last few years. For the purpose of expansion the company needs  100 crores as additional capital. The company decides to raise funds through equity shares.
Chirag Kapoor, the finance manager of the company recommended that the shares may be sold through issuing houses or brokers. Identify and explain the method recommended by Mr. Kapoor through which the company can raise additional funds for expansion purposes. (2)
Answer:
Offer for Sale: Under this method securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stock brokers. In this case, a company sells securities embolic at an agreed price to brokers who, in turn, resell them to the investing public.

Explanation: The method recommended by Mr. Kapoor is Offer for Sale. Intermediaries play essential role in this type of issue of securities. Companies approach intermediaries like issuing houses or stock brokers for issue of securities.

Question 3.
Explain the two concepts which are part of the exercise which would reveal whether a company is understaffed, overstaffed or optimally staffed. (2)
Answer:

• Workload analysis: This would enable an assessment of the number and types of human resources necessary for the performance of various jobs and accomplishment of organisational objectives.
• Workforce analysis: This would reveal the number and type available.

Explanation: The two concepts which are part of the exercise which would reveal whether a company is understaffed, overstaffed or optimally staffed is workload analysis and workforce analysis.

The assessment of number and type of human resource available for performing a task in an organisation is called workforce analysis and the assessment of number and type of human resource required for performing a task in an organisation is called workload analysis.

Question 4.
“Measurement of a company’s progress may involve calculation of certain ratios like gross profit ratio, net profit ratio, and return on investment etc. at periodic intervals”. Identify the function of management involved in the above context. Also briefly explain the step in the process of the identified function discussed above. (2)
Answer:
(A) Controlling
(B) Measurement of actual performance Once performance standards are set, the next step is measurement of actual performance. Performance should be measured in an objective and reliable manner. There are several techniques for measurement of performance. These include personal observation, sample checking, performance reports, etc.

Explanation: The above context is related to controlling function of management and the step of controlling function discussed above is measurement of actual performance. Measurement of actual performance is done when performance standard are set. This step become easier when performance standards are set in quantitative term.

Question 5.
Mr. Pawan Kumar, the CEO of an E-Commerce startup, which was facing the problem of huge employee turnover, decided to hold a meeting with the managers to discuss the issue. While addressing the managers in the meeting, he advised them to take certain measures which focus on psychological, social and emotional factors, in order to motivate employees.

Explain any two such measures discussed by him, when he suggested that job should be made interesting so that the job itself becomes a source of motivation, employees should be congratulated for good performance, also, stability regarding future income and work should be provided to employees, in order to develop a positive attitude among the subordinates(3)
Answer:
Non monetary incentives: (Any two)
(i) Job enrichment: It is concerned with designing jobs that include greater variety of work content, require higher level of knowledge and skill, etc,.

(ii) Employee recognition programmes: Recognition means acknowledgment with a show of appreciation.

(iii) Job security: Employees want their job to be secure. They want certain stability about income and work so that they do not feel worried about these aspects and work with greater zeal.

Explanation: Non monetary incentives:

• Job enrichment: “Employees should be congratulated for good performance”.
• Motivation: When jobs are enriched and made interesting, the job itself becomes a source of motivation to the individual.
• Job security: “Stability regarding future income”. Every employee wants security and stability regarding his/her job. When they are assured of their job it works as a motivation for them.

Question 6.
State any three points of importance of Directing.
Answer:
Importance of Directing: (Any three)
(i) Directing helps to initiate action by people in the organisation towards attainment of desired objectives.

(ii) Directing integrates employees’ efforts in the organisation in such a way that every individual effort contributes to the organisational performance.

(iii) Directing guides employees to fully realise their potential and capabilities by motivating and providing effective leadership.

(iv) Directing facilitates introduction of needed changes in the organisation.

(v) Effective directing helps to bring stability and balance in the organisation since it fosters cooperation and commitment among the people and helps to achieve balance among various groups, activities and the departments.

Explanation: Importance of directing can be seen by the following points:

• Directing integrates employeesefforts in the organisation in such a way that every individual effort contributes to the organisational performance.
• Directing facilitates introduction of needed changes in the organisation.
• Directing helps to initiate action by people in the organisation towards attainment of desired objectives.

OR

Define leadership as an element of Directing. Enumerate any two styles of Leadership. (3)
Answer:
Leadership indicates the ability of an individual to maintain good interpersonal relations with followers and motivate them to contribute for achieving organisational objectives, (or any other correct definition)

Styles of leadership (Any two):

• Autocratic or Authoritarian leader gives orders and expects his subordinates to obey those orders.
• Democratic or Participative leaders will develop action plans and make decisions in consultation with their subordinates.
• Laissez faire or Free-rein leader does not believe in the use of power unless it is absolutely essential.

OR

Leadership is the art or process of influencing people so that they will strive willingly and enthusiastically towards the achievement of group goals.

The two styles of leadership are:
(i) Autocratic: In this style of leadership subordinates are suppose to obey the orders from their superiors. In autocratic leadership communication is only one-way with the subordinate only acting according to the command given by the manager.

Democratic In this style of leadership leader make plan with the consultation of his followers. He will encourage them to participate in decision making. Democratic In this style of leadership leader make plan with the consultation of his followers. He will encourage them to participate in decision making.

Question 7.
List any three factors affecting the Working Capital requirement of a company. (3)
Answer:
Factors affecting working capital requirement of the company (Any three):
(i) Nature of Business influences working capital requirements in a trading organisation which usually needs a smaller amount of working capital compared to a manufacturing organisation, while service industries which usually do not have to maintain inventory require less working capital.

(ii) Scale of operations influences working capital requirements in large organisations which require a large amount of working capital as compared to the organisations which operate on a lower scale.

(iii) Business cycle affects the requirement of working capital by a firm, as in case of a boom a larger amount of working capital is required as compared to the period of depression.

(iv) Seasonal Factors affect the working capital requirement, as in peak season large amounts of working capital is required and lower amount is required in the lean season.

(v) Production cycle affects the working capital requirement, as it is higher in firms with longer processing cycles and lower in firms with shorter processing cycles.

(vi) Credit allowed in a firm with liberal credit policy results in a higher amount of debtors, increasing the requirement of working capital

(vii)Credit availed by a firm, to the extent to which the firm avails the credit on purchases the working capital requirement is reduced.

(viii) Operating efficiency may reduce the level of raw materials, finished goods and debtors resulting in lower requirement of working capital

(ix) Availability of raw material influences the working capital requirement as larger the lead time, larger the quantity of material to be stored and larger shall be the amount of working capital required.

(x) If the growth potential of a concern is perceived to be higher, it will require a larger amount of working capital.

(xi) Higher level of competitiveness may necessitate larger stocks and increases working capital requirement.

(xii) The working capital requirement of a business becomes higher with higher rate of marks inflation.

Explanation: The factors affecting working capital requirement are: (any three)

(i) Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a smaller amount of working capital compared to a manufacturing organisation.

This is because there is usually no processing. Therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that.

In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible. Other factors remaining the same, a trading business requires less working capital.

(ii) Scale of Operations: For organisations which operate on a higher scale of operation, the quantum of inventory and debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.

(iii) Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as well as production are likely to be larger and, therefore, larger amount of working capital is required. As against this, the requirement for working capital will be lower during the period of depression as the sales as well as production will be small.

(iv) Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, larger amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.

(v) Production Cycle: Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Some businesses have a longer production cycle while some have a shorter one.

Duration and the length of production cycle, affects the amount of funds required for raw materials and expenses. Consequently, working capital requirement is higher in firms with longer processing cycle and lower in firms with shorter processing cycle.

(vi) Credit Allowed: Different firms allow different credit terms to their customers. These depend upon the level of competition that a firm faces as well as the credit worthiness of their clientele. A liberal credit policy results in higher amount of debtors, increasing the requirement of working capital.

(vii) Credit Availed: Just as a firm allows credit to its customers it also may get credit from its suppliers. To the extent it avails the credit on purchases, the working capital requirement is reduced.

(viii) Operating efficiency may reduce the level of raw materials, finished goods and debtors resulting in tower requirement of working capital

(ix) Availability of Raw Material: If the raw materials and other required materials are available freely and continuously, lower stock levels may suffice. If, however, raw materials do not have a record of un-interrupted availability, higher stock levels may be required.

In addition, the time lag between the placement of order and the actual receipt of the materials (also called lead time) is also relevant. Larger the lead time, larger the quantity of material to be stored and larger shall be the amount of working capital required.

(x) Growth Prospects: If the growth potential of a concern is perceived to be higher, it will require Larger amount of working capital so that it is able to meet higher production and sales target whenever required.

(xi) Level of Competition: Higher level of competitiveness may necessitate larger stocks of finished goods to meet urgent orders from customers. This increases the working capital requirement. Competition may also force the firm to extend liberal credit terms discussed earlier.

(xii) Inflation: With rising prices, larger amounts are required even to maintain a constant volume of production and sales. The working capital requirement of a business thus, become higher with higher rate of inflation.

It must, however, be noted that an inflation rate of 5%, does not mean that every component of working capital will change by the same percentage. The actual requirement shall depend upon the rates of price change of different components (e.g., raw material, finished goods, labour cost,) Finished goods as well as their proportion in the total requirement.

Question 8.
Priya is a regional manager of XYZ. Ltd. She is a hardworking employee and is trying to reduce wastage of resources in her company. She has set standards for performance of different activities and is ensuring that targets are met according to these standards with minimal wastage of resources. She has set up CCTV cameras which helps her to keep a close check on the activities of the subordinates and know how the employees are performing.

She also rewards the employees with a bonus when these standards are met. She is trying her best to ensure a good performance of her team this year through the application of an important function of management. Explain any two benefits of the function of management highlighted above. (3)
Answer:
Importance of controlling (Any two):
(i) Accomplishing organisational goals: The controlling function measures progress towards the organisational goals and brings to light the deviations, if any, and indicates corrective action.

(ii) Ensuring Order and discipline: Controlling creates an atmosphere of order and discipline in the organisation. It helps to minimise dishonest behaviour by keeping a close check on their activities.

(iii) Making efficient use of resources: Each activity is performed in accordance with predetermined standards and norms. This ensures that resources are used in the most effective and effcient manner.

(vi) Improving employee motivation: A good control system ensures that employees know welt in advance what they are expected to do and what are the standards of performance on the basis of which they will be appraised. It, thus, motivates them and helps them to give better performance.

Explanation: The function of management highlighted here is Controlling.

The importance of controlling is as follows: (any two)

(i) Accomplishing organisational goals: The controlling function measures progress towards the organisational goals and brings to light the deviations, if any, and indicates corrective action. It, thus, guides the organisation and keeps it on the right track so that organisational goals might be achieved.

(ii) Judging accuracy of standards: A good control system enables management to verify whether the standards set are accurate and objective. An efficient control system keeps a careful check on the changes taking place in the organisation and in the environment and helps to review and revise the standards in light of such changes.

(iii) Making efficient use of resources. By exercising control, a manager seeks to reduce wastage and spoilage of resources. Each activity is performed in accordance with predetermined standards and norms. This ensures that resources are used in the most effective and efficient manner.

(iv) Improving employee motivation: A good control system ensures that employees know well in advance what they are expected to do and what are the standards of performance on the basis of which they will be appraised. It, thus, motivates them and helps them to give better performance.

(v) Ensuring order and discipline: Controlling creates an atmosphere of order and discipline in the organisation. It helps to minimise dishonest behaviour on the part of the employees by keeping a close check on their activities. The box explains how an importexport company was able to track dishonest employees by using computer monitoring as a part of their control system.

(vi) Facilitating coordination in action: Controlling provides direction to all activities and efforts for achieving organisational goals. Each department and employee is governed by predetermined standards which are well coordinated with one another. This ensures that overall organisational objectives are accomplished.

Question 9.
Enumerate any five rights of a consumer under the Consumer Protection Act, 2019.
Answer:
Rights of a Consumer under the Consumer Protection Act, 2019 (Any five):
(i) Right to safety: The consumer has a right to be protected against goods and services which are hazardous to life, health and property.

(ii) Right to be informed: The consumer has a right to have complete information about the product he intends to buy including its ingredients, date of manufacture, price, quantity, directions for use, etc.

(iii) Right to be assured: The consumer has the freedom to assess a variety of products at competitive prices.

(iv) Right to be heard: The consumer has a right to file a complaint and to be heard in case of dissatisfaction with a good or a service.

(v) Right to seek redressal: The consumer has a right to get relief against unfair trade practice of restrictive trade practices or unscrupulous exploitation in case the product or a service falls short of his expectation.

(vi) Right to consumer education: The consumer has a right to acquire knowledge and to be a well informed consumer throughout life.

Explanation: The Rights of a Consumer under the Consumer Protection Act, 2019: (any five)

(i) Right to Safety: The consumer has a right to be protected against goods and services which are hazardous to life, health and property. For example, electrical appliances which are manufactured with substandard products or do not conform to the safety norms might cause serious injury. Thus, consumers are educated that they should use electrical appliances which are ISI marked as this would be an assurance of such products meeting quality specifications.

(ii) Right to be informed: The consumer has a right to have complete information about the product he intends to buy including its ingredients, date of manufacture, price, quantity, directions for use, etc. It is because of this reason that the legal framework in India requires the manufactures to provide such information on the package and Label of the product.

(iii) Right to be assured: The consumer has the freedom to access variety of products at competitive prices. This implies that the marketers should offer a wide variety of products in terms of quality, brand, prices, size, etc. and allow the consumer to make a choice from amongst these.

(iv) Right to be heard: The consumer has a right to file a complaint and to be heard in case of dissatisfaction with a good or a service. It is because of this reason that many enlightened business firms have set up their own consumer service and grievance cells. Many consumer organisations are also working towards this direction and helping consumers in redressal of their grievances.

(v) Right to seek redressal: The consumer has a right to get relief against unfair trade practice of restrictive trade practices or unscrupulous exploitation in case the product or a service falls short of his expectations. The Consumer Protection Act 2019 provides for redressal to the consumers including replacement of the product, removal of defect in the product, compensation paid for any loss or injury suffered by the consumer, etc.

(vi) Right to Consumer Education: The consumer has a right to acquire knowledge and to be a well informed consumer throughout life. He should be aware about his rights and the reliefs available to him in case of a product or service falling short of his expectations. Many consumer organisations and some enlightened businesses are taking an active part in educating consumers in this respect.
OR
Enumerate any five responsibilities of a Consumer Protection Act, 2019. (5)
Answer:
Responsibilities of a Consumer under the Consumer Protection Act, 2019 (Any five):
(i) Be aware of various goods and services available in the market so that an intelligent and wise choice can be made.

(ii) Buy only standardised goods as they provide quality assurance.

(iii) Learn about the risks associated with products and services, follow manufacturer’s instructions and use the products safely.

(iv) Read labels carefully so as to have information about prices, net weight, manufacturing and expiry dates, etc.

(v) Assert yourself to ensure that you get a fair deal.

(vi) Be honest in your dealings. Choose only from legal goods and services and discourage unscrupulous practices.

(vii) Ask for a cash memo on purchase of goods or services.

(viii) File a complaint in an appropriate consumer forum in case of a shortcoming in the quality of goods purchased or services availed.

(ix) Form consumer societies which would play an active part in educating consumers and safeguarding their interests.

Explanation: The responsibilities of a Consumer under the Consumer Protection Act, 2019 are: (Any five)

(i) Be aware about various goods and services available in the market so that an intelligent and wise choice can be made.

(ii) Buy only standardised goods as they provide quality assurance. Thus, look for ISI mark on electrical goods, FPO mark on food products, Hallmark on jewelry, etc.

(iii) Learn about the risks associated with products and services, follow manufacturer’s instructions and use the products safely.

(iv) Read labels carefully so as to have information about prices, net weight, manufacturing and expiry dates, etc.

(v) Assert yourself to ensure that you get a fair deal.

(vi) Be honest in your dealings. Choose only from legal goods and services and discourage unscrupulous practices like black-marketing, hoarding, etc.

(vii) Ask for a cash memo on purchase of goods or services. This would serve as a proof of the purchase made.

(viii) File a complaint in an appropriate consumer forum in case of a shortcoming in the quality of goods purchased or services availed. Do not fail to take an action even when the amount involved is small.

(ix) Form consumer societies which would play an active part in educating consumers and safeguarding their interests.

(x) Respect the environment. Avoid waste, littering and contributing to pollution.

Question 10.
State any five regulatory functions of the Securities and Exchange Board of India. (5)
Answer:
Regulatory Functions of Securities and Exchange Board of India (Any five)

• Registration of brokers and sub-brokers and other players in the market.
• Registration of collective investment schemes and Mutual Funds.
• Regulation of stock brokers, portfolio exchanges, underwriters and merchant bankers and the business in stock exchanges and any other securities market.
• Regulation of takeover bids by companies.
• Calling for information by under-taking inspection, conducting enquiries and audits of stock exchanges and intermediaries.
• Levying fee or other charges for carrying out the purposes of the Act.
• Performing and exercising such power under Securities Contracts (Regulation) Act 1956, as may be delegated by the Government of India.

Explanation: Regulatory Functions of Securities and Exchange Board of India are: (any five)

• Registration of brokers and subbrokers and other players in the market.
• Registration of collective investment schemes and Mutual Funds.
• Regulation of stock brokers, portfolio exchanges, underwriters and merchant bankers and the business in stock exchanges and any other securities market.
• Regulation of takeover bids by companies.
• Calling for information by undertaking inspection, conducting enquiries and audits of stock exchanges and intermediaries.
• Levying fee or other charges for carrying out the purposes of the Act.
• Performing and exercising such power under Securities Contracts (Regulation) Act 1956, as may be delegated by the Government of India.

Question 11.
In an interview with a leading news channel, Mr. Rakesh Kwatra, CEO of‘Get My Job” has suggested that the Companies which want more and more people to apply for jobs in their organisation should make the process of applying for jobs easier and candidate friendly.

It is for this reason, he said, that most progressive companies today have a short application process. He also said that the application form filled by the candidate is very important as it is the information supplied in the application forms, which helps the manager in eliminating unqualified or unfit job seekers.

The company can create a mechanism that attempts to measure certain characteristics of individuals like aptitude, manual dexterity, and intelligence to personality. The candidate may then be called for an in-depth conversation to evaluate their suitability for the job.

(A) Name the process and steps in the process of identifying and choosing the best person out of a number of prospective candidates for a job discussed above.
(B) Also explain the next three steps in the process which can be subsequently performed by the company. (5)
Answer:
(A) Selection: Steps in the process of selection discussed:

• Preliminary Screening.
• Selection Tests.
• Employment interview

(B) Next two steps:

(i) Reference and background checks:
Many employers request names, addresses and telephone numbers of references for the purpose of verifying information and gaining additional information on an applicant. Previous employers, known persons, teachers and university professors can act as references.

(ii) Selection Decision: The final decision has to be made from among the candidates who passed the tests, interviews and reference checks. The views of the concerned manager will be generally considered in the final selection.

(iii) Medical Examination: After the selection decision and before the job offer is made, the candidate is required to undergo a medical fitness test. The job offer is given to the candidate being declared fit after the medical examination.

Explanation:

(A) The process discussed here is Selection. The steps in the process of selection discussed are:

• Preliminary Screening.
• Selection Tests.
• Employment interview

(B) The next three steps in the process are:

(i) Reference and Background Checks:
Many employers request names, addresses, and telephone numbers of references for the purpose of verifying information and, gaining additional information on an applicant. Previous employers, known persons, teachers and university professors can act as references.

(ii) Selection Decision: The final decision has to be made from among the candidates who pass the tests, interviews and reference checks. The views of the concerned manager will be generally considered in the final selection because it is he/she who is responsible for the performance of the new employee.

(iii) Medical Examination: After the selection decision and before the job offer is made, the candidate is required to undergo a medical fitness test. The job offer is given to the candidate being declared fit after the medical examination.

Question 12.
Vansh Limited is a large and reputed company which manufactures ventilators. After the outbreak of ‘COVID-19’ in 2020 the company witnessed an increase in revenue by 40%. It has plans to further increase its production capacity and also start production of PPE kits, sanitisers and masks in 2022.

The Finance manager of the Company Mr. Rajiv feels confident about the future of the company and its liquidity position. Discuss the meaning of Dividend Decision and in the light of the above statement explain any two factors which should be considered by ‘Vansh Limited’ while formulating the dividend policy of the company.
Answer:
Dividend decision: The decision involved here is how much of the profit earned by the company (after paying tax) is to be distributed to the shareholders and how much of it should be retained in the business.

Factors affecting Dividend decision: (Any two)

(i) Amount of Earnings: Dividends are paid out of current and past earnings. Therefore, earnings are a major determinant of the decision about dividend.

(ii) 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.

(iii) 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.

(iv) 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

Explanation: Dividend decision: Dividend is that portion of profit which is distributed to shareholders. The decision involved here is how much of the profit earned by company (after paying tax) is to be distributed to the shareholders and how much of it should be retained in the business. While the dividend constitutes the current income re-investment as retained earning increases the firm’s future earning capacity.

The extent of retained earnings also influences the financing decision of the firm. Since the firm does not require funds to the extent of re-invested retained earnings, the decision regarding dividend should be taken keeping in view the overall objective of maximising shareholder’s wealth.

The factors affecting Dividend decision are:

(i) Amount of Earnings: Dividends are paid out of current and past earning. Therefore, earnings is a major determinant of the decision about dividend.

(ii) 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.

(iii) 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.

(iv) 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.

(v) 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.

(vi) 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.

(vii) 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.

(viii) 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.

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

(x) Legal Constraints: Certain provisions of the Companies Act place restrictions on payouts 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

OR

Vedansh Limited has a share capital of ₹ 10,00,000 divided into shares of ₹100 each. For expansion purpose ,the company requires additional funds of ₹ 5,00,000. The management is considering the following alternatives for raising funds :
Alternative 1: Issue of 5000 Equity shares of ₹ 100 each
Alternative 2: Issue of 10% Debentures of ₹5,00,000 The company’s present Earnings Before Interest and Tax (EBIT) is ₹4,00,000 p.a. Assuming that the rate of Return of investment remains the same after expansion, which alternative should be used by the company in order to maximise the returns to the equity shareholders. The Tax rate is 50%. Show the working. (5)
Answer:
Rate of Return of Investment is 4,00,000/10,00,000 x 100 = 40%
EBIT after expansion = 40% x 15,00,000 = 6,00,000
Calculation of EPS

	Plan I	Plan II
EBIT	600000	600000
(-) Interest	——	50000
EBT	600000	550000
(-) Tax @50%	300000	275000
EAT	300000	275000
No. of shares	15000	10,000
EPS	20	27.5

The company should use Plan 2 in order to increase the return to the equity shareholders.

Explanation: Rate of Return of Investment is 4,00,000/10,00,000 x 100 = 40%EBIT after expansion = 40% x 15,00,000 = 6,00,000
Calculation of EPS

Calculation of EPS
	Plan I	Plan II
EBIT	600000	600000
(-) Interest	—–	50000
EBT	600000	550000
(-) Tax @50%	300000	275000
EAT	300000	275000
No. of shares	15000	10,000
EPS	20	27.5

The company should use Plan 2 in order to increase the return to the equity