CBSE Important Questions Class 12 Business Studies Chapter 9 Financial Management

Financial management is the process of procuring and using business finance in a way that reduces cost, controls risk and improves returns.
CBSE Important Questions Class 12 Business Studies Chapter 9 help students practise Financial Management through objective, short-answer and case-based questions.

CBSE Important Questions Class 12 Business Studies Chapter 9 help students revise how companies arrange funds, invest them and decide dividend payouts. Financial Management is one of the most concept-heavy chapters because it includes investment decision, financing decision, dividend decision, capital structure, fixed capital and working capital. In the 2026-27 CBSE paper, students may get MCQs on formulas, short answers on financial planning and case questions based on debt, RoI, working capital or dividend policy. This chapter should be revised with exact NCERT terms because trading on equity, financial risk and capital budgeting are closely connected.

Key Takeaways

• Financial Management: It focuses on optimal procurement and effective use of funds.
• Financial Decisions: Investment, financing and dividend decisions are the three broad decisions.
• Capital Structure: It shows the mix between owners’ funds and borrowed funds.
• Working Capital: Net working capital is the excess of current assets over current liabilities.

CBSE Important Questions Class 12 Business Studies Chapter 9 Structure 2026-27

Section A: Objective Type Questions from CBSE Important Questions Class 12 Business Studies Chapter 9

Section A carries 20 marks through 1-mark questions. Financial Management MCQs usually test objectives, decisions, capital structure, fixed capital, working capital and financial planning terms.

Q1. Money required for carrying out business activities is called:

1. Business finance
   b. Dividend
   c. Capital market
   d. Inventory

Answer: a. Business finance

Business finance is required to start, run, modernise, expand and diversify a business.

Q2. Financial management is concerned with:

1. Recruitment and selection
   b. Optimal procurement and use of finance
   c. Only advertising decisions
   d. Only employee training

Answer: b. Optimal procurement and use of finance

Financial management compares sources of funds and deploys them effectively.

Q3. The primary objective of financial management is:

1. Sales maximisation
   b. Wealth maximisation
   c. Production maximisation
   d. Employee maximisation

Answer: b. Wealth maximisation

The objective is to maximise the market value of equity shares.

Q4. Which decision relates to investment in fixed assets?

1. Dividend decision
   b. Financing decision
   c. Capital budgeting decision
   d. Pricing decision

Answer: c. Capital budgeting decision

Capital budgeting decisions are long-term investment decisions.

Q5. Which decision is concerned with the proportion of funds from debt and equity?

1. Financing decision
   b. Marketing decision
   c. Staffing decision
   d. Controlling decision

Answer: a. Financing decision

Financing decision decides how much finance to raise from which source.

Q6. The decision about distribution of profit to shareholders is called:

1. Investment decision
   b. Dividend decision
   c. Capital budgeting decision
   d. Working capital decision

Answer: b. Dividend decision

Dividend decision decides how much profit is distributed and retained.

Q7. Financial planning aims to ensure:

1. Maximum recruitment
   b. Funds are available at the right time
   c. No production takes place
   d. Sales are stopped

Answer: b. Funds are available at the right time

Financial planning estimates fund requirements and possible sources.

Q8. Capital structure refers to the mix between:

1. Cash and debtors
   b. Owners’ funds and borrowed funds
   c. Fixed assets and current assets
   d. Sales and purchases

Answer: b. Owners’ funds and borrowed funds

Capital structure class 12 questions often test debt-equity mix.

Q9. Debt-equity ratio is calculated as:

1. Debt / Equity
   b. Equity / Sales
   c. Profit / Debt
   d. Assets / Sales

Answer: a. Debt / Equity

Capital structure may be shown through the debt-equity ratio.

Q10. Trading on equity is possible when:

1. Return on investment is higher than cost of debt
   b. Cost of debt is higher than return on investment
   c. There is no debt
   d. There is no equity

Answer: a. Return on investment is higher than cost of debt

Trading on equity increases EPS when debt is used favourably.

Q11. Financial risk arises due to:

1. Use of debt
   b. Use of cash sales
   c. Use of branding
   d. Use of advertising

Answer: a. Use of debt

Debt creates fixed financial obligations like interest and repayment.

Q12. Fixed capital refers to investment in:

1. Long-term assets
   b. Cash only
   c. Raw material only
   d. Credit sales only

Answer: a. Long-term assets

Fixed capital class 12 questions include plant, machinery, land and buildings.

Q13. Current assets are expected to convert into cash within:

1. One year
   b. Five years
   c. Ten years
   d. Fifteen years

Answer: a. One year

Current assets include cash, debtors, bills receivable and inventories.

Q14. Net working capital is calculated as:

1. Current Assets − Current Liabilities
   b. Fixed Assets − Equity
   c. Debt − Equity
   d. Profit − Dividend

Answer: a. Current Assets − Current Liabilities

Working capital class 12 questions often test liquidity and day-to-day operations.

Q15. A trading business usually needs:

1. Less working capital than manufacturing business
   b. More fixed capital than manufacturing business
   c. No funds
   d. Only long-term funds

Answer: a. Less working capital than manufacturing business

Trading businesses usually do not process raw material into finished goods.

Q16. Assertion: Interest on debt is a deductible expense for tax purposes.

Reason: Debt may be cheaper than equity.

1. Both Assertion and Reason are true, and Reason explains Assertion
   b. Both are true, but Reason does not explain Assertion
   c. Assertion is true, but Reason is false
   d. Assertion is false, but Reason is true

Answer: a. Both Assertion and Reason are true, and Reason explains Assertion

Tax deductibility reduces the effective cost of debt.

Q17. Assertion: Higher inventory improves liquidity without any cost.

Reason: Current assets provide lower return than fixed assets.

1. Both are true
   b. Both are false
   c. Assertion is false, Reason is true
   d. Assertion is true, Reason is false

Answer: c. Assertion is false, Reason is true

Excess inventory ties up funds and may reduce profitability.

Q18. Fill in the blank: The excess of current assets over current liabilities is called ________.

Answer: net working capital

Net working capital shows short-term liquidity position.

Q19. Fill in the blank: The objective of financial management is to maximise shareholders’ ________.

Answer: wealth

Wealth maximisation increases the market value of equity shares.

Q20. Fill in the blank: A decision to buy a new machine is a ________ decision.

Answer: investment

A long-term investment decision is also called a capital budgeting decision.

Section B: Very Short Answer Questions from Financial Management Class 12 Important Questions

Section B carries 2-mark questions with answers of 30-50 words. Financial Management Class 12 Important Questions in this section usually test definitions and direct concept clarity.

Q21. What is business finance?

Business finance means money required for carrying out business activities. It is needed to establish, run, modernise, expand and diversify a business. It also supports day-to-day operations like buying material and paying expenses.

Q22. What is meant by capital structure?

Capital structure means the mix between owners’ funds and borrowed funds. Owners’ funds include equity, preference capital and retained earnings. Borrowed funds include loans, debentures and public deposits.

Q23. State the two objectives of financial planning.

The two objectives of financial planning are ensuring availability of funds when required and avoiding unnecessary fund raising. It helps the business meet commitments without keeping idle finance.

Q24. What is trading on equity?

Trading on equity means increasing returns to equity shareholders by using debt. It works when return on investment is higher than the cost of debt. It increases EPS through fixed financial charges.

Q25. What is financial risk?

Financial risk is the chance that a firm may fail to meet fixed financial obligations. It arises due to debt because interest and repayment of principal must be paid on time.

Q26. What are current assets? Give examples.

Current assets are assets that are expected to convert into cash within one year. Examples include cash, marketable securities, bills receivable, debtors, finished goods, work in progress and raw materials.

Section C: Short Answer Questions from Class 12 Business Studies Chapter 9 Financial Management

Section C carries 3-mark questions with answers of 50-80 words. Class 12 Business Studies Chapter 9 Financial Management Important Questions usually test brief explanations and concept differences.

Q27. What are the main objectives of financial management?

The main objective of financial management is wealth maximisation.

It means maximising the market value of equity shares. Financial managers take investment, financing and dividend decisions to add value for shareholders. A decision is good when its benefit is more than its cost.

This objective protects long-term financial health.

Q28. Explain the three broad financial decisions class 12.

The three broad financial decisions class 12 are investment, financing and dividend decisions.

1. Investment decision: It decides where funds should be invested.
2. Financing decision: It decides the source and mix of funds.
3. Dividend decision: It decides how much profit should be distributed or retained.

These decisions affect shareholders’ wealth.

Q29. How does working capital affect liquidity and profitability?

Working capital affects both liquidity and profitability.

Higher current assets improve liquidity because the firm can meet short-term obligations easily. However, current assets usually give lower returns than fixed assets. Excess working capital may reduce profitability.

Low working capital may increase profitability, but it can create payment problems.

Q30. Why is financial planning class 12 important?

Financial planning class 12 is important because it estimates fund requirements and sources.

It helps a business avoid shortage or excess funds. It also prepares the firm for future situations, coordinates functions like sales and production, and reduces wasteful use of finance.

Financial planning links present decisions with future operations.

Q31. State any three factors affecting dividend decision class 12.

Factors affecting dividend decision class 12 include earnings, cash flow and growth opportunities.

1. Amount of earnings: Higher earnings allow higher dividend.
2. Cash flow position: Dividend needs cash outflow.
3. Growth opportunities: Growth companies retain more profits.
4. Shareholders’ preference: Regular-income shareholders may prefer dividend.

Dividend decision affects shareholder wealth.

Q32. State any three factors affecting fixed capital requirement.

Fixed capital requirement depends on business nature, scale and technology.

1. Nature of business: Manufacturing needs more fixed capital than trading.
2. Scale of operations: Larger operations need more plant and space.
3. Choice of technique: Capital-intensive techniques need more fixed assets.
4. Technology upgradation: Fast-changing technology increases fixed capital needs.

Fixed capital supports long-term assets.

Q33. State any three factors affecting working capital requirement class 12.

Factors affecting working capital requirement class 12 include business nature, scale and production cycle.

1. Nature of business: Manufacturing needs more working capital than trading.
2. Scale of operations: Larger scale requires more inventory and debtors.
3. Production cycle: Longer cycle increases working capital needs.
4. Credit allowed: Liberal credit increases debtors.

Working capital supports daily operations.

Section D: Long Answer I Questions from CBSE Class 12 Business Studies Financial Management

Section D carries 4-mark questions with answers of 80-120 words. CBSE Class 12 Business Studies Financial Management questions here usually test explanation, application and short case logic.

Q34. Explain the role of financial management in business.

Financial management affects the financial health of a business.

It decides the size and composition of fixed assets. It also affects current assets like cash, inventory and debtors.

Financial management decides how much long-term and short-term finance should be used. It also decides the mix of debt and equity.

These decisions affect interest, dividend, depreciation and profit. Good financial management reduces cost of funds and invests them in profitable activities.

Q35. Explain any four factors affecting financing decision.

Financing decision decides the sources from which funds should be raised.

1. Cost: Cheaper sources are usually preferred.
2. Risk: Debt carries fixed payment risk.
3. Floatation cost: Higher issue cost makes a source less attractive.
4. Cash flow position: Strong cash flows make debt more viable.
5. Control considerations: Equity may dilute control.
6. Capital market condition: Rising markets make equity issues easier.

The final choice should balance cost, risk and control.

Q36. Explain capital structure class 12 with formula.

Capital structure class 12 refers to the proportion of debt and equity used by a company.

Owners’ funds include equity capital, preference capital and retained earnings. Borrowed funds include loans and debentures.

Capital structure may be calculated as:

$$
\text{Debt-Equity Ratio} = \frac{\text{Debt}}{\text{Equity}}
$$

or

$$
\text{Debt Proportion} = \frac{\text{Debt}}{\text{Debt} + \text{Equity}}
$$

An optimal capital structure increases the value of equity shares.

Q37. Explain why capital budgeting decisions are important.

Capital budgeting decisions are important because they involve large investment in long-term assets.

They affect long-term growth, profitability and risk. Funds remain blocked in fixed assets for many years. These decisions are often irreversible without heavy losses.

Examples include buying machinery, starting a new plant, launching a new product line or modernising production.

A wrong capital budgeting decision can seriously damage the financial position of a business.

Q38. A transport service is earning good returns by serving industries. Will its working capital requirement be less or more? Give reason.

Its working capital requirement will be less.

A transport service is a service business. Service businesses usually do not maintain large inventories of raw material or finished goods. They can provide services without heavy stock investment.

Since less money is blocked in inventory, working capital needs remain lower.

However, the firm still needs funds for fuel, wages, maintenance and regular operating expenses.

Section E and F: Long Answer II and Case-Study Based Questions

Section E and F carry 5 or 6-mark questions that need detailed answers of 150+ words. Financial Management questions here often cover investment decision, capital structure, working capital and case-based financial planning.

Q39. Explain the three financial decisions class 12 in detail.

Financial decisions class 12 include investment decision, financing decision and dividend decision.

1. Investment decision: It relates to how funds are invested in assets. Long-term investment decisions are called capital budgeting decisions. These include buying machinery, opening a branch or acquiring fixed assets. Short-term investment decisions relate to cash, inventory and receivables.
2. Financing decision: It decides the amount of finance to be raised from different sources. The firm may use equity, retained earnings, debentures, loans or preference capital. This decision affects cost of capital and financial risk.
3. Dividend decision: It decides how much profit should be distributed to shareholders and how much should be retained. Retained earnings support future growth, while dividend gives current income.

All three decisions aim at maximising shareholders’ wealth.

Q40. Explain any six factors affecting capital structure.

Capital structure depends on the relative use of debt and equity.

1. Cash flow position: Strong cash flows support higher debt.
2. Interest coverage ratio: Higher ICR shows better ability to pay interest.
3. Debt service coverage ratio: Higher DSCR shows better ability to meet debt obligations.
4. Return on investment: Higher RoI allows favourable trading on equity.
5. Cost of debt: Lower cost of debt encourages more debt.
6. Tax rate: Higher tax rate makes debt cheaper due to interest deductibility.
7. Control: Debt avoids dilution of control.
8. Stock market conditions: Bullish markets make equity easier to issue.

The company should choose a risk-return mix that increases shareholders’ wealth.

Q41. Explain any six factors affecting working capital requirement class 12.

Working capital requirement depends on operating needs and market conditions.

1. Nature of business: Manufacturing needs more working capital than trading or services.
2. Scale of operations: Larger operations require more inventory and debtors.
3. Business cycle: Boom increases production and sales, so more working capital is needed.
4. Seasonal factors: Peak season needs higher working capital.
5. Production cycle: Longer production cycle blocks funds for more time.
6. Credit allowed: Liberal credit increases debtors.
7. Credit availed: Supplier credit reduces working capital needs.
8. Inflation: Rising prices increase the amount needed for production and sales.

A firm must balance liquidity and profitability while deciding working capital.

Q42. Explain any six factors affecting dividend decision class 12.

Dividend decision depends on earnings, cash and future plans.

1. Amount of earnings: Higher earnings allow higher dividend.
2. Stability of earnings: Stable earnings support regular dividend.
3. Stability of dividend: Companies prefer a stable dividend per share.
4. Growth opportunities: Growth firms retain more earnings.
5. Cash flow position: Dividend requires actual cash outflow.
6. Shareholders’ preference: Some shareholders prefer regular income.
7. Taxation policy: Tax treatment affects dividend preference.
8. Legal constraints: Companies must follow legal provisions before declaring dividend.

A good dividend decision balances current income and future growth.

Q43. Sunrises Ltd. needs ₹80,00,000 to replace machines. It wants to issue debentures at 10%. Its EBIT was ₹8,00,000 and total capital investment was ₹1,00,00,000. Should it issue debentures?

The company should not issue debentures.

The reason is that the cost of debt is higher than the return on investment.

Return on investment is:

$$
\text{RoI} = \frac{\text{EBIT}}{\text{Total Investment}} \times 100
$$

$$
\text{RoI} = \frac{8,00,000}{1,00,00,000} \times 100 = 8%
$$

The cost of debt is 10%. Since RoI is lower than the cost of debt, the company will face unfavourable financial leverage.

Using debt in this case may reduce EPS. Therefore, issuing debentures is not a rational decision.

Q44. Aval Ltd. wants to enter leather goods and needs specialised machinery. The finance manager prepares a financial blueprint to estimate fund needs and timing. Identify the concept and state its objectives.

The concept is financial planning.

Financial planning is the preparation of a financial blueprint of an organisation’s future operations. It estimates the amount of funds required, timing of funds and possible sources.

The objectives are:

1. Ensuring availability of funds: The company must have funds when machinery and operations require them.
2. Avoiding unnecessary fund raising: Excess funds increase cost and may encourage wasteful expenditure.
3. Matching funds with needs: Financial planning connects fund requirement with internal and external sources.
4. Supporting smooth operations: It helps the company avoid shocks due to shortage or surplus of funds.

In this case, the finance manager estimates future profits and checks internal sources before arranging outside funds.

Q45. Explain the importance of fixed capital decisions.

Fixed capital decisions are important because they affect long-term business performance.

1. Long-term growth: Investment in fixed assets affects future earning capacity.
2. Large funds involved: Huge capital is blocked in machinery, buildings and projects.
3. Risk involved: Wrong decisions can affect returns for many years.
4. Irreversible nature: Fixed asset decisions cannot be easily reversed without loss.
5. Profitability impact: Modern assets may improve productivity and returns.
6. Competitiveness: Advanced technology can improve market position.

Fixed capital class 12 questions often link these decisions with capital budgeting.

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