12th Commerce Secretarial Practice

Written according to the New Textbook (2013-2014)
published by the Maharashtra State Board of

Secondary and Higher Secondary Education, Pune.
First Edition: February 2014
Std. XII Commerce
Secretarial Practice
Ms. Toral Juthani
Ms. Urvi Mehta
(M.Com, PGDFM)
(M.Com, C.S.)
Salient Features :
Exhaustive coverage of syllabus in Question Answer Format.
Covers answers to all Textual Questions, Board Questions
(Mar 08 Oct 12)
Relevant Marking Scheme for Each Question.
Includes Additional Important Questions, Intext Questions.
Quick Review at the end of each chapter to facilitate quick
revision.
Two Model Question Papers as per the latest paper pattern.
Simple and Lucid language.
Self evaluative in nature.
TargetPublications PVT. LTD.

Mumbai, Maharashtra
Tel: 022 6551 6551
Website : www.targetpublications.org | email : mail@targetpublications.org
Std. XII Commerce
Secretarial Practice
Target Publications PVT. LTD.

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First Edition : February 2014

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Preface
Secretarial Practice is a subject that compiles the knowledge and skills a Company Secretary should posses. The
competency of the company secretary lies in conducting valid correspondence between the Board of Directors
and the public, thereby acts as a front face of the organization.
We present to you "Std. XII Commerce: Secretarial Practice" with a revolutionary fresh approach towards
content and thus laying a platform for an in-depth understanding of the subject.
This book has been written according to the revised syllabus and guidelines as prescribed by the state board and
covers answers to all textual questions as well as board question papers from March 2008 to October 2012.
In addition to this, the book includes additional important questions for each chapter that not only aim at
covering the entire topic but also makes students ready to face the competition.
The sub-topic wise classified question and answer format of this book helps the students in easy
comprehension.
Furthermore, we have provided model answers to each question in the form of pointers which makes it easy for
students to memorize and reproduce the answers in their examinations. The model questions are provided with
relevant marking schemes so as to highlight the importance of each question.
Every chapter ends with a Quick Review which summarizes the entire lesson through a graphic organizer.
The book also includes two model question papers as per the latest paper pattern.
We are sure this study material will turn out to be a powerful resource for students and facilitate them in
understanding the concepts of this subject in the most lucid way.
The journey to create a complete book is strewn with triumphs, failures and near misses. If you think weve
nearly missed something or want to applaud us for our triumphs, wed love to hear from you.
Please write to us on: mail@targetpublications.org
Best of luck to all the aspirants!
Yours faithfully
Publisher
No.
Topic Name
Page No.
Business Finance
Sources of Business Finance
21
Role of a Secretary in Capital Formation
52
Issue of Debentures
79
Deposits
91
Depository and Dematerialization
102
Declaration and Payment of Dividend
113
Correspondence with Members
126
Correspondence with Debenture holders
149
10
Correspondence with Depositors
160
11
Financial Markets
171
12
Stock Exchange
184
13.
Board Paper Pattern and Weightage
201
14.
Model Question Paper - I
203
15.
Model Question Paper - II
205
Note: All the Textual questions are represented by * mark.

All the Intext questions are represented by # mark.
Target Publications Pvt. Ltd.
01
Chapter 01: Business Finance
Business Finance
Contents:
1.1
ii.
1.1
Introduction
1.2
Meaning of Financial Management
1.3
Financial Planning
1.4
Capital Structure
1.5
Fixed Capital and Working Capital
Introduction
Q.1. Explain the term Business Finance.

[5]
Ans: i.
The term business finance can be
broadly explained by considering the
factors business and finance.
ii.
The term business deals with
production and distribution of goods and
services.
iii. The term finance is basically required
for consumption as well as investment
in any business.
iv. In simple words, business finance
applies to all financial activities of
agriculture, industry, banking, transport,
insurance, etc.
v.
Thus, the scope of business finance
includes commercial finance, industrial
finance, property finance, corporate
finance and even agriculture finance.
vi. It
mainly
deals
with
raising,
administering and disbursing of funds
by a business firm or an organization.
vii. In actual practice, business finance
refers to corporation finance.
viii. Now-a-days, the term corporation
finance is known as financial
management.
1.2
Meaning of Financial Management
*Q.2. What is Financial Management? State its

role in the organization.
[5]
Ans: i.
Being a specialized function of general
management, financial management is
mainly concerned with raising of
finance and its optimum and effective
utilization for achievement of goals of
the organization.
iii.
It deals with planning, organizing,

directing, co-ordinating and controlling
financial activities.
It is also called as Resource
Management.
Definition:
i.
Ezra Soloman: Financial Management
is concerned with effective use of an
important economic resource, namely
capital funds.
ii.
Kuchal S.C.: Financial Management

deals with procurement of funds and
their effective utilization in business.
Role of financial management:

The role of financial management can be
explained with reference to the functions
performed by it:
a.
Routine functions.
b.
Executive functions.
a.
Routine functions:
i.
Record keeping and reporting:
Keeping records of financial
transactions and sending the
reports to different departmental
heads.
ii.
Preparing various financial
statements: This is done to
analyze
the
position
and
performance of an organization.
iii. Cash Planning: Cash planning is
done properly as it allows the
company to plan its working
capital.
iv. Credit Management: Credit
management means managing the
funds which are due with the
creditors and accordingly deciding
the credit period that is to be
offered to the creditors.
v.
Reporting
to
Directors:
Providing accurate information to
Board of Directors on current
financial position for making
decisions of purchases, marketing,
pricing, etc.
1

b.
Executive functions:
i.
Forecasting
financial
requirements: Forecasting of
finance means projection of
financial needs of business for
some time ahead. Forecasting
simply means budgeting financial
needs of the expected programmes.
An organization requires capital
i.e. fixed capital (long term) and
working capital (short term) for
running its business.
Forecasting not only includes the
amount of funds required but also
the duration of funds, its timing
and the kind of funds i.e. owned
or borrowed, etc.
ii.
Deciding sources of funds: After
determining the amount of finance
required, various sources of raising
of funds such as shares, debentures,
financial
institutions,
money
lenders, etc. are considered.
An utmost care is to be taken
while selecting the funds as there
needs to be a proper balance
between long term funds and short
term funds.
iii. Investment Decisions:
Investment
decision
ensures
effective utilization of funds
raised by the organization in
a.
long term assets or fixed
assets such
as land,
building,
machinery,
furniture, etc.
b.
short term assets or current
assets
such
as
cash
requirement,
account
receivables and inventory.
iv. Dividend policy: A finance
manager has to decide the
proportion of profit that it is to be
retained in the business for future
expansion and the proportion that
is to be distributed as dividend
among shareholders. It is the
prime duty of the finance manager
to
balance
the
investors
expectations and use of retained
earnings for future expansion or
acquisition of additional assets.
Std. XII(Commerce): Secretarial Practice

v.
vi.
Checking and analysis of

financial
performance:
An
organization
prepares
and
analyzes
various
financial
statements which helps in
improving techniques of financial
control.
Advising Board of Directors: A
finance manager brings to the
notice of the Board of Directors
problems related to finance and
also suggests possible solutions
for the same. He also gives advice
on important matters such as
pricing, expansion, acquisition,
dividend policy, etc.
Q.3. *What are the objectives of financial

management?
OR
State
the
objectives
of
financial
management.
[5]
Ans: The basic objectives of financial management
are stated as follows:
i.
Profit maximization:
a.
It is considered as the basic
principle of any business activity.
According to this principle, all
functions of business aim at profit.
b.
The
concept
of
profit
maximization is traditional in
nature and is based on the
assumption that profit is a tool of
measuring the success of any
business firm.
c.
Profit maximization is considered
to be the most important business
objective since,
1.
it is difficult for any
business firm to survive
without profit.
2.
success can be measured
with the profit earning
capacity of an organization.
3.
high profit results in better
returns to shareholders.
4.
increase in profitability of
an organization allows the
use of surplus funds for the
future expansion of the
firm.
5.
it has to be achieved for
socio-economic welfare.

ii.
Wealth Maximization:
a.
According to Prof. Soloman
Ezra, the ultimate goal of
financial management should be
maximization of owners wealth.
b.
Wealth maximization is also
known as value maximization
i.e. maximizing net present value
of a firm.
c.
The
focus
of
financial
management is on wealth
maximization of its owners i.e.,
equity shareholders. The wealth of
shareholders is reflected in market
value of shares. Thus, wealth
maximization
means
the
maximization of market price of
shares.
d.
The wealth of equity shareholders
is maximized only when market
value of equity shares is
maximized.
iii.
Social satisfaction:
a.
Business firms now-a-days not
only think about investors, but
also consider welfare of people in
general.
b.
As a business firm operates in
society, hence it is responsible
towards the society.
c.
They do so by protecting the
interests of suppliers, customers,
creditors, employees of the
company and government.
Q.4. Write short notes on.
[5 marks each]
*i. Role of Financial Management.
Ans: Refer Q.2.
ii.
Investment decisions.
Ans: a.
Investment decision basically
ensures effective utilization of the
funds raised by the organization in
1.
Long term assets or fixed
assets.
2.
Short term assets or
current assets.
b.
Fixed assets i.e. land, building,
machinery,
equipment
and
furniture, etc. forms a large
portion of funds raised and
includes a major portion of
investment decision.

c.
d.
e.
It is important to invest in fixed

asset wisely as the investment has
to be made for long term basis.
On the other hand, Current assets
include investment to be made on
short term assets like cash,
account receivable and inventory.
The aspect of investment decisions
relating to current assets is known
as working capital management.
iii.
Social satisfaction objective of a

business firm.
Ans: a.
Business firms now-a-days not
only think about investors, but
also consider welfare of people in
general.
b.
As a business firm operates in
society, hence it is responsible
towards the society.
c.
The
interest
of
suppliers,
customers, creditors, employees
of the company and government is
to be protected.
d.
The shareholders expect high rate
of dividend, customers want
products of good quality at
reasonable prices, society requires
effective and efficient use of
scarce resources of production and
government insists on obeyance of
rules and regulations and regular
payment of taxes. A business firm
has to fulfill all such social
responsibilities.
e.
Thus,
along
with
profit
maximization
and
wealth
maximization, social satisfaction
is an equally important objective
of any business firm.
Q.5. State with reasons, whether the following
statements are True or False.
[5 marks each]
*i. Financial management is essential for
all types of organizations.
Ans: This statement is TRUE.
Reasons:
a.
All types of organizations, whether
profit making or non profit
making,
need
financial
management as it plays a crucial
role in making effective and
optimum use of financial resources.
3

b.
These organizations require funds

for their development and
expansion.
c.
Financial management refers to
management of funds and is
mainly concerned with raising of
finance
and
its
effective
utilization.
d.
It also deals with planning,
organizing,
directing,
coordinating
and
controlling
e.
Financial management helps in
maximizing profit of the company
which results in maximization of
the owners wealth.
Hence, financial management is
essential for all types of organizations.
ii.
Financial management has become

subject of considerable importance in
developed countries.
Ans: This statement is FALSE.
Reasons:
a.
Financial management is a subject
of considerable importance in
developing countries like India.
b.
In such countries, the existence of
business entity depends upon the
savings of the people which are
meager in general.
c.
These scarce savings should be
utilized
to
the
maximum
efficiency through well-managed
d.
Routine and executive functions
of financial management help a
finance
manager
to
make
optimum
use
of
financial
resources.
Thus, financial management is a matter
of great concern in developing
countries.
iii.
An utmost care is to be taken while

selecting the sources of funds.
Reasons:
a.
A company can raise its capital
from different sources. Funds can
also be borrowed from financial
institutions as well as lenders.
4

b.
However, there has to be a proper

balance between the short term
and long term funds.
c.
The funds raised from outsiders
and owners have to be in a certain
proportion.
d.
However, if a firm raises funds
from lenders, the terms and
conditions of credit should be kept
in mind.
Hence, an utmost care is to be taken
while selecting the sources of funds.
iv. A finance manager distributes all the
profits earned as dividend to the
shareholders.
Reasons:
a.
A business firm is a profit making
organization.
b.
Its profit depends upon the
effective utilization of funds.
c.
A finance manager has to deal
with the decision regarding
declaration of dividends out of the
profits earned by the organization.
d.
Shareholders
are
usually
interested in receiving higher rate
of dividends whereas the Board of
Directors are interested in
retaining earnings for future
expansion.
Thus, the finance manager balances the
expectations of investors and the use of
retained earnings to acquire additional
assets rather than distributing all the
profits earned as dividend to the
shareholders.
*v.
The proper aim of financial

management is wealth maximization.
Reasons:
a.
The shareholders invest their
funds in a company or an
organization with a motive to
increase the investment.
b.
The wealth of such shareholders is
reflected in market value of
shares.
c.
If the market value of equity
shares increases, wealth of
shareholders also increases.

d.
The share price of a company,

quoted in share market index, is a
reflection of its earning capacity,
dividend and retention policy.
Thus, the proper aim of financial
management is maximizing market
value of equity shares of the company.
vi.
*Maximization of profit is real and

complete motive.
OR
Profit maximization is the only
objective of financial management.
Reasons:
a.
Profit is a tool of measuring the
success of any business firm i.e.
high level profitability results in
better return (dividend) to the
shareholders which in turn
increases their earning per share
(EPS).
b.
In simple terms, the business firm
should undertake only such
activities that increase profit and
those activities which decrease
profit should be avoided.
c.
Maximization
of
profit
is
important in regard to various
factors such as: to generate funds
for future expansion, better
dividend to the shareholders,
increase in the creditworthiness of
the firm, etc.
d.
However, it is not the only factor
important
for
financial
management.
e.
The proper aim of financial
management
is
wealth
maximization of its equity
shareholders.
f.
Moreover, business firms now-adays aim at social satisfaction and
social welfare.
g.
Therefore, profit maximization
along with wealth maximization
and social satisfaction are the
important objectives of financial
management.
Thus, Maximization of profit is not the
real and complete motive.

Q.6. Distinguish between the following:
[5 marks each]
i.
Routine
Function
and
Executive
Function.
Ans:
Routine function
Executive function
Meaning
a. Routine function Executive function is
is one of the an essential element
routine
activity i.e. a major activity
financial
under
financial under
management.
management.
Nature
b. Routine function Executive function
includes tasks and includes, the key
functions
functions undertaken
conducted
on by the financial
daily basis.
management.
Sources
c. Routine function Executive
function
includes record includes a process
keeping,
which begins with
reporting, cash 1. Forecasting
planning
and 2. Deciding sources
credit
of funds
management.
3. Making
investment
decisions
4. Dividend policy
5. Analysis
of
financial
performance
6. Advising Board
of Directors.
Objective
d. The main aim of The main aim of
Routine function Executive function is
is
to
prepare to carry out financial
various financial functions smoothly,
statements and to and to analyze the
provide
financial
information to the performance of the
Board of Directors firm. It is significant
as they are the in improving the
policy
decision techniques
of
makers of the financial control.
organization.
5

ii.
Profit Maximization
Maximization.

and
Wealth
Ans:
Profit Maximization Wealth Maximization
Meaning
a. Profit maximization Wealth maximization
is based on the is also known as
assumption
that value maximization.
profit is a tool of It aims to maximise
measuring
the net present value of
success of any the firm.
business
firm
thereby it aims at
maximization
of
profit.
Objective
Wealth maximization
b. Profit
on
maximization helps focuses
in growth and maximizing wealth of
expansion of any equity shareholders
business firm as by increasing market
of
equity
high
level value
profitability results shares.
in better returns to
shareholders
and
surplus
funds
which can be used
for future projects
and activities of the
firm.
Advantages
c. Profit measures the Wealth maximization
financial progress takes into account
of a firm.
risks and uncertainty
involved in business
activities.
Dis-advantages
Wealth maximization
d. Profit
maximization
is is a vague concept.
short
term
in Merely an increase in
nature.
It
is shareholders wealth
uncertain and the does not lead to
timing of return is wealth maximization
not considered.
as there are number
of factors that affect
wealth requirement.
6
1.3
Financial Planning
*Q.7. What is Financial Planning? State the

importance of financial planning.
[5]
Ans: The term financial planning refers to
assessment of financial requirements and
arranging the sources of capital.
Financial planning is required not only to
increase profit but also for survival of the
firm. It can be implemented with an effective
financial plan.
The financial plan includes information about
the economic environment in which the
business operates.
It establishes targets of sales and profits and
promotes co-ordination of resources and
efforts to reach these targets.
According to J.H. Boneville, Financial
planning includes a financial plan of
corporation which has two fold aspects. i.e. it
refers not only to capital structure of the
corporation but also to the financial policies
which corporation has adopted or intends to
adopt.
Importance of financial planning:
The finance manager gets entire information
about his firms activities and on that basis he
prepares a financial plan. The financial plan so
prepared becomes crucial with respect to
decision making.
The key elements of financial planning are:
i.
Elimination of waste:
It is possible to eliminate the wasteful
expenditure of a company, with proper
financial planning.
Through financial planning, several
factors such as change in government
policy on tax, fluctuating interest rates,
etc. can be anticipated and duly tackled.
If there is lack of proper financial
planning, the organization may suffer
huge irreversible and uncompensable
losses due to wasteful expenditure.
ii.
Co-ordination:
Proper financial planning is the key for
smooth functioning of the organizational
activities such as production, distribution,
marketing and personnel.
Financial planning should match all other
plannings such as production planning,
distribution planning, personnel planning
and overall corporate planning.
iii.
iv.
v.
vi.
vii.
Finance manager brings about coordination among all departmental heads

of the organization.
Dynamism:
A dynamic finance manager would take
initiative and face various changing
financial situations as and when they
arise.
Proper and effective financial planning
helps the finance manager to forecast
the future trends.
Such forecasting helps the organization
to undertake only profitable projects and
avoid the unprofitable ones.
Communication:
Proper and effective financial planning
helps the finance manager to
communicate the various aspects of
financial plan to the executives of other
departments.
This further helps to eliminate the
wastage of time and increase the
goodwill and financial resources of the
company.
Decision Making:
Financial planning helps a firm to take
appropriate and timely decisions to
achieve its objectives. Thus, to
implement any scheme, there must be a
budgetary provision in the financial
planning.
Integration:
Financial planning gets completed only
with consultation and co-operation of all
departments of the organization which
in turn, promotes team spirit among all
the executives of the company.
Futuristic:
Financial planning takes into account
not only the present but also the future
developments. This futuristic element of
financial planning helps for advance
programming.

[5 marks each]
*i. Objectives of Financial Planning.
Ans: Objectives of financial planning include:
a.
Proper utilization of funds:
Maximum usage of the available
financial resources is the basic
aim of financial planning. It is
important that adequate funds
should be raised at no extra cost.

b.
c.
d.
Adequate supply of funds:

Financial
planning
includes
forecasting the firms financial
needs. It is important to have
sufficient supply of funds to
ensure smooth functioning of the
organization. There must be
enough funds so that the firm does
not face any financial distress.
Efficient use of funds:
It is important to manage funds
wisely. Financial planning aims at
supervising the usage of funds
because the funds so generated is
not only for earning profit but also
for the survival of the firm.
Elimination
of
wasteful
expenditure:
Financial planning ensures that no
excess fund is raised by the firm.
It is important that the firm
generate or procure only that
much amount which is needed.
Any extra cost must not be
incurred while raising the funds
and the funds so raised should be
properly utilized as per the
requirement of the firm. Any
surplus so generated needs to be
monitered, so as to avoid its
misuse.
*ii. Importance of Financial Planning.

Ans: Refer Q.7.
[5 marks each]
i.
*It is not possible to go ahead without
financial plan.
OR
#Sound financial planning is the key
to successful business operations.
Reasons:
a.
Financial Planning is an important
function of financial management.
It
predicts
the
financial
requirement and arranges for the
sources of required funds. It is a
continuous process in day to day
administration of business.
7

b.
Financial planning is not only

required for profit making but
even for survival of a firm. The
financial plan must include
information
about
economic
environment in which the business
operates.
Financial
planning
serves as a guide for overall
activities of the organization.
c.
The information provided in the
financial plan assists in decision
making of a firm. It establishes
targets of sales and profits and
promotes
co-ordination
of
resources and efforts to reach
these targets. It is an advance
programming of all plans of
financial management.
Thus, it is not possible for finance
manager to go ahead unless he prepares
a sound financial plan.
ii.
Modern management lays a great

emphasis on a detailed financial
plan.
Reasons:
Refer Q.9. (i)
iii.
Financial
planning
helps
in
eliminating wasteful expenditure of
the firm.
Reasons:
a.
Financial planning helps in
forecasting the needs of an
organization whether current or
futuristic.
b.
Financial planning is analytical
planning as it considers several
factors such as change in
government policy on taxes,
fluctuating interest rates, etc.
c.
These events can be timely
anticipated and tackled with the
help of financial planning.
Hence, financial planning assists in
avoiding wasteful expenditure which
would otherwise become a huge loss
and cause an irreversible damage to the
organization.
8

1.4
Capital Structure
Q.10.Define Capital Structure. Explain

components of capital structure.
the
OR
*Write a short note on: Capital Structure
and its components.
[5]
Ans: Capital structure:
i.
ii.
iii.
iv.
v.
Capital structure constitutes two words

i.e. Capital and structure. The word
capital refers to the investment of
funds in business while structure means
arrangement of different components in
proper proportion.
A company can raise its capital from
different sources i.e. Owned capital,
borrowed capital or both.
To decide Capital structure means to
decide upon the ratio of owned capital
i.e. equity share capital to a borrowed
capital i.e. debt.
According to John H. Hampton, A
firms capital structure is the relation
between the debt and equity securities
that makes up the firms financing of its
assets.
Thus, the term Capital structure means
financing mix. It refers to the
proportion of different securities raised
by a firm for long term finance.
Components of Capital structure.

i.
Equity share capital:
Equity share capital is provided by
equity shareholders and it is the basic
source of financing activities of
business. The holders of such shares
bear ultimate risk associated with the
ownership.
Equity shares carry dividend at a
fluctuating rate, depending upon the
profits earned by the company.
ii.
Preference share capital:
Preference shares carry dividend at a
fixed rate of interest and enjoy
preferential right over equity shares for
return of capital in case of winding up of
the
company.
Unlike
equity
shareholders, preference shareholders
have limited voting rights.

iii.
iv.
Retained Earnings:
The part of the profit retained by the
company for meeting future financial
needs and for expansion of the firm is
known as retained earnings. In simple
words, it is ploughing back of profits.
Borrowed Capital:
It consists of the following:
a.
Debentures:
A debenture is a certificate of loan
evidencing the fact that the
company is liable to pay a
specified amount with interest at
an agreed rate.
b.
Term Loans:
Term loans are provided by bank
and other financial institutions at a
fixed rate of interest.

3.
c.
*Q.11.What is Capital Structure? What are the

internal and external factors influencing
capital structure?
[10]
Ans: Capital Structure:
Refer Q.10.
Factors influencing capital structure:
The factors which play a vital role in capital
structure determination are divided into two
categories:
i.
Internal factors. ii.
External factors.
i.
Internal factors:
a.
Requirement of Capital:
1.
In the initial stages of
business, a company cannot
issue varieties of securities
as there is considerable risk
involved and hence, it is
preferable to raise capital
through equity shares.
2.
Later on for expansion or
modernisation, the company
may issue other types of
securities such as shares,
debentures, etc.
b.
Size and nature of business:
1.
The size of business has
great impact on its capital
structure.
2.
Trading concerns raise
capital by issue of equity as
well as preference shares as
they require more working
capital.
d.
e.
Small companies have

limited capacity to raise
funds from external sources.
4.
Large companies possess
huge investments, hence
they can issue debentures by
offering securities of fixed
assets such as land,
building, machinery, etc.
So, these companies prefer
to raise funds by issuing
equity shares along with
debentures.
Growth of business firm:
1.
Capital requirement of a
firm depends upon the stage
of development.
2.
At the initial stage, the
source of finance is mostly
equity shares and short term
loans.
3.
As the stage progresses, the
requirement increases and
funds are procured by
issuing debentures and
preference shares.
Adequate earnings and Cash
position:
1.
Developed companies with
stable earnings (stable cash
flow) utilize large amount
of debt capital in their
capital structure as they can
pay a fixed rate of interest.
2.
Whereas companies with
unstable
earnings
(unpredictable cash flow)
should not opt for debt in
their capital structure as
they may face difficulty in
meeting the fixed amount of
interest.
Period of finance:
1.
If funds are required on
regular basis, the company
should raise it through issue
of equity shares.
2.
For short period, funds can
be raised through issue of
debentures or preference
shares.
9

f.
g.
h.
10
Future plans and development:

1.
Capital structure is designed
by the management keeping in
mind the future development
and expansion plans.
2.
Equity shares can be issued
in the initial stages whereas
debentures and preference
shares may be issued in
future
to
finance
developmental plans.
Trading on equity:
1.
The use of borrowed capital
for financing a firm is known
as Trading on equity.
2.
If the rate of interest on debt
is lower than the rate of
earnings of the company, the
equity
shareholders
get
additional dividend. This
increases the creditworthiness
of the company and the
company is able to raise
further loan at a lower rate of
interest.
3.
On the other hand, if the
company earnings are not
sufficient, it may lead to
financial crisis as the interest
on debt has to be paid even
in case of loss. If no dividend
is paid on equity shares, it
adversely
affects
the
creditworthiness
of
the
company.
Capital gearing:
1.
The ratio between debt capital
(fixed interest) and equity
capital (variable dividend) is
called capital gearing.
2.
It is high gearing when the
proportion of debt capital is
high than the equity share
capital while it is low
gearing when the proportion
of debt capital is low than
the equity share capital.
3.
In order to protect the interest
of equity shareholders, the
company usually uses proper
mix of various types of
securities in its capital
structure.

i.
ii.
Attitude of management:
1.
Capital structure is influenced
by the attitude of the persons
in the management.
2.
If the management wishes
to have exclusive control,
they raise capital through
preference shares and debt
capital. Since the holder of
such shares do not enjoy
any voting rights, thereby
cannot interfere in the
management
of
the
company.
External Factors:
a.
Market Conditions:
1.
Various
methods
of
financing
should
be
considered depending upon
the
prevailing
market
conditions.
2.
If the share market is in a
declining situation, the
company should raise funds
by issuing debts.
3.
On the other hand, during
the period of boom in the
share market, the company
should raise funds by
issuing equity shares.
b.
Attitude of investors:
1.
Attitude of investors also
plays an important role in
determination of capital
structure.
2.
If the investors prefer to
take risk and expect higher
returns, they invest in the
equity shares.
3.
If the investors prefer to earn
safe and assured income and
are not ready to take risk,
they invest in preference
shares and debentures.
c.
Cost of capital:
1.
Cost of capital is the
minimum return expected
by its supplier.
2.
In case of debt holder, rate
of interest is fixed and the
loan is repaid within the
prescribed period.

3.
d.
e.
f.
g.
In case of shareholders, rate

of dividend is not fixed their
capital is repaid only when
the company is liquidated.
4.
Thus, debt is a cheaper
source of capital than
equity.
5.
However, the company
cannot minimize cost of
capital by employing only
debt.
Government
rules
and
regulations:
1.
According to SEBI, the
normal debt equity ratio is
2 : 1.
2.
However, in case of large
capital intensive project, the
permitted ratio is 3 : 1.
3.
Government provides aid
and some concessions to
small industrial projects to
raise more debt capital.
Attitude
of
financial
institutions:
1.
If financial institutions
prescribe high terms of
lending, then the company
should move to other source
of financing.
2.
However,
if
financial
institutions prescribe easy
terms of lending, the
company should obtain
funds from such institutions.
Rate of interest:
1.
Capital structure depends
upon the rate of interest
prevailing in the market.
2.
If the rate of interest is
higher, firms delay debt
financing.
3.
Conversely, if the rate of
interest is lower, firms opt
for debt financing.
Taxation:
1.
Interest paid against debt is
tax deductable expenditure
whereas dividend is not
considered
as
tax
deductable expenditure for
the company.

2.
h.
Hence, issue of debt capital

is more preferable than
issue of share capital.
Competition:
1.
The company which faces
cut-throat
competition
should raise funds by
issuing equity shares as
their earnings are not certain
and adequate.
2.
Whereas
the
company
which has a monopoly in
the market, may issue debt
capital because of certainty
of earnings.

[5 marks each]
i.
Factors influencing capital structure.
Ans: Refer Q.11.
ii.
Sound Capital Structure.
Ans: a.
Capital structure refers to the
composition of capital and ratio of
different securities in total capital.
It comprises of net worth (equity
+ reserves) and long term
liabilities.
b.
A company can raise its capital
from different sources i.e owned
capital or borrowed capital or
mixture of both.
c.
Different proportion of sources
are used in capital structure as per
business requirement.
d.
The organization is said to have a
sound capital structure when the
ratio of securities i.e. debt to
equity, is favourable. The ideal
ratio prescribed by SEBI is 2 : 1.
e.
Balanced capital structure is an
optimal mixture of debt and
equity.
f.
There is no ideal pattern of capital
structure. However, there should
be appropriate mix of securities in
the capital structure so that EPS
i.e Earning per share is
maximized.
11

statements are True or False. [5 marks each]
*i. There is hard and fast rule for the
proportion of owned funds and
borrowed funds.
Reasons:
a.
The pattern of capital structure of
various firms varies widely. Hence
to determine the best possible
pattern of capital structure i.e.
proportion of owned funds and
borrowed funds, many factors are to
be borne in mind viz. internal and
external factors.
b.
Many internal factors influence
capital structure viz. requirement of
capital, size and nature of business,
growth of business, cash position,
period of finance, trading on equity,
development of the firm, etc.
c.
On the other hand, external factors
such as market conditions, cost of
capital, attitude of investors and
financial institutions, government
policies and regulations, etc.
influence capital structure.
d.
Also, it is important to maintain a
proper mix of various types of
finance in capital structure, so that
the interest of equity shareholders is
protected.
Thus, the proportion of owned funds and
borrowed funds may differ from
organization to organization depending
upon certain factors viz. internal and
external factors.
*ii. Trading on equity is a double edged
sword.
Reasons:
a.
The use of borrowed capital for
financing a firm is known as
Trading on equity.
b.
If the rate of interest on debt is lower
than the rate of earnings of the
company, the equity shareholders get
additional dividend.
c.
Higher rate of dividend to equity
shareholders improves goodwill of
the company and also increases the
market value of shares.
12

d.
Thus, the company is able to raise

further loans at lower rate of
interest.
e.
If the company earnings are not
sufficient, it may lead to financial
crisis as the interest on debt has to
be paid even in case of loss.
f.
If no dividend is paid on equity
shares, it adversely affects the
goodwill and creditworthiness of
the company.
g.
Thus, it becomes difficult for the
company to raise further loans.
Thus, trading on equity is a double
edged sword as it may increase income
of shareholders if the things go right.
However, it also increases the risk of
loss under adverse conditions.
1.5
Fixed capital and Working capital
*Q.14.What is Fixed Capital? State factors

affecting requirement of fixed capital. [5]
Ans: Meaning:
i.
Fixed capital is that portion of total
capital which is invested in fixed assets
such as, land, building, equipments,
machinery, etc.
ii.
It may be held in business for 5, 10 or
20 years or more, thereafter it may be
sold or reused.
iii. In National Accounts, it is defined as
the stock of tangible, durable fixed
assets owned or used by resident
enterprises for more than one year.
iv. Investors invest their money in fixed
capital hoping to make future profit.
Factors affecting fixed capital requirement.
i.
Nature of business:
a.
The nature of business plays a
vital role in determining fixed
capital requirement. For eg. Rail,
roads and other public utility
services
have
large
fixed
investment.
b.
Their
working
capital
requirements are nominal as they
supply services and not product.
c.
They mainly deal in cash sales
only.

d.
ii.
iii.
iv.
v.
On the other hand, trading

organizations like retailers, require
less of fixed capital as they do not
need large funds for land, building,
plants and machineries.
Size of business:
a.
Bigger the business higher the
need of fixed capital.
b.
Hence, the size of a firm, either in
terms of its assets or sales affects
the need of fixed capital.
Growth and expansion:
In order to manage growing production
and turnover, a growing firm may need
to invest more in fixed assets.
Stage of development of business:
The requirement of fixed capital for a
newly established organization is more
than that of an established organization.
Business cycle:
When there is a boom period in an
economy, the organization needs to invest
more in fixed assets so as to increase its
production
capacity.
However,
in
recession,
the
organization
avoid
undertaking huge projects, and hence, it
may not require more of fixed capital.
*Q.15.What is Working Capital? State factors

affecting requirement of working capital.
[10]
Ans: i.
Working capital means current assets or
circulating capital.
ii.
According to Gerstenbergh, working
capital is the excess of current assets
over current liabilities. It is sometimes
referred to as net working capital or
circulating capital.
iii. According to Western and Brigham,
working capital refers to a firms
investment in short term assets such as
cash, short term securities, account
receivable and inventories. It also refers
to gross working capital.
Factors
affecting
working
capital
requirement:
i.
Nature of business:
a.
Industrial and manufacturing
enterprises, trading firms, big
retail stores need a large amount
of working capital as they have to
satisfy varied and continuous
demand of consumers.
b.
ii.
iii.
iv.
v.
vi.
vii.
Hence, the nature of business

highly influences the requirement
of working capital.
Size of business:
a.
Large scale firms require large
amount of working capital.
b.
Hence, the size of business has a
great impact on the requirement of
working capital.
Volume of sale:
a.
The volume of sale is directly
proportional to the size of
working capital.
b.
If the volume of sale increases,
there is an increase in amount of
working capital and vice-versa.
Production cycle:
a.
The process of converting raw
material into finished goods is
called production cycle.
b.
A firm requires more working
capital when the production cycle
is longer and vice-versa.
Business cycle:
a.
When there is boom in economy,
sales will increase, which will
lead to increase in investment to
stock. Hence more additional
working capital would be
required.
b.
During recession period, sales
would decline and the need of
working capital would also
decrease.
Terms of purchase and sales:
a.
If the credit terms of purchases are
favourable and terms of sales are
less liberal then the requirement
of working capital is reduced as
the requirement of cash is less.
b.
On the other hand, if the firm does
not get proper credit for purchase
and adopts liberal credit policy for
sales it will require more working
capital.
Credit Control:
a.
Volume and terms of credit sales,
collection policy, etc. are the
important factors of credit control.
13

b.
Sound credit policy improves cash

flow and hence the firms making
cash sales require less working
capital.
c.
Liberal credit policy increases the
risk of bad debts and hence the
firms selling on easy credit terms
may require more working capital.
viii. Growth and expansion activities:
a.
The working capital requirement
will increase with growth of the
firm.
b.
It needs funds continuously to
support large scale operation.
ix. Management ability:
a.
The requirement of working
capital is reduced if there is proper
co-ordination between production
and distribution of goods.
b.
Lack of co-ordination between
different departments may result
in heavy stocking of finished and
semi-finished
goods,
which
ultimately leads to an increase in
the requirement of working
capital.
x.
External factors:
If the financial institutions and banks
provide funds to the firm as and when
required the need of working capital is
reduced.
xi. Requirement of cash:
The requirement of working capital
depends upon the cash required by the
organization for various purposes.
If the requirement of cash is more, then
company requires more working capital
and vice-versa.
xii. Seasonal fluctuations:
The requirement of working capital
depends upon the seasonal fluctuations.
It states that, if the demand for the
product is seasonal, the working capital
required in that season will be more.
For eg: Before winter season, sweaters
manufacturing companies need more
working capital to manufacture the same
so that they can put these goods before
winter starts.
14

[5 marks each]
i.
Fixed capital is used in production of
goods.
Reasons:
a.
Fixed capital is that portion of
total capital which is invested in
fixed assets such as land, building,
equipments etc.
b.
Fixed capital is held in business
for longer duration.
c.
It is used as an investment in long
term assets for better future
returns.
d.
It is generated by issuing shares,
debentures, long term loans, etc.
Thus, Fixed capital is not used in
production of goods.
*ii.
Requirement of working capital does

not depend upon any factor.
Reasons:
a.
Working capital refers to a firms
investment in short term assets
such as cash, short term securities,
account receivables, inventories,
etc.
b.
The amount of working capital
needed may vary from business to
business.
c.
Working capital is affected by
nature of firms activities, the
industrial health of the country,
the availability of raw materials,
the ease or tightness of money
markets, etc.
d.
The working capital requirement
is also influenced by the cash
amount required in the business. If
the requirement of cash is more
then company needs higher
amount of working capital and
vice-versa.
e.
Firms credit policy and period of
holding cash also influence cash
balance which indirectly affects
the requirement of working
capital.
Thus, working capital of a firm is
influenced by various factors.

*Q.17.Distinguish between: Fixed Capital and
Working Capital
[5]
Ans:
Fixed Capital
Working Capital
Meaning
i. Fixed capital is Working
capital
that portion of refers to a firms
total capital which investment in short
is invested in fixed term assets such as
assets such as cash, short term
land,
building, securities, account
equipments,
receivable
and
machinery, etc.
inventories.
Nature
ii. It may be held in It remains in the
business for 5, 10, business for a short
20 years or more.
period of time and
circulates into the
business.
Purpose
iii. Fixed capital is It is invested in
invested in long short term assets to
working
term assets for the fulfill
growth
and capital needs.
expansion of a
firm.
Sources
iv. It is generated by It is accumulated
trade
issuing
shares, through
credits, short term
debentures,
public
borrowing
of loans,
deposits, etc.
loans, etc.
Objective
v. Investors
invest Investors invest in
their money in working capital for
fixed capital for immediate returns.
better
future
returns.
Risks involved
vi. Risk involved in Risk involved in
the investment of the investment of
fixed capital is working capital is
high.
low as compared to
fixed capital.
Authority
vii. Generally,
Top Middle level or
level
level management lower
can
decides on matters managers
related to fixed decide on matters
capital investment. related to working
capital needs.

Factors affecting
viii. Need of fixed Need of working
capital
depends capital
depends
upon
various upon
various
factors such as:
factors such as:
of a. Seasonal
a. Size
fluctuations
business
of b. Production cycle
b. Nature
c. Requirement of
machinery
cash, etc.
c. Expansion, etc.
Objective Type Questions
I.
Select the correct answer from the possible

choices given below and rewrite the
statements.
[1 mark each]
*1. Business finance deals with _______
activities of business.
(A) manufacturing
(B) selling
(C) financial
2.
_______ refers to management of
business funds.
(A) Financial management
(B) Strategic management
(C) Inventory management
3.
_______ is called as Resource
Management.
(A) Inventory management
(B) Data management
(C) Financial management
4.
Financial management has become an
important aspect in the business
environment of _______ countries.
(A) developed
(B) developing
(C) under-developed
*5. A business firm is basically _______
organization.
(A) profit-oriented
(B) service-oriented
(C) Non-profit
*6. Normally _______ gives advice to
Board of Directors in respect of
financial matters.
(A) Auditor
(B) Secretary
(C) Finance Manager
7.
Wealth maximization is also known as
_______ maximization.
(A) value
(B) source
(C) man-power
15
*8.
Wealth maximization of owner means

maximization of _______ of shares.
(A) face value
(B) market value
(C) issue value
*17. Trading on equity means use of

_______ capital for financing a firm.
(A) equity
(B) preference
(C) borrowed
9.
The financial plan must include

information about _______ environment
in which business operates.
(A) economic
(B) social
(C) cultural
*18. During the period of boom in share

market, _______ are issued to raise
capital.
(A) bonds
(B) debentures
(C) equity shares
*10. Due to _______ planning it is possible

to eliminate wasteful expenditure.
(A) Financial
(B) Sales
(C) Production
*19. The investors who are ready to take risk

prefer _______ shares for investment.
(A) preference
(B) equity
(C) bonus
*11. The _______ means mix-up of various

sources of funds in desired proportions.
(A) Capital structure
(B) Term loan
(C) Retained profit
*20. If share market is depressed a company

should issue _______ capital.
(A) debt
(B) owned
(C) mix
12.
13.
Capital structure is the _______

financing of firm represented by long
term debt, preferred stock and net worth.
(A) temporary
(B) permanent
(C) balanced
The ideal structure for new company is
to raise capital through _______.
(A) Debentures
(B) Preference shares
(C) Equity shares
*14. Large manufacturing companies have

_______ investments in fixed assets.
(A) huge
(B) small
(C) moderate
*15. The _______ concerns can acquire
funds from various sources.
(A) well established
(B) newly established
(C) small trading
16.
16
If funds are required on regular basis,

the company should raise funds through
issue of _______.
(A) Equity shares
(B) Preference shares
(C) Debentures
*21. The SEBI has prescribed debt-equity

ratio norm of _______.
(A) 1 : 1
(B) 2 : 1
(C) 2 : 2
*22. The _______ is considered as tax
deductable expenditure.
(A) dividend
(B) bonus
(C) interest
*23. The _______ capital stay in business
almost permanently.
(A) fixed
(B) working
(C) debt
*24. The difference between current assets
and current liabilities is _______ capital.
(A) debt
(B) fixed
(C) working
*25. Big retail stores require large amount of
_______ capital.
(A) fixed
(B) working
(C) loan
*26. If the volume of sales increases, there is

_______ in amount of working capital.
(A) an increase
(B) a decrease
(C) no change
27.
2.
i.
ii.
If credit policy is _______, it is possible

for the company to improve its cash
flow.
(A) sound
(B) liberal
(C) just
iii.
iv.
v.
*28. A firm selling on credit terms requires

_______ working capital.
(A) more
(B) medium
(C) less
Match the following.
[1 mark each]
Ans: (i d), (ii h), (iii j), (iv i), (v b).
Debt
b.
equity ratio
Trading on c.
equity
Interest
d.
Capital
gearing
e.
h.
i.
j.
Group B
Use of equity capital
for
financing
business.
Tax
deductable
expenditure
Ratio between income
and expenditure.
Non tax deductable
expenditure
Provides advice to
secretary on financial
matters.
2:1
Use of borrowed
capital.
1:2
Provides advice to
Board of Directors on
financial matters.
Ratio between debt
capital and equity
capital.
Ans: (i i), (ii f), (iii g), (iv b), (v j).

III.
Group A
Group B
i.
Financial
a. Minimise market value
management
of equity shares
ii. Wealth
b. Investment in fixed
maximization
assets
iii. Financial plan c. Ratio of buying and
selling
iv. Capital
d. Management
of
structure
business funds
v. Fixed capital e. Ad hoc programming
of finance
f. Investment in current
assets
g. Management of
business activities
h. Maximise market
value of equity shares
i. Ratio of different
securities in capital
j. Advance programming
of financial
management.
a.
f.
g.
*29. A firm making cash sales requires

_______ working capital.
(A) less
(B) more
(C) no
II.
*1.
Group A
Finance
Manager
Fill in the blanks and rewrite the sentences.

[1 mark each]
1.
In actual practice, business finance

refers to _______ finance.
2.
The term corporation finance is also

known as _______ management.
3.
The new economic policy

introduced in July _______.
4.
_______ is a tool of measuring the

success of business firm.
5.
The term _______ planning refers to

assessment of financial requirements
and arranging the sources of capital.
6.
Financing mix is
_______.
7.
_______ is an acknowledgement of loan

raised by a company.
8.
Term loans are provided by bank at a

_______ rate of interest.
9.
_______ shareholders have priority over

equity shareholders.
was
also known as
17

10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Ans: 1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
18
If the proportion of debt capital is high

as compared to equity share capital, it is
_______ gearing.
The cost of capital is the _______ return
expected by its supplier.
_______ is a cheaper source of capital
than equity.
According to SEBI, the debt equity ratio
for large capital intensive project is
_______.
_______ is not a tax deductable
expenditure for the company.
The concept of fixed capital was
theoretically analysed by _______.
In National Accounts, fixed capital is
considered as the stock of tangible,
durable fixed assets owned or used by
resident enterprises for more than
_______ year.
The process of converting raw material
into _______ goods is called production
cycle.
If the manufacturing cycle is short, it
requires _______ working capital.
The upward swing in economy leads to
_______ in investment in stock.
If a business organization adopts liberal
credit policy for sales, then the
organization would require _______
working capital.
Corporation
Financial
1991
Profit
Financial
Capital structure
Debenture
Fixed
Preference
high
minimum
Debt
3:1
Dividend
David Recardo
One
finished
Less
increase
more

IV.
Write a word or a term or a phrase which

can substitute each of the following
statements.
[1 mark each]
*1. A function concerned with raising of
finance and its effective utilization in
business.
*2.
The basic principle of business activities

that aims at profit.
*3.
The
principle
which
means
maximization of market price of equity
shares.
*4.
An advance programming of all plans of

financial management.
*5.
A mix-up of various sources of funds in

desired proportion.
6.
Capital or funds provided by equity

shareholders.
7.
Loans provided by bank and other

financial institutions.
*8.
The use of borrowed

financing business firm.
*9.
The ratio between debt capital (fixed

interest) and equity capital (variable
dividend).
capital
for
*10. The portion of total capital which is

invested in fixed assets.
*11. The sum of current assets of the
business.
*12. The difference between current assets
and current liabilities.
Ans: 1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Financial management
Profit maximization
Wealth maximization
Financial planning
Capital structure
Equity share capital
Term loans
Trading on equity
Capital gearing
Fixed capital
Working capital
Net working capital

Quick Review
FINANCIAL MANAGEMENT
OBJECTIVES
FUNCTIONS
IMPORTANCE
Profit
Social
Wealth
Maximization Maximization Satisfaction
Routine
i.
Executive
Elimination of waste
expenditure
ii. Co-ordination
i.
Record keeping
and reporting
i.
Forecasting financial
requirements
iii. Dynamism
iv. Communication
ii. Preparation of
various financial
statements
ii. Deciding sources of

funds
iii. Investment decisions
vi. Integration
iii. Cash planning
iv. Dividend policy
vii. Futuristic
v. Decision making
iv. Credit management
v. Checking and analysis

v. Providing information
of financial performance
to Board of Directors vi. Advising Board of Directors
CAPITAL STRUCTURE
INFLUENCING FACTORS
COMPONENTS
Owned funds
OR
Shareholders funds
Owed funds
OR
Borrowed funds
i.
Equity share capital
i.
Debentures
ii.
Preference share capital
ii.
Term loans
iii. Retained earnings.
Internal
Factors
External
Factors
i.
Requirement of
capital
i.
Market
conditions
ii.
Size and nature

of business
ii.
Attitude of
investors
iii. Growth of
business firm
iv.
Adequate earning
and cash position
v.
Period of finance
vi.
Future plan
and development
vii. Trading on equity
iii. Cost of capital

iv.
Government rules
and regulations
v.
Attitude of
financial institutions
vi.
Rate of interest
vii. Taxation
viii. Competition
viii. Capital gearing

ix.
Attitude of
management
19

CAPITAL
FIXED CAPITAL
WORKING CAPITAL
Factors affecting fixed

capital requirement
Factors affecting working

capital requirement
i.
i.
Nature of business
ii. Size of business
ii.
Size of business
iii. Growth and expansion

of business
iii. Volume of sale

iv.
Production cycle
iv. Stage of development

of business
v.
Business cycle
vi.
Terms of purchase
and sales
Nature of business
v. Business cycle
vii. Credit control

viii. Growth and expansion
activities
ix.
Management ability
x.
External factors
xi.
Requirement of cash
xii. Seasonal fluctuations
20

12th Commerce Secretarial Practice

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Written according to the New Textbook (2013-2014)

published by the Maharashtra State Board of

First Edition: February 2014

Std. XII Commerce

Ms. Urvi Mehta

TargetPublications PVT. LTD.

Std. XII Commerce

Target Publications PVT. LTD.

First Edition : February 2014

Target Publications PVT. LTD.

Best of luck to all the aspirants!

Sources of Business Finance

Role of a Secretary in Capital Formation

Depository and Dematerialization

Declaration and Payment of Dividend

Correspondence with Members

Correspondence with Debenture holders

Correspondence with Depositors

Board Paper Pattern and Weightage

Model Question Paper - I

Model Question Paper - II

Note: All the Textual questions are represented by * mark.

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Chapter 01: Business Finance

Meaning of Financial Management

Fixed Capital and Working Capital

Q.1. Explain the term Business Finance.

Meaning of Financial Management

*Q.2. What is Financial Management? State its

It deals with planning, organizing,

Kuchal S.C.: Financial Management

Role of financial management:

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Std. XII(Commerce): Secretarial Practice

Checking and analysis of

Q.3. *What are the objectives of financial

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Chapter 01: Business Finance

It is important to invest in fixed

Social satisfaction objective of a

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These organizations require funds

Financial management has become

An utmost care is to be taken while

Std. XII(Commerce): Secretarial Practice

However, there has to be a proper

The proper aim of financial

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The share price of a company,

*Maximization of profit is real and

Chapter 01: Business Finance

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Std. XII(Commerce): Secretarial Practice

*Q.7. What is Financial Planning? State the

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Finance manager brings about coordination among all departmental heads

Q.8. Write short notes on.

Chapter 01: Business Finance

Adequate supply of funds:

*ii. Importance of Financial Planning.

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Financial planning is not only

Modern management lays a great

Std. XII(Commerce): Secretarial Practice