Section A-

Q1) What are the basic for financial decisions of a commercial organisation?
Ans) The basic for financial decisions of a commercial organization are:

1. Funds requirement decision

This is the most important function performed by the finance manager. A careful estimate
has to be made about the total funds required by the enterprise taking into account both
the fixed and the working capital requirements

2. Financing decision
Provision of funds required at the proper time is one of the primary tasks of the finance
manager. Every business activity requires funds and hence every financial manager faces
this problem. He has to identify the sources from which the funds can be raised, the
amount that can be raised from each source and the cost and other consequences
involved in raising it.

3. Investment decision
The decision related to various investments are taken by the finance manager after
evaluating the different capital investment proposals and select the best keeping in view the
overall objective of the enterprise. This would involve fixing the criteria for evaluating different
investment proposals, fixing priorities, committing funds for them, etc.,

4. Dividend decision
The dividend decision involves the determination of percentage of profits earned by the
enterprise, which is to be paid to its shareholders. Factors like the market price of the shares, the
trend of earnings, the tax position of the shareholders, etc plays an important role in the
determination of the dividend policy of a business enterprise

Q2) Briefly explain the relationship between return,risk and market value of equity.
Ans)
i) Equity Shareholders enjoy good dividends in times of prosperity and also face the
risk of earning nothing in the case of adversity.

ii) Equity shareholders can control the company as they are entitled to vote in the
AGM. Persons who prefer risk to better return and also wish to have control in the
management of the company prefer equity shares

iii) Financing through equity shares does not impose any burden on company since
payment of dividend depends on the availability of profits and to the discretion of
the Directors.

iV) Financing through equity shares is costly as compared to financing through

preference or debenture
v) The expectation of the equity shareholders may be high. The equity shareholders can easily
manipulate the control of the company

vi) The cost of underwriting and distributing the equity share capital is generally higher
than that of the preference share capital and debenture.