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Maharashtra State Board · HSC Commerce · Class 12 (Std XII)

Class 12 Secretarial Practice Chapter 1: Introduction to Corporate Finance

Short notes, key concepts, quick revision and practice MCQs with answers

This chapter explains what corporate finance is, why it matters to a company, the two kinds of capital a business needs (fixed and working), and how a company mixes its sources of funds to form its capital structure.

Key concepts: Introduction to Corporate Finance

Corporate finance
The part of finance that deals with how a company raises money and puts it to use, including financial planning, capital structuring and investment decisions.
Financing decision
The finance manager's choice of where to raise funds (equity, debt, bank loans, deposits, debentures) and the right mix of debt and equity so that the firm is well capitalised.
Investment decision
Deciding how to deploy the raised funds so that returns are higher than the cost of capital. It is also called capital budgeting.
Fixed capital
Capital invested in long-lived assets such as land, building, furniture and machinery that are not meant for resale. It stays in the business almost permanently.
Working capital
Capital needed for day-to-day activities such as stock, receivables and expenses. Gross working capital is total current assets; net working capital is current assets minus current liabilities.
Capital structure
The mix of different long-term sources of funds in a desired proportion, made up of owned funds (shares, reserves) and borrowed funds (debentures, loans).
Cost of capital
The minimum return that the investors of a firm expect on the funds they supply. Investments must earn more than this.
Cash cycle of working capital
Cash is turned into stock and work-in-process, then finished goods, then receivables on credit sales, and collection brings the money back to cash.

Quick revision: important points

Practice MCQs with answers

  1. Corporate finance mainly deals with which of the following?

    1. Sale of finished goods to customers
    2. Raising and using capital by a business corporation
    3. Recruiting and training employees
    4. Advertising and sales promotion
    Show answer

    Answer: B. Raising and using capital by a business corporation
    Corporate finance is about the acquisition (raising) and use of capital by a business corporation.

  2. Choosing between equity capital, bank loans, public deposits and debentures to raise funds is which decision?

    1. Investment decision
    2. Dividend decision
    3. Financing decision
    4. Marketing decision
    Show answer

    Answer: C. Financing decision
    Deciding the source and mix of funds is the financing decision of the finance manager.

  3. Which other name is given to the investment decision of a firm?

    1. Capital budgeting
    2. Capital structure
    3. Working capital
    4. Financial planning only
    Show answer

    Answer: A. Capital budgeting
    Finding investments and deploying funds successfully in the business is called capital budgeting.

  4. Cost of capital is best described as

    1. The price of raw materials
    2. The total profit of a company
    3. The tax paid by a company
    4. The minimum return expected by the investors
    Show answer

    Answer: D. The minimum return expected by the investors
    Cost of capital is the minimum return investors expect, so a firm must earn more than it on its investments.

  5. A company cannot pay salaries or buy raw material on time because funds are not available. Which importance of corporate finance is being missed?

    1. Replacing old assets
    2. Smooth running of the business
    3. Research and development
    4. Expansion and diversification
    Show answer

    Answer: B. Smooth running of the business
    Regular payment of salaries, loans and purchases needs a smooth flow of finance for the firm to run smoothly.

All Class 12 Secretarial Practice chapters

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