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CBSE Class12 Case StudiesInBusinessStudies –Financial Management
July23, 2021July 24, 2021
CBSE Class12 Case StudiesInBusinessStudies –Financial Management
FINANCIALMANAGEMENT
Financial Management:Definition
Financial Managementisconcernedwithoptimal procurementaswell asusage of finance.
Objective
The prime objective of financial management istomaximise shareholder’swealthbymaximisingthe
marketprice of a company’sshares.
Financial DecisionsInvolvedinFinancial Management
InvestmentDecision
FinancingDecision
DividendDecision
Role of Financial Management
To determine the capital requirementsof business,bothlong-termandshort-term.
To determine the capital structure of the companyanddetermine the sourcesfromwhererequired
capital will be raisedkeepinginview the riskandreturnmatrix.
To decide aboutthe allocationof fundsintoprofitable avenues,keepinginview theirsafetyaswell.

To decide aboutthe appropriationof profits.
To ensure efficientmanagementof cashinorder to ensure bothliquidityandprofitability.
To exercise overall financial controlsinorderto promote safety,profitabilityandconservationof
funds.
INVESTMENTDECISION
It seekstodetermine astohowthe firm’sfundsare investedindifferentassets
It helpstoevaluate newinvestmentproposalsandselectthe bestoptiononthe basisof associated
riskand return.
Investmentdecisioncanbe long-termorshort-term.
A long-terminvestmentdecisionisalsocalledaCapital Budgetingdecision.
Typesof InvestmentDecision
WorkingCapital/Short-termInvestmentDecision
It referstothe amountof capital requiredtomeetday- to-dayrunningof business.
It relatestodecisionsaboutcash,inventoryandreceivables.
It affectsbothliquidityandprofitabilityof business.
Capital BudgetingDecision/FixedCappital/Long-termInvestmentDecision
It referstothe amountof capital requiredforinvestmentinfixedassetsorlongtermprojectswhich
will yieldreturnandinfluence the earningcapacityof businessoveraperiodof time.
It affectsthe amountof assets,competitivenessandprofitability of business.
Factors AffectingCapital BudgetingDecision/Long- termInvestmentDecision
The expectedcashflowsfromthe proposedprojectshouldbe carefullyanalysed.
The expectedrate of returnshouldbe carefullystudiedintermsof riskassociatedfromthe
proposedproject.
Differenttypesof ratioanalysisshouldbe done toevaluate the feasibilityof the proposedprojectas
comparedto similarprojectsinthe same industry.
FINANCINGDECISION
FinancingDecision:Definition

Financingdecisionrelates todeterminingthe amountof finance tobe raisedfromdifferentsources
of finance.Thisdecisiondeterminesthe overallcostof capital and the financial riskof the enterprise.
Typesof Sourcesof RaisingFinance
OwnedSources
Equityshares
Preference shares
Retainedearnings
BorrowedSources
Debentures
Bonds
Loan frombank or financial institutions
Publicdeposit
ConsiderationsInvolvedinthe Issue of Debt
Interestonborrowedfundshastobe paidregardlessof whetherornota businesshasmade a profit.
Likewise,borrowedfundshave tobe repaidatafixedtime.
There issome amountof financial riskindebtfinancing.
The cost of debtislessthanequityasthe degree of riskassumedbythe investorsislessandthe
amountof interestpaidbythe companyistax deductible.
Factors AffectingFinancingDecision
The source of finance whichinvolvesthe leastcostshouldbe chosen.
The risk involvedinraisingdebtcapital ishigherthanequity.
The sourcesinvolvinghighflotationcostrequire special consideration.
If the cash flowpositionof abusinessisgood,itshouldoptfordebtelse equity.
If the fixedoperatingcostofabusinessislow,itshouldoptfordebtelse equity.
The issue of equitycapital dilutesthe control of existingshareholdersoverbusinesswhereas
financingthroughdebtdoesnotleadtoany sucheffect

If there is boomincapital marketit iseasyfor the companyto raise equitycapital,else itmayoptfor
debt.
ConsiderationsInvolvedinthe Issue of Equity
Shareholders donotexpectanycommitmentregardingthe paymentof returnsorrepaymentof
capital.
The floatationcoston raisingequitycapital ishigh.
The shareholdersexpecthigherreturnsinreturnforassuminghigherrisks.
DIVIDENDDECISION
DividendDecisionrelatestodisposal of profitbydecidingthe proportionof profitwhichistobe
distributedamongshareholdersandthe proportionof profitwhichistobe retainedinthe business
for meetingthe investmentrequirements.
Factors AffectingDividendDecision
If the earningsof the companyare high,dividendsare paidata higherrate.
If the earningsof a companyare stable,itislikelytopayhigherdividends.
A companyismore likelytomaintainastable dividendrate overaperiodof time,unlessthere isa
significantchange initsearnings.
A companyplanningtopursue a growthopportunityislikelytopaylowerdividends.
The dividendsare paidincash,therefore if the cashflow of the companyisgood,it islikelytopay
higherdividends.
If the shareholderspreferregularincome informof dividends,the companyislikelytomaintaina
dividendpayoutrate.
If the tax rate ishigh,the companyis likelytopaylessdividend.
If a companywantspositive reactionsatstockmarket,ItIs likelytopay higherdividends.
A large companycan access fundseasilyfromcapital marketasperitsrequirements,therefore,itis
likelytoretainlesserprofitsandislikelytopayhigherdividends.
The legal constraintshouldbe consideredatthe time of dividend paymentbyacompany.
The contractual constraintsmayalsoaffectthe dividendpaymentbyacompany.
FINANCIALPLANNING

Financial Planning:Definition
The processof estimatingthe fundsrequirementof a businessandspecifyingthe sourcesof fundsis
calledfinancial planning.Itbasicallyinvolvespreparationof afinancial blueprintof anorganisation’s
future operations.
TwinObjectivesof Financial Planning
To ensure availabilityof fundsasperthe requirementsof business.
To see that the enterprise doesnotraise resourcesneedlessly.
Importance of Financial Planning
It ensuressmoothrunningof abusinessenterprisebyensuringavailabilityof fundsatthe righttime.
It helpsinanticipatingfuture requirementsof fundsandevadingbusinessshocksandsurprises.
It facilitatesco-ordinationamongvariousdepartmentsof anenterprise,like marketingand
productionfunctions,throughwell-definedpoliciesandprocedures.
It increasesthe efficiencyof operationsbycurbingwastage of funds,duplicationof efforts,andgaps
inplanning..
It helpstoestablishalinkbetweenthe presentandthe future.
It providesacontinuouslinkbetweeninvestmentandfinancingdecisions.
It facilitateseasyperformance asevaluationstandardsare setinclear,specificandmeasurable
terms.
CAPITALSTRUCTURE
Capital Structure:Definition
It referstothe mix betweenownersandborrowedfunds.
Financial Risk:Definition
It referstoa situationwhenacompanyisunable tomeetitsfixedfinancial chargeslike paymentof
interestondebtcapital.

Tradingon Equity:Definition
It referstothe increase inthe earningspershare byemployingthe sourcesof finance carryingfixed
financial chargeslike debentures(interestispaidata fixedrate) orpreference shares(dividendis
paidat fixedrate).
Financial Leverage:Definition
The proportionof debtin the overall capital iscalledfinancial leverage.ItiscomputedasD/E or
D/D+E, where D isthe Debt andE isthe Equity.
FIXED CAPITAL
FixedCapital:Definition
It referstoinvestmentinlong-termassets.
Importance of Managementof FixedCapital
It affectsthe growthand profitabilityof busmessmfuture.
It involveshuge investmentoutlayintermsof investmentinland,building,machineryetc.
Its influencesthe overall levelof businessriskof the organisation.
If these decisionsare reversedtheymayleadtomajorlosses.
WORKINGCAPITAL
WorkingCapital:Definition
The fundsneededtomeetthe day-todayoperationsof the businessiscalledworkingcapital.
MIND MAP
cbse-class-12-case-studies-in-business-studies-financial-management-1
cbse-class-12-case-studies-in-business-studies-financial-management-2

Factors Affectingthe Choice of Capital Structure
S. NO Factor Use sourcesof debtcapital Use sourcesof ownedcapital
1. Cash flowposition If the cash flow positionisgoodthe businessmayuse debt. If
the cash flowpositionispoorthe businessmayuse equity.
2. Interestcoverage ratio If the interestcoverage ratioishighthe businessmayuse debt. If
the interestcoverage ratiolowthe businessmayuse equity.
3. Debtservice coverage ratio If the debtservice coverage ratioishighthe businessmay
use debt. If the debtservice coverage ratioislow the businessmayuse equity.
4. Returnon investment If the returnon investmentishighthe businessmayuse debt. If
the returnon investmentislowthe businessmayuse equity.
5. Cost of debt If the cost of debtis low the businessmayuse debt. If the cost of debtis
highthe businessmayuse equity.
6. Cost of equity The company mayuse debtup to a certainlimitsothat shareholdersdonot
expecthigherreturnsonequity.Shareholdersexpecthigherreturnswhenthe companyusesdebt
beyondapointdue to increase inthe financial risk, sothe costof equityincreases.
7. Tax rate If the tax rate ishighthe businessmayuse debt.If the tax rate islow the
businessmayuse equity.
8. FloatationcostsThe floatationcostislesseronusingdebt The floatationcostishigher
on usingequity.
9. Financial riskconsideration If the financial riskislow the businessmayuse debt. If
the financial riskishighthe businessmayuse equity.
10. Flexibility Too much use of debtreducesflexibilitytoraise more debt. If the
businessdoesn’twant torestrictitsflexibility,itmayissue equity.
11. Control Issue of debtdoesn’taffectcontrol of existingshareholders. Issue of equity
dilutesthe control of the existingshareholders.
12. Stock marketconditionsIf there is recessioninthe stockmarket,the businessmayissue debt
capital. If there is boominthe stock market,the businessmayissue equity.
13. Regulatoryframework:The businesswill choosethe optionwhereitcaneasilyfulfillthe norms
of the concernedregulatorlike abankor SEBI.
14. Capital structure of othercompanies:The businessmustknow whatthe industrynormsare,
whethertheyare followingthemordeviatingfromthemandadequate justificationmustbe there.

Factors Affectingthe FixedCapital Requirementsof aBusinessEnterprise
S. No Factor FixedCapital RequirementsisMore FixedCapital RequirementsisLess
1. Nature of Business Manufacturing Trading
2. Scale of Operations Large Small
3. Choice of Technique Capital Intensive Labour Intensive
4. Frequencyof Technology
Upgradation High Low
5. DiversificationPlans Yes No
6. Availabilityof Financial Alternatives No Yes
7. Growth Prospects High Low
8. Level of Collaboration Low High
Factors Affectingthe WorkingCapital Requirementsof aBusinessEnterprise
S. No Factor WorkingCapital RequirementsIsMore WorkingCapital RequirementsIsLess
1. Nature of Business Manufacturing Trading
2. Scale of Operations Large Small
3. BusinessCycle Boom Recession
4. Seasonal Factors On Season Off Season
5. ProductionCycle Longer Shorter
6. CreditAllowed Liberal/Yes Strict/Nil
7. CreditAvailed No Yes
8. OperatingEfficiency Low High

9. Availabilityof RawMaterial DifficultEasy
10. Growth Prospects High Low
11. Level of Competition High Low
12. Inflation High Low
LATEST CBSE QUESTIONS
Question1.
What ismeantby ‘financial management’?(CBSE,Delhi 2017)
Answer:
Question2.
SomnathLtd. isengagedinthe businessof exportof garments.Inthe past,the performance of the
companyhad beenuptothe expectations.Inline withthe latesttechnology,the companydecided
to upgrade itsmachinery.Forthis,the Finance Manager,Dalmiaestimatedthe amountof funds
requiredandthe timings.Thiswill helpthe companyinlinkingthe investmentandthe financing
decisionsonacontinuousbasis.Dalmiatherefore,beganwiththe preparationof asalesforecastfor
the nextfouryears.Fie alsocollectedthe relevantdataaboutthe profitestimatesinthe coming
years.By doingthis,he wantedtobe sure aboutthe availabilityof fundsfromthe internal sourcesof
the business.Forthe remainingfundshe istryingtofindoutalternative sourcesfromoutside.(CBSE,
Delhi 2017)
Identifythe financial conceptdiscussedinthe above para.Alsostate the objectivestobe achieved
by the use of financial concept,soidentified.
Answer:
Financial planningisthe financial conceptdiscussedinthe above paragraph.The processof
estimatingthe fund requirementsof abusinessandspecifyingthe sourcesof fundsiscalledfinancial
planning.Itrelatestothe preparationof a financial blueprintof anorganisation’sfuture operations.
The objectivestobe achievedbythe use of financial conceptare statedbelow:
To ensure availabilityof fundswheneverrequiredwhichinvolvesestimationof the fundsrequired,
the time at whichthese fundsare to be made available andthe sourcesof these funds.
To see that the firmdoesnotraise resourcesunnecessarilyasexcessfundingisalmostasbadas
inadequate funding.Financial planningensuresthatenoughfundsare availableatrighttime.

Question3.
Explainbrieflyanyfourfactorswhichaffectthe choice of capital structure of a company.
(CBSE,Delhi 2017)
Answer:
The four factorswhichaffectthe choice of capital structure of a companyare describedbelow:
Risk:Financial riskreferstoa situationwhenacompanyisunable tomeetitsfixedfinancial charges.
Financial riskof the companyincreaseswith the higheruse of debt.Thisisbecause issue of debt
involvesfixedcommitmentintermsof paymentof interestandrepaymentof capital.
Flexibility:Toomuchdependence ondebtreducesthe firm’sabilitytoraise debtduringunexpected
situations.Therefore,itshouldmaintainflexibilitybynotusingdebttoitsfull potential.
InterestCoverage ratio(ICR):The interestcoverage ratioreferstothe numberof timesearnings
before interestandtaxesof a companycoversthe interestobligation.Thismay be calculatedas
follows:
ICR = EBIT/Interest.
If the ratiois higher,loweristhe riskof companyfailingtomeetitsinterestpaymentobligations
hence debtmaybe issuedorvice versa.Butbesidesinterestpaymentrelatedrepaymentobligations
shouldalsobe considered.
Cash flowposition:The issue of debtinvolvesafixedcommitmentinthe formof paymentof interest
and repaymentof capital.Therefore if the cashflow positionof the companyisweakitcannotmeet
the fixedobligationsinvolvedinissue of debtitislikelytoissue equityorvice versa.
Question4.
Explainbrieflyanyfourfactorsthat affectthe workingcapital requirementof acompany.
(CBSE,Delhi 2017)
Answer:
The four factorsthat affectthe workingcapital requirementsof acompanyare explainedbelow:
Creditavailed:Incase the suppliersfromwhomthe firmprocuresthe raw material neededfor
productionorfinishedgoodsfollow aliberal creditpolicy,the businesscanbe operatedonminimum
workingcapital orvice versa.
Creditallowed:The credittermsmayvaryfromfirmto firm.However,if the levelof competitionis
highor creditworthinessof itsclientsisgoodthe firmislikelytofollow aliberal creditpolicyand

grant creditto itsclientsitresultsinhigheramountof debtors,increasingthe requirementof
workingcapital orvice versa.
Scale of operations:The amountof workingcapital requiredbyabusinessvariesdirectlyin
proportiontoitsscale of business.Fororganisationswhichoperate onahigherscale of operation,
the quantumof inventory,debtorsrequiredisgenerallyhigh.Suchorganisations,therefore,require
large amountof workingcapital ascomparedto the organisationswhichoperate onalowerscale.
Growth prospects:The businessfirmswhowishtotake advantage of a forthcomingbusiness
opportunityorplanto expanditsoperationswill require higheramountof workingcapital sothatis
able to meethigherproductionandsalestargetwheneverrequiredorvice versa.
Question5.
Explainbrieflyanyfourfactorsthat affectthe fixedcapital requirementsof acompany.
(CBSE,Delhi 2017)
Answer:
The four factorsthat affectthe fixedcapital requirementsof acompanyare explainedbelow:
Nature of business:The kindof activitiesabusinessis engagedinhasanimportantbearingonits
fixedcapital requirements.Onone handa tradingconcerndoesnot require topurchase plantand
machineryetc.andneedslowerinvestmentinfixedassets.Whereasonthe otherhanda
manufacturingorganisationis likelytoinvestheavilyinfixedassetslike land,building,machinery
and needsmore fixedcapital.
Scale of operations:The amountof fixedcapital requiredbyabusinessvariesdirectlyinproportion
to itsscale of businessA largerorganisationoperatingata higherscale needsbiggerplant,more
space etc. and therefore,requireshigherinvestmentinfixedassetswhencomparedwiththe small
organisation.
Diversification:If abusinessenterprise planstodiversifyintonew productlines,itsrequirementof
fixedcapital willincreaseascomparedtoan organisationwhichdoesnothave anysuch plans.
Growth prospects:If a businessenterprise planstoexpanditscurrentbusinessoperationsinthe
anticipationof higherdemand,itsrequirementof fixed capital willbe more ascomparedto an
organisationwhichdoesn’tplantopersue anysuchplans.
Question6.
What ismeantby ‘Capital Structure’?(CBSE,OD2017)
Answer:
Capital structure referstothe mix betweenownedfundsandborrowedfunds.

Question7.
RamnathLtd. is dealinginimportof organicfooditemsinbulk.The companysellsthe itemsin
smallerquantitiesinattractive packages.Performanceof the companyhasbeenupto the
expectationsinthe past.Keepingupwiththe latestpackagingtechnology,the companydecidedto
upgrade itsmachinery.Forthis,the Finance Managerof the company,Mr. VikrantDhull,estimated
the amountof fundsrequiredandthe timings.Thiswill helpthe companyinlinkingthe investment
and the financingdecisions onacontinuousbasis.
Therefore,Mr.VikrantDhull beganwiththe preparationof asalesforecastforthe nextfouryears.
He alsocollectedthe relevantdataaboutthe profitestimatesinthe comingyears.Bydoingthis,he
wantedtobe sure aboutthe availabilityof fundsfromthe internalsources.Forthe remainingfunds
he is tryingto findoutalternative sources.
Identifythe financial conceptdiscussedinthe above paragraph.Also,state anytwopointsof
importance of the financial concept,soidentified.(CBSE,OD2017)
Answer:
Financial planningisthe financial conceptdiscussedinthe above paragraph.The processof
estimatingthe fundrequirementsof abusinessandspecifyingthe sourcesof fundsiscalledfinancial
planning.Itrelatestothe preparationof a financial blueprintof anorganisation’sfuture operations.
The two pointshighlightingthe importance of planningare describedbelow:
It helpsinanticipatingfuture requirementsof afundsandevadingbusinessshocksandsurprises.
Question8.
Whenis financial leveragefavourable?(CBSE,Sample Paper2017)
Answer:
Financial leverage affectsthe profitabilityof abusinessanditis saidto be favourable whenreturnon
investment( ROI) ishigherthancost of Debt.
Question9.
“A businessthatdoesn’tgrowdies”,saysMr.Shah,the ownerof ShahMarble Ltd. withglorious36
monthsof its grand successhavingacapital base of RS.80 crores.Withina shortspan of time,the
companycouldgenerate cashflowwhichnotonlycoveredfixedcashpaymentobligationsbutalso
create sufficientbuffer.The companyisonthe growthpathand a new breedof consumersiseager
to buythe Italianmarble soldbyShahMarble Ltd. To meetthe increasingdemand,Mr.Shahdecided
to expandhisbusinessbyacquiringamine.Thisrequiredaninvestmentof RS.120crores. To seek

advice inthismatter,he calledhisfinancial advisorMr.Sethwhoadvisedhim aboutthe judicious
mix of equity(40%) and Debt(60%).Mr. Sethalsosuggestedhimtotake loanfroma financial
institutionasthe costof raisingfundsfromfinancial institutionsislow.Thoughthiswillincrease the
financial riskbutwill alsoraise the returntoequityshareholders.He alsoapprisedhimthatissue of
debtwill notdilute the control of equityshareholders.Atthe same time,the interestonloanisa tax
deductible expenseforcomputationof tax liability.Afterdue deliberationswith Mr.Seth,Mr. Shah
decidedtoraise fundsfroma financial institution.
Identifyandexplainthe conceptof Financial ManagementasadvisedbyMr. Sethinthe above
situation.
State the four factorsaffectingthe conceptasidentifiedinpart(1) above whichhave beendiscussed
betweenMr.Shahand Mr. Seth.(CBSE,SamplePaper2017)
Answer:
Capital structure isthe conceptof Financial ManagementasadvisedbyMr.Sethin the above
situation.Capital structure referstothe mix betweenownersfundsandborrowedfunds.
The four factorsaffectingcapital structure whichhave beendiscussedbetweenMr.Shahand Mr.
Sethare explainedbelow:
Cashflowposition:The issue of debtcapital involvesafixedburdenonthe companyinthe formof
paymentof interest andrepaymentof capital.Therefore if the cashflow positionof acompanyis
goodit may issue debtelse equitytoraise the requiredamountof capital.
RiskConsideration:Financialriskreferstoasituationwhenacompanyisunable to meetitsfixed
financial charges.Financialriskof the companyincreaseswiththe higheruse of debt.Thisisbecause
issue of debtinvolvesfixedcommitmentintermsof paymentof interestandrepaymentof capital.
Tax rate:Consideringthe factthatamountof interestpaidisa deductibleexpense,costof debtis
affectedbythe tax rate. If for example afirmisborrowing@10% and the tax rate is 30%, the after
tax cost of debtisonly7%. Therefore,whenthe tax rate ishigheritmakesdebtrelativelycheaper
and increasesitsattractionvis-a-visequity.
Control:The issue of debenturesdoesn’taffectthe control of the equityshareholdersoverthe
businessasthe debenture holdersdonothave the rightto participate inthe managementof the
business.
Question10.
Shalini,afteracquiringadegree inHotel ManagementandBusinessAdministration,tookoverher
familyfoodprocessingcompanyof manufacturingpickles,jamsandsquashes.The businesshad
beenestablishedbyhergreatgrandmotherandwasdoingreasonablywell.However,the fixed
operatingcostsof the businesswerehighandthe cashflow positionwasweak.She wantedto

undertake modernisationof the existingbusinesstointroduce the latestmanufacturingprocesses
and diversifyintothe marketof chocolatesandcandies.She wasveryenthusiasticandapproacheda
finance consultant,whotoldherthatapproximately?50 lakhwouldbe requiredforundertakingthe
modernisationandexpansionprogramme.He alsoinformedherthatthe stockmarketwas going
througha bullishphase.
Keepingthe above considerationsinmind,name the source of finance Shalinishouldnotchoose for
financingthe modernisationandexpansionof herfoodprocessingbusiness.Give one reasonin
supportof your answer.
Explainanytwootherfactors,apart fromthose statedinthe above situation,whichShalini should
keepinmindwhile takingthisdecision.(CBSE,Sample Paper2016)
Answer:
Shalini shouldnotchoose debtcapital forfinancingthe modernisationandexpansionof herfood
processingbusinessbecausethe fixedoperatingcostof the companyis high.Itcannot take the
additional burdenof fixedcommitmentsintermsof paymentof interestandrepaymentof capital by
issuingdebt.
The other twofactors thatShalini mustkeepinmindwhile takingthisdecisionare statedbelow:
Risk:Financial riskreferstoa situationwhenacompanyisunable tomeetitsfixedfinancial charges.
Financial riskof the companyincreaseswiththe higheruse of debt.Thisisbecause issue of debt
involvesfixedcommitmentintermsof paymentof interestandrepaymentof capital.
Flexibility:Toomuchdependence ondebtreducesthe firm’sabilitytoraise debtduringunexpected
situations.Therefore,itshouldmaintainflexibilitybynotusingdebtto itsfull potential.
Question11.
Radhikaand Vani whoare youngfashiondesigners,lefttheirjobvyithafamousfashiondesigner
chainto set-upa company‘Fashionate Pvt.Ltd.’Theydecidedtoruna boutique duringthe dayand
coachingclassesforthe entrance examinationof National Institute of FashionDesigninginthe
evening.Forthe coachingcentre,theyhiredthe firstfloorof anearbybuilding.Theirmajorexpense
was the moneyspentonphotocopyingof notesfortheirstudents.Theythoughtof buyinga
photocopierknowingfullythattheirscale of operationswasnotsufficienttomake full use of
photocopier.
In the basementof the buildingof Fashionate Pvt.Ltd,PraveenandRameshwere carryingona
printingandstationerybusinessinthe name of ‘NeoPrintsPvt.Ltd.’RadhikaapproachedPraveen
withthe proposal tobuy a photocopierjointlywhichcouldbe usedbybothof themwithoutmaking
separate investment.Praveenagreedtothis.
Identifythe factoraffectingthe fixedcapital requirementsof Fashionate Pvt.Ltd.(CBSE,Delhi 2016)

Answer:
The factor affectingthe fixedcapital requirementof Fashionable Pvt.Ltd.isthe levelof
collaboration.Thiskindof arrangementof usingthe resourcesjointlyhelpstoreduce the fixed
capital requirementsof the businessfirms.
Question12.
Kay Ltd.is a companymanufacturingtextiles.Ithasa share capital of ? 60 lakhs.Inthe previousyear,
itsearningpershare was ? 0.50. For diversification,the companyrequiresanadditionalcapital of ?
40 lakhs.The companyraisedfundsbyissuing10% debenturesforthe same.Duringthe year,the
companyearneda profitof ? 8 lakhson the capital employed.Itpaidtax @ 40%.
State whetherthe shareholdersgainedorlost,inrespectof earningpershare ondiversification.
Showyour calculationsclearly.
Alsostate any three factorsthat favourthe issue of debenturesbythe companyas part of itscapital
structure.(CBSE,OD 2016)
OR
VivoLtd.is a companymanufacturingtextiles.Ithasa share capital of Rs. 60 lakhs.The earningper
share in the previousyearwasRs.0.50. For diversification,the companyrequiresanadditional
capital of Rs. 40 lakhs.The companyraisedfundsbyissuing10% debenturesforthe same.During
the current year,the companyearneda profitof Rs. 8 lakhsonthe capital employed.Itpaidtax @
40%.
State whetherthe shareholdersgainedalost,inrespectof earningpershare ondiversification.
Showyour calculationsclearly.
Also,state anythree factorsthat favourthe issue of debenturesbythe companyaspart of itscapital
structure.(CBSE,Delhi 2016)
Answer:
Let uspresume thatthe share capital of Rs. 60 lakhis made upof Rs. 6 lakh equitysharesassuming
that the face value of each share is Rs.10.
SourcesSituation1
(Amount(inRs.)) Situation2
(Amount(inRs.))

Equityshares 60,00,000 60,00,000
10 % Debentures NIL 40,00,000
Total Capital 60,00,000 1,00,00,000
EBIT — 8,00,000
Less:Interest — – (4,00,000)
EBT — 4,00,000
Less:Tax @ 40% — – (1,60,000)
EAT *3,00,000 2,40,000
No.of sharesof Rs. 10 each 6,00,000 6,00,000
EPS 0.50 2,40,000/6,00,000 = 0.40
*0.50 x 6,00,000 = 3,00,000
ConsequentlyEBT/EBITinsituation1= Rs. 5,00,000
Thus,on diversification,the earningpershare felldownfromRs.0.50 to Rs.0.40.
The three factors that favourthe issue of debenturesbythe companyaspart of itscapital structure
are as follows:
Tax deductibility:Debtisconsideredtobe a relativelycheapersource of finance asthe amountof
interestpaidondebtistreatedas a tax deductibleexpense.
Flotationcost:The moneyspentbythe companyon raisingcapital throughdebenturesislessthan
that spentonequity.
Control:The issue of debenturesdoesn’taffectthe control of the equityshareholdersoverthe
businessasthe debenture holdersdonothave the rightto participate inthe managementof the
business.
Question13.
Rizul Bhattacharya,afterleavinghisjob,wantedtostarta Private LimitedCompanywithhisson.His
son waskeenthatthe companymaystart manufacturing mobile-phoneswithsome unique features.
Rizul Bhattacharyafeltthatmobile phonesare prone toquickobsolescence andaheavyfixedcapital
investmentwouldbe requiredregularlyinthisbusiness.Therefore,he convincedhissontostarta
furniture business.
Identifythe factoraffectingfixedcapital requirementswhichmade Rizul Bhattacharyachoose the
furniture businessovermobile phones.(CBSE,OD2016)

Answer:
The factor affectingthe fixedcapital requirementswhichmade RizulBhattacharyachoose the
furniture businessovermobile phonesistechnological upgradation.
Question14.
Tata International Ltd.earnedanetprofitof Rs. 50 crores. Ankit,the finance managerof Tata
International Ltd.wantstodecide howtoappropriate these profits.Discussanyfive factorswhich
will helphimintakingthisdecision.(CBSE,SamplePaper,2015)
Answer:
The five factorswhichwill helpAnkit,intakingthe dividenddecisionare describedbelow:
Earnings:Since the dividendsare paidoutof currentand pastearnings,there isa directrelationship
betweenthe amountof earningsof the companyandthe rate at whichitdeclaresdividend.If the
earningsof the companyare high,itmay declare ahigherdividendorvice-versa.
Cash flowposition:Since the dividendsare paidincash,if the cash flow positionof the companyis
goodit may declare higherdividendorvice-versa.
Accessto capital market:If the companyenjoysaneasyaccessto capital marketbecause of itscredit
worthiness.Itdoesnotfeel the needtodependentirelyonretainedearningstomeetitsfinancial
needs.Hence,itmaydeclare higherdividendorvice-versa.
Growth prospects:If the companyhas anyforthcominginvestmentopportunities,itmaylike to
retainprofitstofinance itsexpansionprojects.Thisisbecause retainedprofitsisconsideredtobe
the cheapestsource of finance asit doesn’tinvolve anyexplicitcosts.Hence,itmaydeclare lower
dividendorvice-versa.
Preferencesof the shareholders:The companiespayingstabledividendsare alwayspreferredby
small investorsprimarilyif theywantregularincome inthe formof ‘stable returns’fromtheir
investments.Large shareholdersmaybe willingtoforgotheirpresentdividendinpursuitof higher
profitsinfuture.Therefore,the preferencesof the shareholdersmustbe takenintoconsideration.
Question15.
‘AbhishekLtd’ismanufacturingcottonclothes.Ithasbeenconsistentlyearninggoodprofitsfor
manyyears.This yeartoo,it has beenable togenerate enoughprofits.There isavailabilityof
enoughcashin the companyand goodprospectsforgrowth infuture.Itis a well managed
organisationandbelievesinquality,equal employmentopportunitiesandgoodremuneration
practices.It hasmany shareholderswhoprefertoreceive aregularincome fromtheirinvestments.
It has takena loanof Rs.50 lakhsfromICICIBank andis boundbycertainrestrictionsonthe
paymentof dividendaccordingtothe termsof the loanagreement.

The above discussionaboutthe companyleadsto variousfactorswhichdecide how muchof the
profitsshouldbe retainedandhowmuchhasto be distributedbythe company.Quotingthe lines
fromthe above discussion,identifyandexplainanyfoursuchfactors.(CBSE,2015)
Answer:
The five factorswhich Ankithasto considerbefore takingdividenddecisionsare:
Growth Opportunities:Financial needsof afirmare directlyrelatedtothe investmentopportunities
available toit.If a firmhas abundantprofitable investmentopportunities,itwill adopta policyof
distributinglowerdividends.Itwouldlike toretainalarge part of its earningsbecause itcanreinvest
themat a higherrate.
Stabilityof Dividends:Investorsalwayspreferastable dividendpolicy.Theyexpecttogeta fixed
amountas dividendswhichshouldincrease graduallyoverthe years.
Legal Restrictions:A firm’sdividendpolicyhastobe formulatedwithinthe legal provisionsand
restrictionsof the IndianCompaniesAct.
RestrictionsinLoanAgreements:Lenders,mostlyfinancial institutions,putcertainrestrictionson
the paymentof dividendstosafeguardtheirinterests.
Liquidity:The cashpositionisasignificantfactorindeterminingthe size of dividends.Higherthe
cash and overall liquiditypositionof afirm, higherwill be itsabilitytopaydividends.
Question16.
Amitisrunningan ‘advertisingagency’andearningalotby providingthisservice tobigindustries
State whetherthe workingcapital requirementof the firmwill be ‘less’or‘more’.Give reasonin
supportof your anser.(CBSE,Sample Paper2014-15)
Answer:
The workingcapital requirementsof Amitwillbe relativelylessashe isrunningan advertising
agency,whereinthere isnoneedtomaintaininventory.
Question17.
Yogesh,a businessman,isengagedinthe purchase andsale of ice-creams.Identifyhisworking
capital requirementsbygivingreasonstosupportyouranswer.Now,he iskeentostarthis ownice-
cream factory.Explainanytwofactors thatwill affecthisfixedcapital requirements.(CBSE,OD
2012)
Answer:

The workingcapital requirementsof Yogeshwillbe lessashe isengagedintradingbusiness.
The two factorsthat will affecthisfixedcapital requirementswhenhe will starthisownice-cream
factoryare describedbelow:
Level of collaboration:If Yogeshgetsanopportunitytosetuphisfactory incollaborationwith
anotherenterprise,hisfixedcapital requirementswillreduce considerablyelse hisfixedcapital
requirementswillbe more.
Financial alternativesavailable:If Yogeshisable toget the place to start the factoryand machinery
on lease,hisfixedcapital requirementswillreduce considerably.Whereasif he decidestopurchase
them,hisfixedcapital requirementswillbe more.
Question18.
Amar isdoinghistransportbusinessinDelhi.Hisbusesare generallyusedfortouristsgoingtoJaipur
and Agra.Identifythe workingcapital requirementsof Amar.Give reasonstosupportyouranswer.
Further,Amarwantsto expandanddiversifyhistransportbusiness.Explainanytwofactors that will
affecthisfixedcapital requirements.(CBSE,OD,2012)
Answer:
The workingcapital requirementsof Amarwill be relativelylessashe isengagedinprtividing
transportserviceswhereinthere isnoneedtomaintaininventory.
The factors affectingthe fixedcapital needsof hisbusinessare asfollows:
fixedcapital willincrease.
Growth prospects:If a businessenterprise planstoexpandits currentbusinessoperationsinthe
anticipationof higherdemand,consequently,more fixedcapital will be neededbyit.
Question19.
Manishis engagedinthe businessof manufacturinggarments.Generally,he usedtosell his
garmentsinDelhi.Identifythe workingcapital requirementsof Manishgivingreasoninsupportof
your answer.Further,Manishwantstoexpandanddiversifyhisgarmentsbusiness.Explainanytwo
factors thatwill affecthisfixedcapital requirements.(CBSE,Delhi 2012)
Answer:
The workingcapital requirementsof Manishwill be relativelymore ashe isengagedinthe business
of manufacturinggarments.Thisisbecause the lengthof productioncycle islongeri.e.ittakestime
to convertraw material intofinishedgoods.

Scale of Operations:The amountof fixedcapital requiredbyabusinessenterprise isdirectly
proportionate toitsscale of operations.Therefore,if Manishplanstodobusinessonalarge scale,
hisfixedcapital requirementswill be more orvice versa.
Technological Upgradation:If Manishplanstouse machinesof latesttechnologyinmanufacturing
garments,hisfixedcapital requirementswillbe more asreplacementof obsolete machineswill
require huge financialoutlay.
Question20.
Harishis engagedinthe warehousingbusinessandhiswarehousesare generallyusedby
businessmentostore fruits.Identifythe workingcapital requirementsof Harishgivingreasonsin
supportof your answer.Further,Harishwantsto expandanddiversifyhiswarehousingbusiness.
Explainanytwofactors that will affecthisfixedcapital requirements.(CBSE,Delhi 2012)
Answer:
The workingcapital requirementsof Harishwill be relativelylessashe isengagedinproviding
warehousingserviceswhereinthere isnoneedtomaintaininventory.
Scale of Operations:The amountof fixedcapital requiredbyabusinessenterprise isdirectly
proportionate toitsscale of operations.Therefore,if Harishplanstodobusinessonalarge scale his
fixedcapital requirementswill be more orvice versa.
ADDITIONALQUESTIONS
Question1.
Arunis a successful businessmaninthe paperindustry.Duringhisrecentvisittohisfriend’splace in
Mysore,he was fascinatedbythe exclusive varietyof incensesticksavailable there.Hisfriendtells
himthat Mysore regionisknownas a pioneerinthe activityof Agarbathi manufacturingbecauseit
has a natural reserve of forestproductsespeciallySandalwoodtoprovide forthe base material used
inproduction.Moreover,the suppliersof othertypesof raw material neededforproductionfollowa
liberal creditpolicyandthe time requiredtomanufacture incense sticksisrelativelyless.
Consideringthe variousfactors,Arundecidestoventure intothisline of businessbysettingupa
manufacturingunitinMysore.
In contextof the above case:

Identifyandexplainthe type of financialdecisiontakenbyArun.
Identifythe three factorsmentionedinthe paragraphwhichare likelytoaffectthe workingcapital
requirementsof his business.
Answer:
InvestmentdecisionhasbeentakenbyArun.Investmentdecisionseekstodetermineastohow the
firm’sfundsare investedindifferentassets.Ithelpstoevaluate new investmentproposalsand
selectthe bestoptiononthe basisof associatedriskandreturn.Investmentdecisioncanbe long
termor short-term.A long-terminvestmentdecisionisalsocalledaCapital Budgetingdecision
The three factors mentionedinthe paragraphwhichare likelytoreduce the working
capital requirementsof hisbusinessare asfollows:.
Availabilityof rawmaterial:Asthere iseasyavailabilityof Sandalwoodwhichisusedasthe base
material forproduction,the workingcapital requirementsof hisbusinesswillbe lessasthere isno
needtostock the raw materials.
Productioncycle:The productioncycle isshorterandlesstime isrequiredtomanu¬facture incense
sticks.Thus,the workingcapital requirementsof hisbusinesswill be low.
Creditavailed:Due tothe fact that the suppliersof othertypesof raw material neededfor
productionfollow aliberal creditpolicy,the businesscanbe operatedonminimumworkingcapital.
Question2.
‘Adwitiya’isacompanyenjoyingmarketleadershipinthe foodbrandssegment.It’sportfolio
includesthree categoriesinthe FoodsbusinessnamelySnackFoods,JuicesandConfectionery.
Keepinginline withthe growingdemandforpackagedfooditnow planstointroduce Ready- To-Eat
Foods.Therefore,the companyhasplannedtoundertake investmentsof nearlyRs.450 crores for its
newline of business.Asperthe currentfinancial report,the interestcoverage ratioof the company
and returnon investmentishigher.Moreover,the corporate tax rate is high.
As a financial managerof the company,whichsource of finance will youoptfordebtorequity,to
raise the requiredamountof capital?Explainbygivinganytwosuitable reasonsinsupportof.your
answer.
Why are the shareholder’sof the companylike togainfromthe issue of debtbythe company?
Answer:

As a financial managerof the company,Iwill optfordebtto raise the requiredamountof capital.
I supportmy decisionbygivingthe followingreasons:
Interestcoverage ratio:The interestcoverage ratioof the company ishighsoit can easilymeetits
fixedcommitmentof paymentof interestandrepaymentof capital.
Tax rate:The tax rate is highwhichmakesdebtrelativelycheaperasthe amountof interestpaidon
debtistreatedas a tax deductible expense.
The shareholdersof the companyare likelytogainfromthe issue 6f debtby the companybecause
the returnon investmentishigher.IthelpSacompanyto take advantage of tradingon equityto
increase the earningspershare.
Question3.
ComputerTechLtd.,isone of the leadinginformationtechnologyoutsourcingservicesprovidersin
India.The companyprovidesbusinessconsultancyandoutsourcingservicestoitsclients.Overthe
past five yearsthe companyhasbeenpayingdividendsathighrate to itsshareholders.However,
thisyear,althoughthe earningsof the companyare high,itsliquiditypositionisnotsogood.
Moreover,the companyplansto undertake new venturesinordertoexpanditsbusiness.
In contextof the above case:.
Give any three reasonsbecause of whichyouthinkComputerTechLtd.hasbeenpayingdividendsat
highrate to itsshareholdersoverthe pastfive years.
Commentuponthe likelydividendpolicyof the companythisyearbystatinganytwo reasonsin
supportof your answer.
Answer:
ComputerTechLtd. has beenpayingdividendsathighrate to itsshareholdersoverthe pastfive
yearsbecause of the followingreasons:
Earnings:The earningsof the company have beenhigh.Since the dividendsare paidoutof current
and pastearnings,there isa directrelationshipbetweenthe amountof earningsof the companyand
the rate at whichit declaresdividend.
Cashflowposition:The cashflowpositionof the companymusthave beengoodasinorderto pay
highdividends,more cashisrequired.
Accessto capital market:Because of itscreditworthiness,the companyenjoyedaneasyaccessto
capital market.Therefore,itdidnotfeel the needtodependentirelyonretainedearningstomeet
itsfinancial needs.Hence,itdeclaredhigherdividendsin past.

Thisyear the companyislikelytofollowaconservativedividendpolicybecause of the following
reasons:
The cash flowpositionof the companyisnotgood and dividendsare paidincash.
The company maylike toretainprofitstofinance its expansionprojects.Retainedprofitsdonot
involve anyexplicitcostandare consideredtobe the cheapestsource of finance.
Question4.
Bhuvaninheritedaverylarge areaof agricultural landinHaryanaafterthe deathof hisgrandfather.
He plansto sell thispiece of landanduse the moneytosetup a small scale paperfactory to
manufacture all kindsof stationaryitemsfromrecycledpaper.Beinganamateurinbusiness,he
decidestoconsulthisfriendSubhashwhoworksinafinancial consultancyfirm.Subhashhelpshim
to prepare a blue printof hisfuture businessoperationsonthe basisof salesforecastinnextfive
years.Basedon these estimates,he helpsBhuvantoassessthe fixedandworkingcapital
requirementsof business.
Identifythe type of financialservicethatSubhashhasofferedtoBhuvan.
Brieflystate anyfourpointshighlightingthe importance of the type of financial service
identifiedinpart(1).
Answer:
Financial planningisthe type of financial service thatSubhashhasofferedtoBhuvan.
The four pointshighlightingthe importance of financial planningare asfollows:
It helpsinanticipatingfuture requirementsof afundsandevadingbusinessshocksandsurprises.
It facilitatesco-ordinationamongvariousdepartmentsof anenterpriselikemarketingand
productionfunctions,throughwell-definedpoliciesandprocedures.
It increasesthe efficiencyof operationsbycurbingwastage of funds,duplicationof efforts,andgaps
inplanning.
Question5.
‘Madhur Milan’isa popularonline matrimonial portal.Itseekstoprovide personalizedmatch
makingservice.The companyhas80 officesinIndia,andisnow planningtoopenofficesin
Singapore,Dubai andCanadato cater to itscustomersbeyondthe country.The companyhas
decidedtooptfor the sourcesof equitycapital toraise the requiredamountof capital.

Identifyandexplainthe type of riskwhichincreaseswiththe higheruse of debt.
Explainbrieflyanyfourfactorsbecause of whichyouthinkthe companyhas decidedtooptfor
equitycapital.
Answer:
Financial riskof the companyincreaseswiththe higheruse of debt.Thisisbecause issue of debt
involvesfixedcommitmentintermsof paymentof interestandrepaymentof capital.Financial risk
referstoa situationwhenacompanyisunable tomeetitsfixedfinancial charges.
The factors because of whichthe companyhas decidedtooptfor equitycapital are asfollows:
Capital marketconditions:The state of capital marketisbullish,sopeople are likelytoinvestmore in
equity.
Fixedoperatingcost:The fixedoperatingcostof companyishighso itcannot take the further
burdenfixedcommitmentintermsof paymentof interestandrepaymentof capital byissuingdebt.
Cashflowposition:The cashflowpositionof the companyisweaksoitcannot meetthe fixed
obligationsinvolvedinissueof debt.
Risk:The proportionof debtin itscapital structure isalreadyhighso itcannot issue furtherdebt,
therebyendangeringthe solvencyof the company.
Question6.
WoodenPeripheralPvt.Ltd.iscountedamongthe top furniture companiesinDelhi.Itisknownfor
offeringinnovativedesignsandhighqualityfurnitureataffordable prices.The companydealsina
wide productrange of home andoffice furniture throughitseightshowroomsinDelhi.The company
isnow planningtoopenfive newshowroomseachinMumbai andBangalore.InBangalore itintends
to take the space forthe showroomsonlease whereasforopeningshowroomsinMumbai,ithas
collaboratedwithapopularhome furnishingbrand,‘Creations.’
Identifythe factorsmentionedinthe paragraphwhichare likelytoaffectthe fixedcapital
requirementsof the businessforopeningnew showroomsbothinBangalore andMumbai
separately,
“With an increase inthe investmentinfixedassets,there isacommensurate increaseinthe working
capital requirement.”Explainthe statementwithreferencetothe case above.
Answer:

The fixedcapital requirementsof WoodenPeripheral Pvt.Ltd.foropeningnew showroomsin
Bangalore will be relativelylessasitstakingspace on lease,soonlyrentalshave tobe paid.
Similarly,itsfixedcapital requirementforopeningshowroomsinMumbai will be reducedasits
goingto share the costs withanothercompanythroughcollaboration.
It’strue that,”With an increase inthe investmentinfixedassets,there isacommen¬surate increase
inthe workingcapital requirement.”Like inthe above case,WoodenPeripheral Pvt.Ltd.isplanning
to investinnewshowrooms.Consequently,itsrequirementof workingcapital will increaseasitwill
needmore moneytostock goods,payelectricitybills andsalariestostaff.Also,itintendstotake the
space for the showroomsinMumbai on lease soitwill have topay rentals.
Question7.
‘Apparels’isIndia’ssecondlargestmanufacturerof brandedLifestyleapparel.The companynow
plansto diversifyintopersonal care segmentbylaunchingperfumes,haircare andskinare products.
Moreover,itisplanningtoopentenexclusive retail outletsinvariouscitiesacrossthe countryin
nexttwoyears.
Identifythe twofactorsaffectingthe fixedcapital needsof the companybyquotinglinesfromthe
paragraph.
Why isthe managementof fixedcapital consideredtobe an importantfora business?
Answer:
The factors affectingthe fixedcapital needsof the companyare as follows:
Growth prospects:If a businessenterprise planstoexpanditscurrentbusinessoperationsinthe
anticipationof higherdemand,consequently,more fixedcapital will be neededbyit.
The managementof fixedcapital isconsideredimportantbecause:
It affectsthe growthand profitabilityof businessinfuture.
It involveshuge investmentoutlayintermsof investmentinland, building,machineryetc.
It influencesthe overalllevel of businessriskof the organisation.
If these decisionsare reversed,theymayleadtomajorlosses.

Question8.
Afterpersuingacourse ineventmanagement,Kajal andherbrotherKamal promotedan event
managementcompanyunderthe name Khushi EntertainmentPrivate Limited.Theystrive together
as dedicatedanddynamicprofessionalsmanagingdifferentkindsof formal andinformal events
across all majorcitiesinIndiaand abroad.Theydesignthe eventideaandco-ordinate the different
aspectsof the eventtomake it a grand success.Asa policy,theytake fiftypercentof the paymentas
advance fromthe clientbefore the startof an eventandreceive the balance chargesafterthe
successful completionof the event.
Commentuponthe workingcapital needsof the companykeepinginminditsnature of business.
Identifythe otherfactormentionedinthe paragraphwhichislikelytoaffectthe workingcapital
requirementof theirbusiness.
Answer:
The workingcapital requirementsof Khushi EntertainmentPrivateLimitedwill be relativelylessas
theyare engagedinprovidingeventmanagementservices,whereinthere isnoneedtomaintain
inventory
The other factormentioned inthe paragraphwhichislikelytoaffectthe workingcapital
requirementof theirbusinessis‘Creditavailed.’Since asapolicy,theytake fiftypercentof the
paymentasadvance from the clientbefore the startof an event,theirrequirementof working
capital isreduced.
Question9.
Storage SolutionLtd.isa large warehousingnetworkcompanyoperating.throughachainof
warehousesat40 differentlocationsacrossIndia.The companynow intendstoundertake
computerisationof itsownedware housesasitseekstoprovide bettervalue addedandcost
effectivesolutionsforscientificstorage andpreservationservicestothe marketparticipantsdealing
inagricultural productsincludingfarmers,traders,etc.
How isthe decisiontoundertake computerisationof ownedwarehouseslikelytoaffectthe fixed
capital requirementsof itsbusiness?
Name any twosourcesthat companymay use to finance the implementationof thisplan.
Answer:

The decisiontoundertake computerisationof ownedwarehouseswill increasethe fixedcapital
requirementsof itsbusinessbothinpresentandfuture asaftersometime,the technologybeing
usedwill become obsolete andneedupgradation.
The company mayuse retainedearningsandtake loansfrom financial institutionstoimplementthis
plan.
Question10.
VisionsLtd.isa renownedmultiplexoperatorinIndia.Presently,itowns234 screensin45
propertiesat20 locationsinthe country.Consideringthe factthatthe there isa growingtrend
amongthe people tospendmore of theirdisposable income onentertainment,twoyearsbackthe
companyhad decidedtoaddmore screensto itsexistingsetupandincrease facilitiestoenhance
leisure,foodchainsetc.Ithadthenfloatedaninitial publicofferof equitysharesinordertoraise
the desiredcapital.The issue wasfullysubscribedandpaid.Overthe years,the salesandprofitsof
the companyhave increasedtremendouslyandithas beendeclaringhigherdividendandthe market
price of itsshares has increasedmanifolds.
Name the differentkindsof financialdecisionstakenbythe companybyquotinglinesfromthe
paragraph.
Do youthinkthe financial managementteamof the companyhas beenable toachieve itsprime
objective?Whyorwhynot?Give a reasoninsupportof your answer.
Answer:
The differentkindsof financial decisionstakenbythe companyare as follows:
Investmentdecision:“Twoyearsbackthe company haddecidedtoadd more screenstoits existing
setup and increase facilitiestoenhance leisure,foodchainsetc.”
Financingdecision:“Ithadthenfloatedaninitial publicofferof equitysharesinordertoraise the
desiredcapital.”
Dividenddecision:“Overthe years,the salesandprofitsof the companyhave increased
tremendouslyandithasbeendeclaringhigherdividend.”
Yes,the financial managementteamof the companyhas beenable toachieve itsprime objectivei.e.
wealthmaximisationof the shareholdersbymaximisingthe marketprice of the sharesof the
company.
Question11.

Aftercompletinghiseducationintravel andtourism, ArjunstartedTravel AngelsPvt.Ltd.alongwith
histwinbrotherBheem.Theircompanyseekstoprovide travel solutionstoitsclientsliketicket
bookingforairways,railwaysandroadways,hotel booking,insurance etc.Althoughthe businessis
doingwell bothof themhave realisedthattheyare notgoodin managingfinance,andfeel confused
and frustratedsometimesdue tofinancial crisesthatmaysuddenlyarise.Inordertoavoidsuch
situationsinthe future,theyhire Nakul andSehdevasfinancial managers,whohave done adegree
certificationcourse infinancial management.
In contextof the above
Give the meaningof financial management.
Outline the role of Nakul andSehdevasthe financial managementteamof the Travel AngelsPvt.
Ltd. bygivinganyfour suitable points.
Answer:
Nakul andSehdevwill playaveryimportantrole asthe financial managementteamof the Travel
AngelsPvt.Ltd.inmanagingthe financial healthof the company:
To determine the capital requirementsof businessbothlong-termandshortterm.
To determine the capital structure of the companyand determine the sourcesfromwhererequired
capital will be raisedkeepinginview the riskandreturnmatrix.
To ensure efficientmanagementof cashinorder to ensure bothliquidityandprofitability.
To exercise overall financial control inordertopromote s’afety,profitabilityandconservationof
funds.
Question12.
WireworksLtd.isa company manufacturingdifferentkindsof wires.Despite fierce competitionin
the industry,ithas beenable tomaintainstabilityinitsearningsandasa policy,uses30% of its
profitstodistribute dividends.The small investorsare veryhappywiththe companyasit has been
declaringhighandstable dividendoverpastfive years.
State any one reasonbecause of whichthe companyhas been able todeclare highdividendby
quotingline fromthe paragraph.
Why doyou thinksmall investorsare happywiththe companyfordeclaringstable dividend?

Answer:
Stabilityinearnings:The companyhasbeenable todeclare highdividendbecause itsearningsare
stable.
“Despite fierce competitioninthe industry,ithasbeenable tomaintainstabilityinitsearnings.”
The small investorsare happywiththe companyfordeclaringstable dividendastheyenjoyaregular
income ontheirinvestment.
Question13.
Manoj isa renownedbusinessmaninvolvedinexportbusinessof leathergoods.Asaresponsible
citizen,he choosestouse jute bagsfor packaginginsteadof plasticbags.Moreover,onthe advice of
hisfriends,he decidestouse jute formanufacturingaesthetichandicrafts,keepinginviewthe
growingdemandfornatural goods.Inorder to implementhisplan,afterconductingafeasibility
study,he decidestosetup a separate manufacturingunitforproducingvariedjute products.
Identifythe type of investmentdecisiontakenbyManoj bydecidingtosetup a separate
manufacturingunitforproducingjute products.
State any twofactors that he is likelytoconsiderwhiletakingthisdecision
Answer:
Capital budgetingdecisionhasbeentakenbyManoj.
The factors affectingCapital BudgetingDecisionare asfollows:
Cash inflows:The expectedcashinflowsfromthe proposedprojectsshouldbe carefullyanalysed
and the projectindicatinghighercashinflowsshouldbe selected.
Rate of return:The expectedrate of returnshouldbe carefullystudiedintermsof riskassociated
fromthe proposedproject.If twoprojectsare likelytoofferthe same rate of return,the project
involvinglesserriskshouldbe selected.
Question14.
KhoobsuratPvt.Ltd.is the largesthairsalonchainin the Delhi,withoverafranchise of 200 salons.
The company isnowplanningtosetup a manufacturingunitinFaribadadforproductionof various
kindsof beautyproductsunderitsownbrand name.

Commentuponthe fixedcapital needsof the company.
How will the requirementof fixedcapital of the companychange whenitimplementsitsplantoset
up a manufacturingunit?
Answer:
The fixedcapital needsof the companyare low as itssalonshave beenpromotedinthe formof
franchises.
The requirementof fixedcapital of the companywill increase whenitimplementsitsplantosetup a
manufacturingunitbecause itwill have tomake investmentsinbuyingland,building,machineryetc.
Question15.
Well-beingLtd.isacompany engagedinproductionof organicfoods.Presently,itsellsitsproducts
throughindirectchannelsof distribution.But,consideringthe suddensurge inthe demandfor
organicproducts,the company isnowinclinedtostartits online portal fordirectmarketing.The
financial managersof the companyare planningtouse debtinorder to take advantage of tradingon
equity.Inorderto finance itsexpansionplans,itisplanningto‘raise a debt capital of Rs. 40 lakhs
througha loan @ 10% froman industrial bank.The presentcapital base of the companycomprises
of Rs.9 lakhequitysharesof Rs.10 each. The rate of tax is30%.
In the contextof the above case:
What are the twoconditionsnecessaryfortakingadvantage of tradingonequity?
Assumingthe expectedrate of returnoninvestmenttobe same asit was forthe current yeari.e.
15% , doyou thinkthe financial managerswill be able tomeettheirgoal.Show yourworkings
clearly.
Answer:
The two conditionsnecessaryfortakingadvantage of tradingonequityare :
The rate of returnon investmentshouldbe more thanthe rate of interest.
The amount of interestpaidshouldbe tax deductible.
SourcesSituation1
Amount(inRs.) Situation2
Amount(inRs.)

Equityshares 90,00,000 90,00,000
10 % Debentures NIL 40,00,000
Total Capital 90,00,000 1,30,00,000
EBIT 13,50,000 19,50,000
Less:Interest — – (4,00,000)
EBT 13,50,000 15,50,000
Less:Tax @ 30% – (4,05,000) – (4,65,000)
EAT 9,45,000 10,85,000
No.of sharesof Rs. 10 each 9,00,000 9,00,000
EPS 9,45,000/9,00,000
= 1.05 10,85,000/9,00,000
= 1.21
Yes,the financial managerswill be able tomeettheirgoal asthe projectedEPS,withthe issue of
debt,ishigherthanthe presentEPS.
Case StudiesinBusinessStudiesBusinessStudiesCase StudiesBusinessStudiesCommerce
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