XII B. St Financial Management M.
M:40
Q1: Financial leverage refers to the portion of debt in the overall capital. State T/F 1
Q2: Capital budgeting decision has a direct impact on liquidity as well as profitability of a
business. State T/F 1
Q3: Another name for long term investment decision is ___________________. 1
Q4: Favourable financial leverage is when __________________is greater than rate of interest on
debt. 1
Q5: Return on investment is computed as?
a. Total Investment X EBIT b. EBIT X EBT
c. EBIT / Total Investment d. EBT / Total Investment. 1
Q6: A decision to acquire a new and modern plant to upgrade an old one is a:
a. financing decision b. working capital decision
c. investment decision d. None of the above. 1
Q7: Match the concept with related formulas:
a. ICR. I. EAT/number of shares
b. Return on investment ll. EBIT/interest
c. Capital structure lll Debt/ Debt+Equity
d. EPS. IV . EBIT/Capital investment*100 1
Q8: Match the following on the basis of financial concept:
a flotation cost. I risk of default on payment
b. Financial planning ll proportion ofdebt in total capital structure
c. Financial leverage lll. Cost of raising funds
d. Financial risk lV. Process of estimating the requirement of funds
and specifying the source of funds 1
Q9: Ramnath Limited is dealing in Import of organic food items in bulk. The company sells the
items in smaller quantities in attractive packages. Performance of the company has been up to
the Expectations in the past. Keeping up with the latest packaging Technology the company
decided to upgrade its machinery. For this the Finance manager of the company Mr. Vikrant Dhol
estimated the amount of funds required and the timings this will help the company in linking the
investment and the financing decisions on a continuous basis.
Mr. Vikrant begins with the preparation of a sales forecast for the next four years. He also
collected the relevant data about the profit estimates in the coming years. By doing this he
wanted to be sure about the availability of funds from the internal sources. For the remaining
funds he is trying to find out alternative sources.
a) Identify the financial concept discussed in the above paragraph.
b) Also state any four points of importance of the financial concept so identified. 3
Q10: Steelone enterprise is manufacturing high quality Steel utensils. The demand for steel
utensils is rising as people are getting aware that plastic is not good for health. This has led to
increase in production of Steel utensils. To encourage sales Steelone enterprises declared a liberal
credit policy which allows 3 months credit to its wholesale buyers.
a) In the light of the above, identify the two factors affecting working capital requirements of
Steel one Enterprise.
State with reason whether the factor as identified above will result in high or low working capital
requirement 3
Q11: Explain the importance of fixed capital decisions. 3
Q12: What is the primary objective of financial management? Explain. 3
Q13: Computer Tech Ltd., is one of the leading information technology outsourcing services providers in
India. The company provides business consultancy and outsourcing services to its clients. Over the past
five years the company has been paying dividends at high rate to its shareholders. However, this year,
although the earnings of the company are high, its liquidity position is not so good. Moreover, the
company plans to undertake new ventures in order to expand its business.
In context of the above case:
1. Give any three reasons because of which you think Computer Tech Ltd. has been paying dividends at
high rate to its shareholders over the past five years.
2. Comment upon the likely dividend policy of the company this years by stating any two reasons in
support of your answer. 4
Q14: Explain any four factors affecting Capital Structure. 4
Q15: Well-being Ltd. is a company engaged in production of organic foods. Presently, it sell its products
through indirect channels of distribution. But, considering the sudden surge in the demand for
organic products, the company is now inclined to start its online portal for direct marketing. The
financial managers of the company are planning to use debt in order to take advantage of trading
on equity. In order to finance its expansion plans, it is planning to raise a debt capital of Rs 40
lakhs through a loan @ 10% from an industrial bank. The present capital base of the company
comprises of Rs 9 lakh equity shares of Rs 10 each. The rate of tax is 30%.
In the context of the above case:
(a) What are the two conditions necessary for taking advantage of trading on equity?
(b) Assuming the expected rate of return on investment to be same as it was for the current year
i.e, do think the financial managers will be able to meet their goal. Show your workings clearly. 6
Q16: a) Yogesh, a businessman is engaged in purchasing and selling of Ice-creams. Identify the working
capital requirement of Manish giving reasons in support of your answer. Explain any two factors
that will affect his fixed capital requirements. 3
b) Aarohan Ltd. An automobile manufacturer was diversifying into manufacturing two-wheelers.
They knew that India is on a growth path and a new breed of consumer is eager for a first vehicle.
The market responded very well to the new product. The company did not have to allow credit, as
it had advance orders from four to six months with deposits paid. Also, due to efficiency in
managing their operations as soon as a vehicle was off the assembly line, it was out to the dealers.
Give any one reason discussed above which helped the firm in managing its working capital
efficiently. 3