NIRMALA CONVENT SCHOOL
Weekly test 4, March 2024
SUB: BUSINESS STUDIES MARKS: 40
CLASS: 12
Q1) Choose the correct option (1 mark each) [1X8=8]
1) Under which of the following situations a company is not likely to issue equity capital?
(a) When the debt service coverage ratio is high.
(b) When the interest coverage ratio is high.
(c) When the cost of debt capital is low.
(d) All of the above
2) If in a particular situation, the earnings per share (EPS) fall with the increased use of debt, it indicates that
_____.
(a) The rate of return on investment (RoI) is less than the cost of debt
(b) The rate of return on investment is more than the cost of debt
(c) The cost of debt is less than the rate of return on investment
(d) None of the above
3) A higher financial leverage ratio indicates that _____.
(a) The dependency of the firm on the debt is more
(b) The dependency of the firm on the debt is less
(c) The proportion of equity in the total capital is high
(d) None of the above
4) A company must adhere to the provisions of the Companies Act while taking the dividend decision. Identify
the related factor of the dividend decision being mentioned in the above line.
(a) Contractual constraints
(b) Legal constraints
(c) Access to capital market
(d) Preferences of shareholders
5) Name the process that enables the management to foresee the fund requirements, both the quantum as well as
the timing.
(a) Financial management
(b) Capital budgeting decisions
(c) Dividend decision
(d) Financial planning
6) Higher debt-equity ratio results in:
(a) Lower financial risk
(b) Higher degree of operating risk
(c) Higher degree of financial risk
(d) Higher EPS
7) Long-term investment decisions are also called as
(a) Working capital decisions
(b) Capital budgeting decisions
(c) Dividend decision
(d) Financing decisions
8) Bharti Ltd. is a leading mobile company. It is planning to acquire Queen Ltd. (its close competitor) business
worth `1,000 crores. Which financial decision is involved in it?
(a) Investment (b) Financing
(c) Dividend (d) None of these
Q2) Answer the following (3 marks each) [3X2=6]
9] What is financial risk? Why does it arise?
10] Aval Ltd. is engaged in the business of export of canvas goods and bags. In the past, the performance of the
company had been up to the expectations. In line with the latest demand in the market, the company decided to
venture into leather goods for which it required specialised machinery. For this, the Finance Manager Prabhu
prepared a financial blueprint of the organisation's future operations to estimate the amount of funds required
and the timings with the objective to ensure that enough funds are available at the right time. 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 of the business. For the remaining funds, he is trying to find
alternative sources from outside.
(a) Identify the financial concept discussed in the above paragraph. Also, state any 3 the factors affecting the
concept identified
Q3) Answer the following (4 marks each) [4X2=8]
11] Explain the concept of financing decision alongwith the factors affecting it.
12] Though Angel Pharma is making huge profits every year on a regular basis, it is not able to provide
sufficient dividend to its shareholders. As a result, EPS remains low. Identify and explain the concept that can
help to resolve the problem.
Q4) Answer the following (6 marks each) [6X3=18]
13] Explain the concept of capital structure alongwith factors affecting the choice of capital structure.
14] Explain the concept of Financial Planning alongwith its importance.
15] Somnath Ltd. is engaged in the export of garments. In the past, the performance of the company had been up
to the expectations. In line with the latest technology, the company decided to upgrade its machinery. Business
For this, the Finance Manager, Dalmia estimated the amount of funds required and the timings. This will help
the company and link the investment and the financing decisions on a continuous basis. Dalmia therefore, began
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 of the business. For the remaining funds he is trying in to find out alternative sources from
outside. Justify the financial concept discussed in the above paragraph. Also, state the objectives to be achieved
by the use of financial concepts, so identified
OR
Well-being Ltd. is a company engaged in production of organic foods. Presently, it sells 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:
1. What are the two conditions necessary for taking advantage of trading on equity?
2. Assuming the expected rate of return on investment to be same as it was for the current year i.e. 15% , do you
think the financial managers will be able to meet their goal. Show your workings clearly