paper industry. During his recent visit to his friend’s place in Mysore, he was fascinated by the exclusive variety of incense sticks available there. His friend tells him that Mysore region in known as a pioneer in the activity of Agarbathi manufacturing because it has a natural reserve of forest products especially Sandalwood to provide for the base material used in production. Moreover, the suppliers of other types of raw material needed for production follow a liberal credit policy and the time required to manufacture incense sticks is relatively less. Considering the various factors, Arun decides to venture into this line of business by setting up a manufacturing unit in Mysore. a) Identify the three factors mentioned in the paragraph which are likely to affect the working capital requirements of his business.
2.. ‘Adwitiya’ is a company enjoying market
leadership in the food brands segment. Its portfolio includes three categories in the Foods business namely Snack Foods, Juices and Confectionery. Keeping in the with the growing demand for packaged food it now plans to introduce ready-To-Eat Foods. Therefore, the company has planned to undertake investments of nearly Rs. 450 crores for its new line of business. As per the current financial report, the interest coverage ratio of the company and return on investment is higher. Moreover, the corporate tax rate is high. a) As a financial manager of the company, which source of finance will you opt for debt or equity, to raise the required amount of capital? Explain by giving any two suitable reasons in support of your answer. b) Why are the shareholders of the company like to gain from the issue of debt by the company?
3. 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. a) 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. b) Comment upon the likely dividend policy of the company this years by stating any two reasons in support of your answer.
4.Bhuvan inherited a very large area of
agricultural land in Haryana after the death of his grandfather. He plans to sell this piece of land and use the money to set up a small scale paper factory to manufacture all kinds of stationary items from recycled paper. Being an amateur in business, he decides to consult his friend Subhash who works in a financial consultancy firm. Subhash helps him to prepare a blue print of his future business operations on the basis of sales forecast in next five years. Based on these estimates, he helps Bhuvan to assess the fixed and working capital requirements of business. a) Identify the type of financial service that Subhash has offered to Bhuvan. b) Briefly state any four points highlighting the importance of the type of financial service identified in part (a)
5.‘Madhur Milan’ is a popular online matrimonial
portal. It seeks to provide personalized match making service. The company has 80 offices in India, and is now planning to open offices in Singapore, Dubai and Canada to cater to its customers beyond the country. The company has decided to opt for the sources of equity capital to raise the required amount of capital. a) Identify and explain the type of risk which increases with the higher use of debt. b) Explain briefly any four factors because of which you think the company has decided to opt for equity capital.
6.Wooden Peripheral Pvt. Ltd. is counted
among the top furniture companies in Delhi. It is known for offering innovative designs and high quality furniture at affordable prices. The company deals in a wide product range of home and office furniture through its eight showrooms in Delhi. The company is now planning to open five new showrooms each in Mumbai and Bangalore. In Bangalore it intends to take the space for the showrooms on lease whereas for opening showrooms in Mumbai, it has collaborated with a popular home furnishing brand, ‘Creations.’ a) Identify the factors mentioned in the paragraph which are likely to affect the fixed capital requirements of the business for opening new showrooms both in Bangalore and Mumbai separately. b) “With an increase in the investment in fixed assets, there is a commensurate increase in the working capital requirement.” Explain the statement with reference to the case above.
7.Krishna Ltd. is manufacturing steel at its plant
at Noida. Due to economic growth, the demand for steel is also growing. The company is planning to set up a new steel plant at Gurgaon. It needs Rs. 800 crore to start the new plant. It decides to raise Rs. 300 crore through debentures, Rs. 200 crore through long-term loan from banks and Rs. 200 crore by issue of equity share to the public. It decided to finance the remaining amount by utilizing its reserves and surplus. a) State the importance of financial planning for this company. b) What is the capital structure of this company? Explain. c) Identify the financial decision involved when the company decides to raise Rs. 800 crore from different sources of funds. d) How will the dividend decision of Krishna Ltd. be affected? Explain. (6 marks) 8. Shalini, after acquiring a degree in Hotel Management and Business administration took over her family food processing company of manufacturing pickles, jams and squashes. The business was established by her great grandmother and was doing reasonably well. However the fixed operating costs of the business were high and the cash flow position was week. She wanted to undertake modernization of the existing business to introduce the latest manufacturing processes and diversify into the market of chocolates and candies. She was very enthusiastic and approached a finance consultant, who told her that approximately Rs. 50 lakh would be required for undertaking the modernization and expansion programme. He also informed her that her stock market was going through a bullish phase. a) Keeping the above considerations in mind, name the source of finance Shalini should not choose for financing the modernization and expansion of her food processing business. Give one reason in support of your answer. b) Explain any two other factors, apart from those stated in the above situation, which Shalini should keep in mind while taking this decision. (6 Marks)
9. Sarah Ltd. is a company manufacturing
cotton yarn. It has been consistently earning good profits for many years. This year too, it has been able to generate enough profits. There’re is availability of enough cash in the company and good prospects for growth in future. It is a well managed organization and believes in quality, equal employment opportunities and good remuneration practices. It has many shareholders who prefer to receive a regular income from their investments. It has taken a loan of Rs. 40 lakhs from IDBI and is bound by certain restrictions on the payment of dividend according to the terms of loan agreement. a) The above discussion about the company leads to various factors which decide how much of the profits should be retained and how much has to be distributed by the company. b) Quoting the lines from the above discussion identify and explain and four such factors. (6 Marks) 10. Shubh Ltd. is manufacturing steel at its plant in India. It is enjoying a buoyant demand for its products as economic growth is about 7%-8% and the demand for steel is growing. The company has decided to set up a new steel plant to cash on the increased demand. It is estimated that it will require about Rs. 2000 crore to set up and about Rs. 500 crore of working capital to start the new plant. (6 Marks) State the objective of financial management for this company. a) Identify and state the decision taken by the finance manager in the above case. b) State any two common factors affecting the fixed and working capital requirements of Shubh Ltd. 11. In a company profits are high and in future less scope of expansion exists. The company has decided to distribute less amount of share of profits to its shareholders. Identify of share of profits to its shareholders. a) State any one value which is affected by the company’s decision. (3 Marks)
12. . A company’s earnings before interest
and tax is Rs. 7 lac. It pays 10% interest on its debt. Total investment of company is rs. 50 lac. a) Advise company whenever it should include debt or equity to raise its capital. b) Name the concept related to this. c) Will be company’s decision to raise funds from debt or equity will change if company’s EBIT becomes 3 lac. 13. Storage Solution Ltd. is a large warehousing network company operating through a chain of warehouses at 40 different locations across India. The company now intends to undertake computerization of its owned ware houses as it seeks to provide better value added and cost effective solutions for scientific storage and preservation services to the market participants dealing in agricultural products including farmers, traders, etc. a) How is the decision to undertake computerization of owned warehouses likely to affect the fixed capital requirements of its business? b) Name any two sources that company may use to finance the implementation of this plan. 14. Visions Ltd. is a renowned multiplex operator in India. Presently, it owns 234 screens in 45 properties at 20 locations in the country. Considering the fact that the there is a growing trend among the people to spend more of their disposable income on entertainment, two years back the company had decided to add more screens to its existing set up and increase facilities to enhance leisure, food chains etc. it had then floated an initial public offer of equity shares in order to raise the desired capital. The issue was fully subscribed and paid. Over the year, the sales and profits of the company have increased tremendously and it has been declaring higher dividend and the market price of its shares has increased manifolds. a) Name the different kinds of financial decisions taken by the company by quoting lines from the paragraph. b) Do you think the financial management team of the company has been able to achieve its prime objective? Why or why not? Give a reason in support of your answer.
15. Wireworks Ltd. is a company
manufacturing different kinds of wires. Despite fierce competition in the industry, it has been able to maintain stability in its earnings and as a policy, uses 305 of its profits to distribute dividends. The small investors are very happy with the company as it has been declaring high and stable dividend over past five years. a) State any one reason because of which the company has been able to declare high dividend by quoting line from the paragraph. b) Why do you think small investors are happy with the company for declaring stable dividend?
16. . Manoj is a renowned businessman
involved in export business of leather goods. As a responsible citizen, he chooses to use jute bags for packaging instead of plastic bags. Moreover, on the advice of his friends, he decides to use jute for manufacturing aesthetic handicrafts, keeping in view the growing demand for natural goods. In order to implement his plan, after conducting a feasibility study, he decides to set up a separate manufacturing unit for producing varied jute products. a) Identify the type of investment decision taken by Manoj by deciding to set up a separate manufacturing unit for producing jute products. b) State any two factors that he is likely to consider while taking this decision.
17. 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 yis now inclined to start its online portal for direct marketing. The financial managers of the company area 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. 15%, do you think the financial managers will be able to meet their goal. Show your workings clearly.
18. Cost of debt is less than cost of equity.
Still a company cannot go with entire debt. Why?(3 marks)
19. Q19. Amar is doing his transport business
in Delhi. His buses are generally used for the tourists going to Jaipur and Agra. Identify the working capital requirement of Amar giving reason in support of your answer. Further Amar wants to expand and diversify his Transport business. Enumerate any four factors that will affect his fixed capital requirements.(3Marks)
20. . Yogesh, a business man is engaged in
publishing and selling of Ice-creams. Identify the working capital requirement of Yogesh giving reason in support of your answer. (1 Mark)
21. . Manish is engaged in business of
garments manufacturing. Identify the working capital requirement of Manish giving reason in support of your answer. (1 Mark)
22. The directors of a manufacturing company
are thinking of issuing Rs. 20 crores worth additional debentures for expansion of their production capacity. This will lead to n increase in debt equity ratio from 2 : 1 to 3 : 1. What are the risks involved in it? What factors other than risk do you think the directors should keep in view before taking the decision? Name any four factors. (3 Marks)
23. Amit is running an ‘Advertising agency’
and earning a lot by providing this service to big industries. State whether the working capital requirement of the firm will be ‘less’ or ‘more’. Give reason in support of your answer.(1 Mark)
24. Tata International Ltd. earned a net profit
of Rs. 50 crores. Ankit the finance manager of Tata International Ltd. wants to decide how to appropriate these profits. Identify the decision that Ankit will have to take and also discuss any five factors which help him in taking this decision. (6 Marks)
25. ‘Indian Logistics’ has its own warehousing
arrangements at key locations across the country. Its warehousing services help business firms to reduce their overheads, increase efficiency and cut down distribution time. State with reason, whether the working capital requirements of ‘India Logistics’ will be high or low. (1 Mark)