Chapter – Financial Management

1.Arun is a successful businessman in the

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)