WORKSHEET-19 BUSINESS STUDIES PART 2(CLASS 12)

 CHAPTER 9 FINANCIAL MANAGEMENT

I. Read the following text and answer the following questions on the basis of the same:

Mr. A. Bose is running a successful business. Mr. Bose is the owner of R. K. Cement Ltd. Mr. Bose decided to expand his business by acquiring a Steel Factory. This required an investment of Rs. 60 crores.

To seek advice in this matter, he called his financial advisor Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%). Employ more of cheaper debt may enhance the EPS. Mr. Ghosh also suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also apprised him that issue of debt will not dilute the control of equity shareholders. 

At the same time, the interest on loan is a tax deductible expense for computation of tax liability. After due deliberations with Mr. Ghosh, Mr. Bose decided to raise funds from a financial institution.

ANSWERS ARE HIGHLIGHTED

1. Identify the concept of Financial Management as advised by Mr. Ghosh in the above situation.

A) Capital Budgeting
B) Capital Structure
C) Dividend Decision
D) Working Capital Decision

2. In the above case Mr. Ghosh suggested to raised more fund from debt.
Higher debt-equity ratio results in:

A) Lower financial risk
B) Higher degree of operating risk
C) Higher degree of financial risk
D) Higher Earning of profit.

3. “Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%)” The proportion of debt in the overall capital is called___________.

A) Working Capital
B) Financial Leverage
C) Total Assets
D) None of these

4. Employ more of cheaper debt may enhance the EPS. Such practice is called:

A) Equity Trading
B) Financial Leverage
C) Investment Decision
D) Trading on Equity

II Read the following text and answer the following questions on the basis of the same: 

Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional Rs.80,00,000 for replacing machines with modern machinery of higher production capacity. It involves committing the finance on a long term basis. These decisions are very crucial for any business since they affect its earning capacity in the long run. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was Rs. 8,00,000 and total capital investment was Rs. 1,00,00,000. Instead of issuing 10% Debenture the Company can issue Equity Shares for raising the fund. The financial manager of the company would normally opt for a source which is the cheapest. 

1. What is the other name of long term decision?

A) Capital Budgeting
B) Gross working capital
C) Financial management
D) Working Capital

2.  A decision for replacing machines with modern machinery of higher production capacity is a:

A) Financing decision
B) Working capital decision
C) Investment decision
D) None of the above 

3. A decision for raising fund of Rs. 80,00,000 either from 10% Debenture or Equity Shares is a:

A) Financing decision
B) Dividend decision
C) Investment decision
D) None of the above

4. The financing decisions are affected by various factors. Which one of the following factor is discussed in the above case?
Choose the correct option.

A) Cash Flow Position of the Company
B) Cost
C) Amount of Earnings
D) Taxation Policy