Test: Financial Management- Case Based Type Questions - Commerce MCQ

Direction: Read the following text and answer the questions given below:

‘Spun Ltd.’ is a company manufacturing cotton Yarn for the past 15 years. It has been consistently earning good profits for many years and is a market leader. This year too, it has been able to generate enough profits. There is availability of enough cash in the company and good prospects for growth in future as the demand for its products has been consistently increasing. It is a well-managed organisation and believes in quality, equal employment opportunities and good remuneration practices and has been able to maintain the same for the past several years.

It has many shareholders who prefer to receive a regular income from their investments. It has taken a loan of ₹ 40 lakhs from ICICI and is bound by certain restrictions on the payment of dividend according to the terms of loan agreement.

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.

Q. It has many shareholders who prefer to receive regular income from their investments.’ This statement represents which factor affecting the dividend decision of Spun Ltd.?

Direction: 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 ₹ 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 ₹ 8,00,000 and total capital investment was ₹ 1,00,00,000. Instead of issuing 10% debenture the company can issue equity shares for raising the funds. The financial manager of the company would normally opt for a source which is the cheapest.

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

Direction: 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 ₹ 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 ₹ 8,00,000 and total capital investment was ₹ 1,00,00,000. Instead of issuing 10% debenture the company can issue equity shares for raising the funds. The financial manager of the company would normally opt for a source which is the cheapest.

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

Direction: 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 ₹ 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 ₹ 8,00,000 and total capital investment was ₹ 1,00,00,000. Instead of issuing 10% debenture the company can issue equity shares for raising the funds. The financial manager of the company would normally opt for a source which is the cheapest.

Q. What is the other name of long-term decision ?

Direction: 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 ₹ 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 ₹ 8,00,000 and total capital investment was ₹ 1,00,00,000. Instead of issuing 10% debenture the company can issue equity shares for raising the funds. The financial manager of the company would normally opt for a source which is the cheapest.

Q. A decision for raising fund of ₹ 80,00,000 either from 10% debenture or equity shares is a:

Direction: 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 ₹ 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.

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

Direction: 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 ₹ 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.

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

Direction: 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 ₹ 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.

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

Direction: 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 ₹ 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.

Q. “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 .................... .

Direction: Read the following text and answer the questions given below:

Charu and Arpita, who are young fashion designers, left their job with a famous fashion designer chain to set–up a company ‘Trends Pvt. Ltd’. They decided to run a boutique during the day and coaching classes for entrance examination of National Institute of Fashion Designing in the evening. For the coaching centre, they took on lease the first floor of a nearby building. Their major expense was money spent on photocopying of notes for their students. They thought of buying a photocopier knowing fully that their scale of operations was not sufficient to make full use of the photocopier.

In the basement of the building of ‘Trends Pvt. Ltd.’, Ramesh and Suresh were carrying on a printing and stationery business in the name of ‘Fine Prints Pvt. Ltd.’ Charu approached Ramesh with the proposal to buy a photocopier jointly which could be used by both of them without making separate investment. Ramesh agreed to this.

Q. ’Charu approached Ramesh with the proposal to buy a photocopier jointly which could be used by both of them without making separate investment.’ This statement represents which factor affecting the fixed capital requirements of Trends Pvt. Ltd.

Direction: Read the following text and answer the questions given below:

Charu and Arpita, who are young fashion designers, left their job with a famous fashion designer chain to set–up a company ‘Trends Pvt. Ltd’. They decided to run a boutique during the day and coaching classes for entrance examination of National Institute of Fashion Designing in the evening. For the coaching centre, they took on lease the first floor of a nearby building. Their major expense was money spent on photocopying of notes for their students. They thought of buying a photocopier knowing fully that their scale of operations was not sufficient to make full use of the photocopier.

In the basement of the building of ‘Trends Pvt. Ltd.’, Ramesh and Suresh were carrying on a printing and stationery business in the name of ‘Fine Prints Pvt. Ltd.’ Charu approached Ramesh with the proposal to buy a photocopier jointly which could be used by both of them without making separate investment. Ramesh agreed to this.

Q. ’For the coaching centre, they took on lease the first floor of a nearby building.’ This statement represents which factor affecting the fixed capital requirements of Trends Pvt. Ltd.?

Direction: Read the following text and answer the questions given below:

Charu and Arpita, who are young fashion designers, left their job with a famous fashion designer chain to set–up a company ‘Trends Pvt. Ltd’. They decided to run a boutique during the day and coaching classes for entrance examination of National Institute of Fashion Designing in the evening. For the coaching centre, they took on lease the first floor of a nearby building. Their major expense was money spent on photocopying of notes for their students. They thought of buying a photocopier knowing fully that their scale of operations was not sufficient to make full use of the photocopier.

In the basement of the building of ‘Trends Pvt. Ltd.’, Ramesh and Suresh were carrying on a printing and stationery business in the name of ‘Fine Prints Pvt. Ltd.’ Charu approached Ramesh with the proposal to buy a photocopier jointly which could be used by both of them without making separate investment. Ramesh agreed to this.

Q. ’They decided to run a boutique during the day and coaching classes for entrance examination of National Institute of Fashion Designing in the evening.’ This statement represents which factor affecting the fixed capital requirements of Trends Pvt. Ltd.?