1 “A capital budgeting decision is capable of changing the financial fortune of a business.” Do you agree? Why or why not?
2. Under which situation the EPS of a company falls with increased use of debt? Explain with the help of an example.
3. How does loan components or debentures in the capital structure act as lever to raise the return on equity share capital ?
4. Explain how are the shareholders are likely to gain with the loan component in capital employed with example.
5 What is meant by “Financial Leverage”? How does it affect the capital structure of a company? Explain with the help of an example of favourable financial leverage.
6. Capital structure decision is essentially optimisation of risk-return relationship. Comment
7. The directors of a manufacturing company are thinking of issuing Rs. 20 lacs additional debentures for expansion of their production capacity. This will lead to an 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 ?
8. You are the finance manager of a company. The board of directors have asked you to determine the working capital requirement for the company. State the factors that you would take in consideration while determining the requirement of working capital for the company.
9. Discuss the primary objective of Financial Management.
10. “Financial Planning is not equivalent to or substitute for Financial Management” .Do you agree? Explain.
11. What do you mean by Financial Blueprint of Organisation? Discuss its importance.
12. How does working capital affect both the liquidity as well as profitability of a business ?
13. A businessman who wants to start a manufacturing concern, approaches you to suggest him whether the following manufacturing concern would require large or small working capital: (a) Bread (b) Coolers (c) Sugar (d) Motorcar (e) Furniture manufactured against specific orders (f) Locomotives.
14. Debt and Equity differ significantly in terms of cost and risk . How ?
Answer to indirect question 10
“Financial Planning is not equivalent to or substitute for Financial Management” .Do you agree? Explain.
Answers to NCERT Questions
Short Ans type (Page 265)
Q7 Discuss about working capital affecting both liquidity as well as profitability of a business
Ans. Working capital is excess of current assets over current liabilities.
More Investment in current assets helps in increasing the liquidity of business as compare to Fixed assets as these are converted in to cash or cash equivalents very quickly
Insufficient Investment in current assets make it more difficult for organisation to meet its payment obligations(decreases Liquidity)
But current assets provide little or no returns (they contribute less to profit)as compare to fixed assets
Balance need to be struck between liquidity and profitability as more working capital increases liquidity but decreases profitability
Long Answer Questions
Q2 Capital Structure decision is essentially optimisation of risk-return relationship.Comment
Ans.Capital structure policy involves a trade-off between risk and return.
· Using more debt raises the riskiness of the firms because payment of interest and return of principal amount is obligatory for business. Any default in meeting these commitments may force business to go in to liquidation
· But a higher propor-tion of debt generally leads to a higher expected rate of return for equity shareholders as EPS increases because of Tading on Equity
· We know that if debt is increased beyond a point , the higher risk associated with greater debt tends to lower the share price .
Therefore, the optimal capital structure is the one that strikes a balance between risk and return to achieve our ultimate goal of maximizing the price of the equity shares(Wealth maximisation)