As a student of business studies, you are expected to learn about the various aspects of management, such as planning, organizing, staffing, directing, and controlling. Case studies are an essential part of the Class 12 Business Studies curriculum as they provide students with an opportunity to apply theoretical knowledge to practical situations. Let's see some Case Study Questions on Financial Management of Business Studies.
Q. 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.
In context of the above case:
Ans.
Q. 2. ‘Adwitiya’ is a company enjoying market leadership in the food brands segment. It’s 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.
In context of the above case:
Ans.
1. As a financial manager of the company, I will opt for debt to raise the required amount of capital.
I support my decision by giving the following reasons:
2. The shareholders of the company are likely to gain from the issue of debt by the company because the return on investment is higher. It helps a company to take advantage of trading on equity to increase the earnings per share.
Q. 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.
In context of the above case:
Ans.
Q. 4. Bhuvn 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.
In context of the above case:
Ans.
Q. 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.
In context of the above case:
Ans.
Q. 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.’
Ans.
1. The fixed capital requirements of Wooden Peripheral Pvt. Ltd. for opening new showrooms in Bangalore will be relatively less as its taking space on lease, so only rentals have to be paid.
Similarly, its fixed capital requirement for opening showrooms in Mumbai will be reduced as its going to share the costs with another company through collaboration.
2. It’s true that, “ With an increase in the investment in fixed assets, there is a commensurate increase in the working capital requirements,” Like in the above case, Wooden Peripheral Pvt. Ltd. is planning to investment in new showrooms. Consequently, its requirement of working capital will increase s it will need more money to stock goods, pay electricity bills and salaries to staff. Also, it intends to take the space for the showrooms I Mumbai on lease so it will have to pay rentals.
Q. 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.
Ans.
i.e., Debit.
Equity
For Krishna Ltd.
Debt = Debentures + Long tgerm loans from banks = 300 + 200 = Rs. 500 crore.
Equity = Share capital + Reserves and surplus (or retained earnings)
= 200 + 100 = Rs. 300 crores.
Therefore, debt equity ratio = 500 = 1.67 : 1
300
Q. 8. Cost of debt is less than cost of equity. Still a company cannot go with entire debt. Why? (3 marks)
Ans. Because debt is more risky for a business, since payment of interest and return principal amount is compulsory for the business. Any default in meeting these commitments may force the business to go into liquidation. That is, increased use of debt increases financial risk of a business (the chance that a firm would fail to pay interest on debt and the principal amount).
Q. 9. 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)
Ans. Working capital requirements of Amar would be less as it is a SERVICE industry.
Factors which will affects his fixed capital requirements are:
Q. 10. 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)
Ans. Working capital requirements of Yogesh would be less as it is a TRADING business.
Q. 11. Manish is engaged in business of garments manufacturing. Identify the working capital requirement of Manish giving reason in support of your answer. (1 Mark)
Ans. Working capital requirements of Manish would be less as it is a MANUFACTURING business. So raw material needs to be converted into finished goods before any sales can become possible.
Q. 12. 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)
Ans. Higher use of debt increases the fixed financial charges of a business because payment of interest and return of principal amount is compulsory. Any default in meeting these commitments may force the business to go into liquidation. As a result, increased use of debt increases the financial risk of a business. Financial risk is the chance that a firm would fail to meet its payment obligations.
Other factors affecting this decision are:
Q. 13. 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)
Ans. Less working capital is required as service industries which usually do not have to maintain inventory require less working capital.
Q. 14. 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)
Ans. Dividend decision
Factors affecting dividend decision.
Q. 15. 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.
Ans.
Any one reason
Q. 16. ‘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)
Ans. Low, as it is a service industry, which usually do not have to maintain inventory.
Q. 17. ‘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.
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.
Quoting the lines from the above discussion identify and explain and four such factors. (6 Marks)
Ans. Factors affecting dividend decision: (Any four)
It has been consistently earning good profits for many years’.
Stability of earnings affects dividend decision as a company having stable earnings is in a position to declare higher dividends.
‘There is available of enough cash in the company’.
A good cash flow positions is necessary for declaration of dividend.
‘Good prospects for growth in the future.’
If a company has good growth opportunities, it pays out less dividend.
‘It has many shareholders who prefer to receive regular income from their investments.’
Shareholder’s preference is kept in mind by the management before declaring dividends.
‘It has taken a loan of Rs. Rs. 40 Lakhs from IDBI and … agreement.’
Which taking dividend decision, companies keep in mind the restrictions imposed by the lenders in the loan agreement.
Q. 18. 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.
Ans.
Value: Maximisation of shareholders’ wealth.
It relates to how the firm’s funds are invested in different assets – fixed assets and working capital.
Q. 19. 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.
Ans.
This decision involves how much of the profit earned by the company (after paying tax) is to be distributed to the shareholder and how much of it should be retained in the business.
Q. 20. 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.
In context of the above case:
Ans.
Q. 21. 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.
In context of the above case:
Ans.
Q. 22. 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.
In context of the above case:
Ans.
“Despite fierce competition in the industry, it has been able to maintain stability in its earnings.”
Q. 23. 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.
In context of the above case:
Ans.
Q. 24. 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:
Ans.
2.
Yes, the financial managers will be able to meet their goal as the projected EPS, with the issue of debt, is higher than the present EPS.
Q. 25. ‘Ganesh Steel Ltd.’ is a large and credit-worthy company manufacturing steel for the Indian market. It now wants to cater to the Asian market and decides to invest in new hi-tech machines. Since the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost the company decides to tap the money-market.
Ans.
It is a unsecured promissory note issued by large and credit-worthy companies to raise short terms funds at lower rates of interest than the prevailing market rates.
Get an overview of Business Finance through this video.
Find NCERT Solutions of Financial Management here.
53 videos|206 docs|49 tests
|
1. What is financial management? |
2. What are the key functions of financial management? |
3. What are the benefits of financial management? |
4. What are the challenges of financial management? |
5. What are the best practices for financial management? |
|
Explore Courses for Commerce exam
|