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


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

Test: Financial Management- Case Based Type Questions for Commerce 2024 is part of Commerce preparation. The Test: Financial Management- Case Based Type Questions questions and answers have been prepared according to the Commerce exam syllabus.The Test: Financial Management- Case Based Type Questions MCQs are made for Commerce 2024 Exam. Find important definitions, questions, notes, meanings, examples, exercises, MCQs and online tests for Test: Financial Management- Case Based Type Questions below.
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Test: Financial Management- Case Based Type Questions - Question 1
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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 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.’ This statement represents which factor affecting the dividend decision of Spun Ltd.?

Detailed Solution for Test: Financial Management- Case Based Type Questions - Question 1
While granting loans to a company, sometimes the lender may impose certain restrictions on the payment of dividends in future. The companies are required to ensure that the dividend does not violate the terms of the loan agreement in this regard.
Test: Financial Management- Case Based Type Questions - Question 2
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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. ‘There is availability of enough cash in the company.’ This statement represents which factor affecting the dividend decision of Spun Ltd.?

Detailed Solution for Test: Financial Management- Case Based Type Questions - Question 2
The payment of dividend involves an outflow of cash. A company may be earning profit but may be short on cash. Availability of enough cash in the company is necessary for declaration of dividend.
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Test: Financial Management- Case Based Type Questions - Question 3
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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 been consistently earning good profits for many years’. This statement represents which factor affecting the dividend decision of Spun Ltd.?

Detailed Solution for Test: Financial Management- Case Based Type Questions - Question 3
A company having stable earning is in a better position to declare higher dividends. As against this, a company having unstable earnings is likely to pay smaller dividend.
Test: Financial Management- Case Based Type Questions - Question 4
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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.?
Detailed Solution for Test: Financial Management- Case Based Type Questions - Question 4
Preference shares, more commonly referred to as preferred stock, are shares of a company's stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders.
Test: Financial Management- Case Based Type Questions - Question 5
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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?
Detailed Solution for Test: Financial Management- Case Based Type Questions - Question 5
The cost of raising funds through different sources are different. A prudent financial manager would normally opt for a source which is the cheapest.
Test: Financial Management- Case Based Type Questions - Question 6
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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:
Detailed Solution for Test: Financial Management- Case Based Type Questions - Question 6
Investment decision It relates to as how the funds of a firm are to be invested into different assets, so that the firm is able to earn highest possible return for the investors. Investment decision can be long-term, also known as capital budgeting where the funds are commited into long-term basis.
Test: Financial Management- Case Based Type Questions - Question 7
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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 ?

Detailed Solution for Test: Financial Management- Case Based Type Questions - Question 7
Capital budgeting decision. involves committing the finance on a long-term basis. For example, making investment in a new machine to replace an existing one or acquiring a new fixed asset or opening a new branch, etc. These decisions are very crucial for any business since they affect its earning capacity in the long run.
Test: Financial Management- Case Based Type Questions - Question 8
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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:
Detailed Solution for Test: Financial Management- Case Based Type Questions - Question 8
Financing decision is about the quantum of finance to be raised from various long-term sources.
Test: Financial Management- Case Based Type Questions - Question 9
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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:
Detailed Solution for Test: Financial Management- Case Based Type Questions - Question 9
Trading on Equity refers to the increase in profit earned by the equity shareholders due to the presence of fixed financial charges like interest.
Test: Financial Management- Case Based Type Questions - Question 10
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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:

Detailed Solution for Test: Financial Management- Case Based Type Questions - Question 10
A high debt/equity ratio is often associated with high risk; it means that a company has been aggressive in financing its growth with debt. If a lot of debt is used to finance growth, a company could potentially generate more earnings than it would have without that financing.
Test: Financial Management- Case Based Type Questions - Question 11
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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.
Detailed Solution for Test: Financial Management- Case Based Type Questions - Question 11
Capital structure refers to the mix between owners and borrowed funds. Capital structure of a company affects both the profitability and the financial risk. A capital structure will be said to be optimal when the proportion of debt and equity is such that it results in an increase in the value of the equity share.
Test: Financial Management- Case Based Type Questions - Question 12
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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 .................... .
Detailed Solution for Test: Financial Management- Case Based Type Questions - Question 12
As the financial leverage increases, the cost of funds declines because of increased use of cheaper debt but the financial risk increases. The impact of financial leverage on the profitability of a business can be seen through EBIT-EPS (Earning before Interest and Taxes-Earning per Share) analysis.
Test: Financial Management- Case Based Type Questions - Question 13
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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.
Detailed Solution for Test: Financial Management- Case Based Type Questions - Question 13
If companies are preferring collaborations, then companies will need less fixed capital as they can share plant and machinery with their collaborators but if company prefers to operate as independent unit then there is more requirement of fixed capital.
Test: Financial Management- Case Based Type Questions - Question 14
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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.?
Detailed Solution for Test: Financial Management- Case Based Type Questions - Question 14
Alternative finance is any type of business finance that doesn't come from a mainstream provider like a high street bank. Mainstream finance is great for many businesses but the banks often have criteria which smaller businesses can't fulfil, and they need other options.
Test: Financial Management- Case Based Type Questions - Question 15
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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.?
Detailed Solution for Test: Financial Management- Case Based Type Questions - Question 15
A firm may choose to diversify its operations for various reasons. With diversification, fixed capital requirements increase e.g., a textile company is diversifying and starting a cement manufacturing plant.
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