Chapter - 9 Financial Management

Case 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 is known as a pioneer in incense stick 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 materials needed for production follows 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:

1. Identify and state the type of financial decision taken by Arun in the above case:
2. Explain the three factors mentioned in the paragraph which are likely to affect the working capital
requirements of his business. (4)

Q. 2. ‘Adwitiya’ is a company enjoying market leadership in the food brands segment.  Its portfolio
includes three categories namely Snacks, Juices and Confectionery.  Keeping in view the growing
demand for packaged food, it now plans to introduce ready-to-eat food.  Therefore, the company has
planned to undertake investments of nearly ₹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:

1. As a financial manager of the company, which source of finance will you opt for - debt or equity, to
raise the required amount of capital?  Explain by giving any two suitable reasons in support of your
answer.
2. Why are shareholders of the company likely to gain with the issue of debt by the company? (4)

Q. 3. Computer Tech Ltd., is one of the leading information technology outsourcing service 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 a 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:

1. Give any three reasons because of which you think Computer Tech Ltd. has been paying dividends at a
high rate to its shareholders over the past five years.
2. Comment upon the dividend policy which the company is likely to follow this year by stating any two
reasons in support of your answer. (5)

Q. 4. Bhuvan 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 stationery 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:

1. Identify and define the type of financial service that Subhash has offered to Bhuvan.
2. Briefly state any four points highlighting the importance of the type of financial service identified in
part (a).
(5)
 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:

1. Explain the type of risk which increases with the higher use of debt.
2. Describe any four factors due to which the company has decided to opt for equity capital. (6)

Q. 6. Wooden Peripherals Pvt. Ltd. is counted amongst 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, ‘Creation’.

1. Identify the factors mentioned in the paragraph which are likely to affect the fixed capital requirements
of the business for opening new showrooms both in Bangalore and Mumbai separately.
2. “With an increase in the investment in fixed assets, there is a commensurate increase in the working
capital requirement.” Explain the statement with reference to the above case. (3)

Q. 7. Krishna Ltd. is manufacturing steel at its plant in Noida.  Due to economic growth, the demand for
steel is also growing.  The company is planning to set up a new steel plant at Gurugram.  It needs ₹800
crores to start the new plant.  It decides to raise ₹300 crores through debentures, ₹200 crores through
long-term loan from bank and ₹200 crores by issue of equity shares to the public.   It decided to finance
the remaining amount by utilizing its reserves and surplus.

1. State any two points of importance of financial planning for this company.
2. What is the capital structure of this company?  Calculate.
3. Identify the financial decision involved when the company decides to raise ₹800 crores from different
sources of funds.
4. How will the dividend decision of Krishna Ltd. be affected?  Explain.           (6)

Q. 8. Cost of debt is less than cost of equity.  Still a company cannot go with entire debt.  Why?   (3)

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 requirements 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.     
(3)

Q. 10. Yogesh, a business man is engaged in purchasing and selling of ice-creams.   Identify the working
capital requirements of Yogesh giving reason in support of your answer.      (1)

Q. 11. Manish is engaged in the business of garments manufacturing.  Identify the working capital
requirements of Manish giving reason in support of your answer.          (1)

Q. 12. The directors of a manufacturing company are thinking of issuing ₹20 crores worth 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 mind before taking the decision?  Name any four factors.       
(3)

Q. 13. Amit is running an advertising agency and earning a good amount by providing this service to big
industries.  State whether the working capital requirements of this advertising agency will be ‘less’ or
 ‘more’.  Give reason in support of your answer.     
(1)

Q. 14. Tata International Ltd. earned a net profit of ₹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)

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 weak.  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 ₹50 lakhs would be required for undertaking the
modernization and expansion programme.  He also informed her that the stock market was going
through a bullish phase.

1. Keeping the above considerations in mind, name the source of finance Shalini should not choose for
financing the modernization and expansion of her food processing business.  Give two reasons in
support of your answer.
2. Explain any two other factors, apart from those stated in the above situation, which Shalini should keep
in mind while taking this decision.    (5)

Q. 16. 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 is now inclined to start its online portal for direct marketing.  The
financial manager of the company is 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 ₹40 lakhs through
a loan @ 10% from an industrial bank.  The present capital base of the company comprises of ₹9 lakh
equity shares of ₹10 each.  The rate of tax is 30%.
In the context of the above case:

1. What are the two conditions necessary for taking advantage of trading on equity?
2. Assuming the expected rate of return on investment to be same as it was for the current year i.e. 15%,
do you think the financial managers will be able to meet their goal.  Show your workings clearly. (6)