Practice Questions

Define 'working capital'.

List the three broad financial decisions that a financial manager makes.

Justify why 'Floatation Costs' are an important factor to consider while making a financing decision.

Recall the formula for the Interest Coverage Ratio (ICR).

A company is planning to diversify into a completely new and unrelated line of business. Evaluate the impact of this decision on its fixed capital requirements.

What is a capital budgeting decision?

Demonstrate with an example how the 'Control' consideration can influence a company's choice between debt and equity financing.

Compare the primary objectives of an 'Investment Decision' and a 'Financing Decision' within a company.

A company's Return on Investment (RoI) is 15 percent, while the interest rate on available debt is 10 percent. Justify whether the company should use 'Trading on Equity'.

Define 'business finance'.

Name the primary objective of financial management.

Justify why a company with high fixed operating costs should opt for a capital structure with lower debt.

Justify why a business that deals in seasonal goods, like woolen garments, would require higher working capital.

A business is shifting from a labour-intensive to a capital-intensive production technique. Evaluate the likely impact on its fixed and working capital requirements.

Propose a reason why the management of a company might prefer debt over equity even if the stock market is bullish.

Explain the concept of 'wealth maximisation' as an objective of financial management.

Explain how the 'cost of debt' and 'tax rate' affect the choice of capital structure.

Describe the twin objectives of financial planning.

Explain the meaning of 'investment decision' and state its two broad categories.

Solve the problem of working capital requirement for a business that shifts from a cash-only sales policy to a liberal credit policy allowing 60 days for payment.

Examine any five factors that affect the working capital requirements of a manufacturing company.

A company is considering a major expansion project by setting up a new plant. Analyze why this capital budgeting decision is crucial and examine three key reasons for its importance.

Compare and contrast 'Financial Planning' and 'Financial Management'.

Evaluate the statement: 'A capital budgeting decision is irreversible and can change the financial fortunes of a business'.

Identify the term used for the increase in profit for equity shareholders due to the presence of fixed financial charges.

Describe the relationship between a firm's capital structure and its financial risk.

Analyze how a company's decision to diversify into a new, unrelated business line would impact its fixed and working capital requirements.

A company has a total capital investment of Rs. 60 Lakh and its Earnings Before Interest and Tax (EBIT) is Rs. 9 Lakh. The interest rate on debt is 10% and the tax rate is 30%. Calculate the company's Return on Investment (RoI) and analyze whether it should use debt financing.

Examine two factors that a financial manager must consider when making a capital budgeting decision for a technology firm where assets become obsolete quickly.

Contrast the dividend policy of a company with high growth opportunities against a company in a mature market with stable earnings.

Apply the twin objectives of financial planning to a scenario where a company anticipates a 30% growth in sales next year.

A fast-growing technology startup has high growth opportunities but unstable earnings. Formulate a suitable dividend policy for this company and justify your proposal.

Propose a capital structure for a well-established company operating in a stable industry with a strong and predictable cash flow position. Justify your choice.

Critique the use of the Interest Coverage Ratio (ICR) as the sole indicator of a firm's capacity to take on more debt.

A business has high fixed operating costs due to expensive machinery and large factory rent. Analyze how this situation should affect its financing decision regarding the use of debt.

Summarize the importance of financial management for a business enterprise.

Design a strategy for a manufacturing firm to reduce its working capital requirement without negatively impacting its day-to-day operations.

Analyze the role of 'Cash Flow Position' and 'Interest Coverage Ratio (ICR)' in determining the capital structure of a firm. Which of these is a better indicator of a company's ability to service its debt?

Describe any five factors that influence a company's dividend decision.

Critique the wealth maximisation objective of financial management. Justify why it is considered superior to the profit maximisation objective.

Propose two distinct financial plans for a company manufacturing luxury goods, one for a period of economic boom and another for a recession.

Explain any five factors that affect the requirement of fixed capital for a business.

A company, X Ltd., has a total capital of Rs. 30 Lakh and an EBIT of Rs. 4 Lakh. The tax rate is 30%. The cost of debt is 10% per annum. Analyze the impact on Earning Per Share (EPS) if the company introduces Rs. 10 Lakh of debt into its capital structure, replacing an equal amount of equity. Assume the face value of shares is Rs. 10.

Examine the statement: 'The primary objective of financial management is profit maximization'.

Critique the financing decision of a company that relies solely on retained earnings to fund its growth projects.