Ch-9(Financial Management)

Ch-9 Financial management

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·         Contents of this Chapter 

 

 

Say Goodbye to Confusion in Financial Decisions. Click here  

 Indirect Questions:

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 does the EPS of a company fall with the increased use of debt? Explain with the help of an example.

3.            How do loan components or debentures in the capital structure act as a lever to raise the return on equity share capital?

4.            Explain how the shareholders are likely to gain from the loan component in the capital employed with an 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 the optimisation of the risk-return relationship. Comment

7.            The directors of a manufacturing company are thinking of issuing Rs. 20 lacs additional debentures for the expansion of their production capacity. This will lead to an increase. in debt-equity, the ratio is 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 making the decision?

8.            You are the finance manager of a company. The board of directors has asked you to determine the company's working capital requirements. State the factors that you would take into consideration while assessing the requirement of working capital for the company.

9.            Discuss the primary objective of Financial Management.

10.          “Financial Planning is not equivalent to or a substitute for Financial Management”.Do you agree? Explain. CLICK HERE

11.          What do you mean by Financial Blueprint of Organisation? Discuss its importance.

12.          How does working capital affect both the liquidity and the profitability of a business?

13.          A businessman who wants to start a manufacturing concern approaches you to suggest to 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? CLICK HERE

Click here to get notes and Indirect questions based on this topic (Trading on equity)

Interactive Self-Test: Trading on Equity: Click here

Check  tips to learn and revise this chapter through the Mind Mapping technique: Click here

Answers to NCERT Questions

Short Ans type (Page 265)

Q7 Discuss how working capital affects both liquidity and the profitability of a business

Ans

 Working capital is the excess of current assets over current liabilities.

More  Investment in current assets helps in increasing the liquidity of the business as compared to fixed assets, as these are converted into cash  or cash equivalents  very quickly

Insufficient  Investment in current assets makes it more difficult for an organisation to meet its payment obligations(decreases Liquidity)

But current assets provide little or no returns  (they contribute less to profit)as compared to fixed assets

Conclusion:

A balance needs to be struck between liquidity and profitability, as more working capital increases  liquidity  but  decreases profitability

Long Answer Questions

Q2 Capital Structure decision is the optimisation of the 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 the business. Any default in meeting these commitments may force the business to go into liquidation

·         But a higher proportion of debt generally leads to a higher expected rate of return for equity shareholders as EPS increases because of Trading on Equity

·          We know that if the debt is increased beyond a point, the higher risk associated with greater debt tends to lower the share price.

Conclusion:

Therefore, the optimal capital structure is the one that strikes a balance between risk and return to achieve our ultimate goal of maximising the price of the equity shares(Wealth maximisation)

Check the presentation on Factors Affecting Working Capital of the business