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This section includes InterviewSolutions, each offering curated multiple-choice questions to sharpen your knowledge and support exam preparation. Choose a topic below to get started.
| 1. |
Keeping in mind that it is a highly capital intensive sector, what factors will affect the fixed and working capital ? Given reasons with regard to both in support of your answer. |
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Answer» The working and fixed capital requirement of S Ltd will be high due to following reasons : (i) The business is capital intensive and the scale of operation is large. (ii) Heavy investments are required for building up the production base and for technological upgradation. (iii) In case of steel industry, the major input are iron ore and coal. The ratio of cost of raw material to total cost is very high. Hence, higher will be the need for working capital. (iv) The longer the operating cycle, the lar4ger is the amount of working capital required, as the funds get locked up in the production process for a long - period of time. (v) Terms of credit for buying and selling goods, discount allowed by suopppliear and to the customers also determine the equantum of working capital. |
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| 2. |
Sudha is an enterprising business woman who has been running a poultry farms for the past ten years. She ahs saved Rs.4 Lakhs from her business. She shared with her family her desire to utilise this meney to expand her business. Her family members gave her different suggestions like buying new machinery to replace the existing one, acquiring altogether new equipments with latest technology, opening a new branch of the poultry farm in another city ans so on. Since these decisions are crucial for her business, involve a huge amount of money and are irreversible except at a huge cost, Sudha wants to analyse all aspects of the decisions, before taking any final decision. |
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Answer» (i) Investment decision/Capital budgeting decision: Investment/Capital budgeting decision involves deciding about how the funds are invested in different assets so that they are able to earn the highest possible return for their investors. (ii) Factor that affect capital budgeting decision are: (a) Cash flows of the project. (b) Rate of return of the project. (c) Investment criteria. |
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| 3. |
Sudha is an enterprising business women who has been running a poultry farm for the past ten years. She has saved `Rs4,00,000` from her business. She shared wiht her family her desire to utilise money to expand her business. Her family members gave her different suggestions like buying new machinery to replace the exiciting one, acquiring altogether neq equipments with latest technology, opeing a new branch of the poultry farm in another city and so on. Since these decisions are crucial for her business, involve a huge amount of money and are irreversible expect at a huge cost, Sudha wansts to analyse all aspects to the decisions, before taking any final decision. (i) Identify and explain the financial deciwsion to be taken by Sudha. (ii) Also, explain the briefly the factors that will affect this decision. |
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Answer» (i) Investement decision/Capital budgeting decision Investment /Capital budgeting decision involves deciding about how the funds are invested in different assets that they are able to earn the highest possible return for their investors. (ii) Factors that affect capital budeting decision are: (Explain). (a) Cash flows of the project (ii) Rate of return of the project (c) Investment criteria. |
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| 4. |
State two purposes of business fiance. |
| Answer» Established companies use business finance to create a capital structure. Capital structure is the amount of debt and equity financing a business has. Business owners commonly use finance to pay for expanded operations or pursue new opportunities. | |
| 5. |
Aarohan Ltd. An automobile manufacturer was diversifying into manufacturing two-wheelers. They knew that india is on a growth path and a new breed of consumer is eager for a first vehicle. The market responded very well to the new product. The company did not have to allow credit, as it had advance orders from four to six months with deposists paid. also, due to efficiency in managing their operations as soon as a vehicle was off the assembely line, it was out to the dealers. Give any one reson discussed above which helped the firm in managing its working capital efficiently. |
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Answer» Factors affecting working capital requirements : (any one) (a) Credit Allowed (b) Operating Efficiency. |
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| 6. |
Explain any four factors which affect the working capital requirement of a company. |
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Answer» Following are the factors affecting working capital of a company: (i) Length of operating cycle/Production cycle: Operating cycle refers to the length of the manufacturing cycle, i.e. the periods taken to convert raw materials into finished products. Longer period means more working capital is required and vice-versa. (ii) Credit policy/Credit allowed: If liberal credit terms are given and a liberal policy is followed, then the, company would require more working capital as there is less cash inflow and vice-versa . (iii) Nature of business: Manufacturing firm requires high amount of working capital as compared to a trading organisation, to convert raw materials into finished goods. (iv) Scale of operations: Large amount of working capital is required by firm operating on a large scale of operations in terms of debt, inventory, etc. as compared to small scale firms. (v) Seasonal factor: Higher amount of working capital is required by the organisation during its peak season as the level of activities is higher as compared to lean season. (vi) Business cycle: During boom period, when sales are high, higher amount of working capital is required as compared to depression period. (vii) Credit availed: If it is difficult to avail credit by the firm (on its purchases) from suppliers then, higher amount of working capital is required. (viii) Availability of raw material: Higher lead time (i.e. time lag between the placement of order and actual receipt of the materials and interrupted availability of raw material will raise the requirements of working capital. (ix) Operating efficiency: Less requirement of working capital will be there in a firm in the presence of best sales effort, ideal debtors turnover ratio and higher inventory turnover ratio. (x) Level of competition: Working capital requirement will be more if level of competition is high. (xi) Inflation: At a higher rate of inflation, working capital requirement will also higher. (xii) Growth prospects: If an organisation has planned for higher growth prospects then its requirement for working capital will be higher. |
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| 7. |
You are the financial manager of a newly established company. The directors have asked you determine the amount of working capital requirement for the company. Explain any four factors that you will consider while determining the working capital requirement for the company . |
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Answer» Calculattion of working capital Working captial. Unless otherwise specified is the net working captial. Net working captial.Net working capital is the excess of current assets over current liabiliies. Thus, net working capital = current Assets, - current liabilities or NWC = CA -CL Factors Affecting working captial The main factors affecting the working captial requirements are given below . (i) Nature of business A trading organisation and a service industry firm usually needs a smaller amount of working captial as compared to a manufacturing organisation . (ii) Scale of operations Organisations which operate on a large scale, their quantium of inventory and debtors required is generally high. such orgainsations, therefore, require large amount of working captial as compared tothe organisations which operate on a lower scale. (iii) Business cycle Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom. the scales as well as production as likely to be larger and , thereforek, against this, the requirement for working captial will be lower during the period of depression.since the sales as well as production will be less. (iv) Seasonal factors Some of the business have seasonal operations. During peak season, larger amount of working captial is required because of higher level of activity . As against , this, the level of activity as well as the requirement for working capital will be lower during the lean season. ( v) Production cycle/operating cycle Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Some businesses have production cycle while some have a shorter one. Duration and the length of production cycle affect the amount of funds required for raw materials and expness. (vi) Credit allowed Differnt firms allow diferent cre3dit terms to their customer.s these depends upond the level of competition that a firm faces, as well as the credit worthines of their expendses. A liberal credit policy results in higher amount of debtors , increasing the requirement of working captial . (vii) Credit availed Just as a firm allows credit to its customers, it also may get credit from jits suppliers. to the extent it avails the credit on purchase, the working captial requirement is reduced. (viii) Availability of raw materials if the raw materials are easily and readily availablel. lower stocks will have to be maintained. whereas, when the raw meteriasl are scarce or not readily available, , higher stock levels have to be maintained, thus increasing the need fro working captial requirement. Time log it is also known as lead time and is an imortant factor as to how working capital is required. Time lag is the time taken between the placement of order and actural receipt of material. If the time lag is more, more working capital will be required, as larger amount of materials will have to be stored. |
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| 8. |
Harish is enagaged in warehouding business and his warehouses are generally used by the businessmen to store fruits. Identify the working capital requirements of Harish giving reason in support of your answer . |
| Answer» Since Harish is providing warehousing service, it does not have to maintain inventory and thus, require less working capital. | |
| 9. |
What is working capital? How is it calculated ? Discuss four important determinants of working capital requirement. |
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Answer» Working capital : Excess of current assets over current liabilities is known as working capital. Working capital is required to meet day to day finance requirements of production and distribution of a business. Working capital = current assets - current liabilities The five important determinants of working capital requirement are: (a) NATURE OF BUSINESS Nature of business is divided into two categories one is trading business firms and other is manufacturing firms. Trading firm deals in readymade finished goods, so it requires less amount of working capital. Manufacturing firm requires higher amount of working capital to be invested in the goods. (b) SCALE OF OPERATION : An organisation operating at a higher scale of operation requires a large amount of working capital where as an organisation operating at a small scale requires lesser amount of working capital. (c) LENGTH OF BUSINESS CYCLE : Longer production cycle means higher amount of funds are required for material and other expenses, so higher amount of working capital will be required. Shorter the period of production would require low amount of working capital. (d) SEASONAL FACTORS : During peak season larger amounts of working capital is required because of the requirement of higher level of inventory. During lean period the sale is low and requirement of working capital is also low. (e) PRODUCTION CYCLE : Businesses with longer production cycle require more working capital as there is long time gap between the recipient of raw materials and their conversion into finished goods and vice versa. |
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| 10. |
Explain briefly any four factors afffecting the fixed captial , requirement of an organisation. |
| Answer» The capital invested in fixed assets like land and buildings, plant and machinery, furinitures and fixtures, etc.is knowen as fixed cpaital. How much is to ve invested in fixed capital. How much is to be invested in fixed assests is determined by many factors. | |
| 11. |
Neelabh is enaged in transport business, and transports fruits and vegatables to different states. Stating the reason in support of your answer, identify the working capital requirements of Neelabh, Neelabh also wants to expand and diversify his transport business, explain any two factors that will affect his fixed capital requirements. |
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Answer» In the transportation businerss, lower amount of working capital required as it is a serivce Neelabh/Pranav would include, payment of salaries, fuel charges, maintenance of vehicles, etc. Factors Affecting the fixed Capital Requirments are : (i) Growth prospects Businessman want s to expand his business, in such situation company requires higheer investment to meet the anticipated demand in future. Thus, the requirement of fixed capital will be higher. (ii) Diversfication IF the businessman diversifies his business, this means larger amount of fixed capital required. |
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| 12. |
Explain the following as factors affecting the requirements of working capital. (i) Business cycles (ii) Level of competition (iv) Operating efficiency |
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Answer» 1. Business Cycle: The need for the working capital is affected by various stages of the business cycle. During the boom period, the demand of a product increases and sales also increase. Therefore, more working capital is needed. On the contrary, during the period of depression, the demand declines and it affects both the production and sales of goods. Therefore, in such a situation less working capital is required. (2) Level of Competition: High level of competition increases the need for more working capital. In order to face competition, more stock is required for quick delivery and credit facility for a long period has to be made available. (3) Operating Efficiency: Operating efficiency means efficiently completing the various business operations. Operating efficiency of every organisation happens to be different.Some such examples are: (i) converting raw material into finished goods at the earliest, (ii) selling the finished goods quickly, and (iii) quickly getting payments from the debtors. A company which has a better operating efficiency has to invest less in stock and the debtors.Therefore, it requires less working capital, while the case is different in respect of companies with less operating efficiency. |
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| 13. |
Explain the following as factors affecting the requirements as factors affecting the equirements of fixed capital. (i) Nature of business (ii) Growth prospects(iii) Divesification (iv) Level of collaboration |
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Answer» 1. Nature of Business: The type of business Co. is involved in is the first factor which helps in deciding the requirement of fixed capital. A manufacturing company needs more fixed capital as compared to a trading company, as trading company does not need plant, machinery, etc. 2. Growth Prospects: Companies which are expanding and have higher growth plan require more fixed capital as to expand they need to expand their production capacity and to expand production capacity companies need more plant and machinery so more fixed capital. 3. Diversification: Companies which have plans to diversify their activities by including more range of products require more fixed capital as to produce more products they require more plants and machineries which means more fixed capital. 4. Level of Collaboration/Joint Ventures: If companies are preferring collaborations, joint venture 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. |
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| 14. |
Explain the following as factors affecting the requirements of working capital. (i) Nature of business (ii) Scale of oprations (iii) Seasonal factors (iv) Production cycle |
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Answer» (1) Nature of Business: The requirement of working capital depends on the nature of business. The nature of business is usually of two types: Manufacturing Business and Trading Business. In the case of manufacturing business it takes a lot of time in converting raw material into finished goods. Therefore, capital remains invested for a long time in raw material, semi-finished goods and the stocking of the finished goods. Consequently, more working capital is required. On the contrary, in case of trading business the goods are sold immediately after purchasing or sometimes the sale is affected even before the purchase itself. Therefore, very little working capital is required. Moreover, in case of service businesses, the working capital is almost nil since there is nothing in stock. (2) Scale of Operations: There is a direct link between the working capital and the scale of operations. In other words, more working capital is required in case of big organisations while less working capital is needed in case of small organisations. (3) Seasonal Factors: Some goods are demanded throughout the year while others have seasonal demand. Goods which have uniform demand the whole year their production and sale are continuous. Consequently, such enterprises need little working capital.On the other hand, some goods have seasonal demand but the same are produced almost the whole year so that their supply is available readily when demanded.Such enterprises have to maintain large stocks of raw material and finished products and so they need large amount of working capital for this purpose. Woolen mills are a good example of it. (4) Production Cycle: Production cycle means the time involved in converting raw material into finished product. The longer this period, the more will be the time for which the capital remains blocked in raw material and semi-manufactured products.Thus, more working capital will be needed. On the contrary, where period of production cycle is little, less working capital will be needed. |
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| 15. |
Explain the following as factors affecting the requirements of fixed capital. (i) Scale of operations (ii) Choice of technique (iii) Technology upgradation (iv) Financing altermatives |
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Answer» Scale of Operation:The companies which are operating at large scale require more fixed capital as they need more machineries and other assets whereas small scale enterprises need less amount of fixed capital. Technique of Production: Companies using capital-intensive techniques require more fixed capital whereas companies using labour-intensive techniques require less capital because capital-intensive techniques make use of plant and machinery and company needs more fixed capital to buy plants and machinery. Technique of Production:Companies using capital-intensive techniques require more fixed capital whereas companies using labour-intensive techniques require less capital because capital-intensive techniques make use of plant and machinery and company needs more fixed capital to buy plants and machinery. Financing altermativesIf companies can arrange financial and leasing facilities easily then they require less fixed capital as they can acquire assets on easy installments instead of paying huge amount at one time. On the other hand if easy loan and leasing facilities are not available then more fixed capital is needed as companies will have to buy plant and machinery by paying huge amount together. |
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| 16. |
Explain briefly any four factors affecting the fixed capital requirements of an organisiation. |
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Answer» The requirement of fixed capital depends upon various factors which four of them are explained below: 1. Nature of Business:The type of business Co. is involved in is the first factor which helps in deciding the requirement of fixed capital. A manufacturing company needs more fixed capital as compared to a trading company, as trading company does not need plant, machinery, etc. 2. Scale of Operation:The companies which are operating at large scale require more fixed capital as they need more machineries and other assets whereas small scale enterprises need less amount of fixed capital. 3. Technique of Production:Companies using capital-intensive techniques require more fixed capital whereas companies using labour-intensive techniques require less capital because capital-intensive techniques make use of plant and machinery and company needs more fixed capital to buy plants and machinery. 4. Technology Up-gradation:Industries in which technology up-gradation is fast need more amount of fixed capital as when new technology is invented old machines become obsolete and they need to buy new plants and machinery whereas companies where technological up-gradation is slow they require less fixed capital as they can manage with old machines. |
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| 17. |
Explain the following as factors affecting the requirements of fixed capital. (i) Nature of business (ii) Growth prospects (iii) Diversification (iv) Level of collaboration |
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Answer» 1. Nature of Business: The type of business Co. is involved in is the first factor which helps in deciding the requirement of fixed capital. A manufacturing company needs more fixed capital as compared to a trading company, as trading company does not need plant, machinery, etc. 2. Growth Prospects: Companies which are expanding and have higher growth plan require more fixed capital as to expand they need to expand their production capacity and to expand production capacity companies need more plant and machinery so more fixed capital. 3. Diversification: Companies which have plans to diversify their activities by including more range of products require more fixed capital as to produce more products they require more plants and machineries which means more fixed capital. 4. Level of Collaboration/Joint Ventures: If companies are preferring collaborations, joint venture 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. |
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| 18. |
Give one example of long-term investment |
| Answer» A long-term investment usually offers a higher probability of maximizing your return over a 10-year period, rather than bringing you a high return in just a few years. Examples of long-term investment vehicles include stocks and index funds. | |
| 19. |
What is business cycle ? |
| Answer» Business cycle refoects the periodic but irregular up and down movements of business activity. | |
| 20. |
what does investment criteria involve ? |
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Answer» nvestment criteria are the defined set of parameters used by financial and strategic buyers to assess an acquisition target. Sophisticated buyers will usually have two sets of criteria: -The parameters that are disclosed publicly to intermediaries such as investment bankers, so they know what the buyer is looking for in order to source deals that fit; and -The parameters developed for internal review that allow a buyer to quickly determine if the acquisition should be pursued further. |
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| 21. |
What is operating cycle ? |
| Answer» Operating cycle may be defined ase the duration between acquistion of raw materials and the collection of cash from receivables. | |
| 22. |
When is the fixed operating burden of a company less ? |
| Answer» IF the firm has less fixed operating payments like interest ,premium , salaries , rent, etc . | |
| 23. |
Define operating cycle. |
| Answer» The operating cycle is the average period of time required for a business to make an initial outlay of cash to produce goods, sell the goods, and receive cash from customers in exchange for the goods. Longer payment terms shorten the operating cycle, since the company can delay paying out cash. | |
| 24. |
State two examples each of current asets and current liabilities. |
| Answer» Some examples of current assets are Cash, Bills Receivable, Prepaid expenses, Sundry debtors, Inventory etc. Current liabilities are Sundry Creditors, Short terms loans and bank overdraft, Outstanding expenses etc. | |
| 25. |
Which compay is in a positionof declare high dividend ? |
| Answer» If a company has excess earnings and decides to pay a dividend to common shareholders, an amount is declared along with a payable date. Usually, this is determined quarterly after a company finalizes its income statement and the board of directors meets to review the financials. | |
| 26. |
What is DSCR ? |
| Answer» The debt-service coverage ratio (DSCR) is a measurement of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year, including interest, principal, sinking-fund and lease payments. | |
| 27. |
How is fixed cpital affected by choice of technique of production ? |
| Answer» Companies using capital-intensive techniques require more fixed capital whereas companies using labour-intensive techniques require less capital because capital-intensive techniques make use of plant and machinery and company needs more fixed capital to buy plants and machinery. | |
| 28. |
What is meant by floatation cost ? |
| Answer» The costs that a company incurs when it makes a new issue of either stocks or bonds. Flotation costs include the costs of printing the certificates, paying the underwriters, government fees, and other associated costs. As new issues are intended to raise capital for the company, it is important for it to ensure that it will at least make back what it spends. | |
| 29. |
Name the major determiant of the dividend decision. |
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Answer» Factors affecting dividend decision : 1.Amount of Earnings Dividends are paid out of current and past earnings. Thus, earnings is a major determinant of dividend decision. 2.Stability in Earnings A company having higher and stable earnings can declare higher dividends than a company with lower and unstable earnings. 3.Stability of Dividends Generally, companies try to stabilise dividends per share. A steady dividend is given each year. A change is only made, if the company’s earning potential has gone up and not just the earnings of the current year. 4.Growth Opportunities Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. The dividend declared in growth companies is, therefore, smaller than that in the non-growth companies. .5.Cash Flow Position Dividend involves an outflow of cash. Availability of enough cash is necessary for payment or declaration of dividends. 6.Shareholders’Preference While declaring dividends, management must keep in mind the preferences of the shareholders. Some shareholder& general desire that atleast a certain amount is paid as dividend. The companies should consider the preferences of such shareholders . 7.Taxation Policy If the tax on dividends is higher, it is better to pay less by way of dividends. But if the tax rates are lower, higher dividends may be declared. This is because as per the current taxation policy, a dividend distribution tax is levied on companies. However, shareholders prefer higher dividends, as dividends are tax free in the hands of shareholders. 8.Stock Market Reaction Generally, an increase in dividends has a positive impact on stock market, whereas, a decrease or no increase may have a negative impact on stock market. Thus, while deciding on dividends, this should be kept in mind.9.Access to Capital Market Large and reputed companies generally have easy access to the capital market and, therefore, may depend less on retained earnings to finance their growth. These companies tend to pay higher dividends than the smaller companies. 10.Legal Constraints Certain provisions of the Companies Act, place restrictions on payouts as dividend. Such provisions must be adhered to, while declaring the dividend. 11.Contractual Constraints 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 payout does not violate the terms of the loan agreement in this regard. |
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| 30. |
A decision is taken in financial management to disturbe ceratain parts of the profit to shareholders after paying tax. What is this decision called ? |
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Answer» Dividend decision. Dividend decision relates to how much of the company’s net profit is to be distributed to the shareholders and how much of it should be retained in the business for meeting the investment requirements.This decision should be taken, keeping in view the overall objective of maximising shareholders’ wealth. |
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| 31. |
How are capital budgeting decisions irreversible ? |
| Answer» The capital budgeting decisions are irreversible due to the fact that it is difficult to find the market for such capital goods. The only alternative is to scrap these assets which involve huge losses. A firm may lose competitiveness if the decision to modernise is delayed or not rightly taken. | |
| 32. |
Capital budgeting decisions involve a number of calculations List them. |
| Answer» There are different methods adopted for capital budgeting. The traditional methods or non discount methods include: Payback period and Accounting rate of return method. The discounted cash flow method includes the NPV method, profitability index method and IRR. | |
| 33. |
Investment dcison includeA. capital budgeting decision and working capital decisionB. debt and equity decisionsC. retained earnings and dividends decisionsD. None of the above |
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Answer» Correct Answer - a (a)capital budgeting decision and working capital decision |
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| 34. |
Name the type of dividend policy that should be followed by a company having growth opportunites.A. Conservative dividend policyB. Regular dividend policyC. Stable dividend policyD. None of the above |
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Answer» Correct Answer - a (A)Conservative dividend policy In order to have a stable rate of dividend, a firm should retain a high proportion of earnings so that the firm can keep adequate funds for payment of dividend when it faces loss. ... Therefore, a more conservative dividend policy should be followed in order that the interest of existing shareholders is not hindered. |
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| 35. |
State, why the need of working capital for a serivce industry, is different from that of a manufacturing industry ? |
| Answer» This is because the operating cycle ofa service industry is shorter than of a manufacturing industry. | |
| 36. |
Which decision is involved in launching a new product line ? |
| Answer» Investment or Capital budgeting decision. | |
| 37. |
Which decision is involved in launching a new product line or opening a new branch ? |
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Answer» Capital budgeting decision. Capital Budgeting is a decision-making process where a company plans and determines any long term capital expenditures whose returns in terms of cash flows are expected to be received beyond a year. |
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| 38. |
Which decision is involved in expenditures on advertising campaign or research and development firm. |
| Answer» Investment or capital budgeting decision. | |
| 39. |
Explain any four factors which determine the choice of the capital stucture of a company. |
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Answer» Factors affecting capital structure : (i)Cost of debt If the rate of interest on debt is high, the company should use less debt in its capital structure, and vice-versa. (ii) Cost of equity When a company increases debt, the financial risk faced by equity shareholders increases. Thus, debt can be used upto a limit. Beyond that point, cost of equity may go up and share prices may decrease. (iii) Interest coverage ratio ICR refers to the no. of times earnings before interest and tax covers the interest obligation. Higher the ICR, the company can borrow more funds and vice-versa. (iv) Debt service coverage ratio It refers to the ratio that takes care of deficiencies in the ICR. A higher DSCR indicates better ability of the company to meet its cash commitments and borrow more funds. |
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| 40. |
When is it favorurable ? |
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Answer» Trading on equity is favourable when Rol gt CoD Where Rol is Return on lnvestment CoD is Cost of Debt |
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| 41. |
What is optimum capital structure ? |
| Answer» Optimal capital structure is a financial measurement that firms use to determine the best mix of debt and equity financing to use for operations and expansions. This structure seeks to lower the cost of capital so that a firm is less dependent on creditors and more able to finance its core operations through equity. | |
| 42. |
What does a high debt service coverage ratio indicate ? |
| Answer» A debt service coverage ratio of 1 or above indicates that a company is generating sufficient operating income to cover its annual debt and interest payments. As a general rule of thumb, an ideal debt service coverage ratio should be 2 or higher. It suggests the company is capable of taking on more debt. | |
| 43. |
Which concept is responsible for increase in EPS with increased used of debt in the capital structure ? |
| Answer» Trading on equity The use of debt alongwith equity increase3s Earnings per share (EPS). This use of fixed financial Charge, i.e interset, incrases the prift earned by shareholders. | |
| 44. |
To maximise the wealth of owners ( i.e shareholders) meansA. to minimise the risk of the shareholdersB. to maximise the shares of shareholdersC. to maximise the current price of equity shares of the companyD. to minimise the tax in the hands of shareholders |
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Answer» Correct Answer - C (c)to maximise the current price of equity shares of the company |
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| 45. |
Decisions related to investment in fixed assets are popularly known asA. business finance decisionsB. financial managementC. capital budgeting decisionsD. None of the above |
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Answer» Correct Answer - C (c)capital budgeting decisions Capital budgeting is the process of allocating resources for major capital expenditures or investments . Therefore, decisions related to investment in fixed assests are popularly known as capital budgeting decision. |
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| 46. |
Financial decisions impacts which of the following iterms of profit and loss account ?A. interestB. profitC. TaxD. All of the above |
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Answer» Correct Answer - D (d) All of the above |
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| 47. |
What do you understena by flatation cost ? |
| Answer» Flatation cost means the cost of raising funds.e.g Various expenses that have to be borne on advertising, printing , prospectus, uderwriting commission, etc. | |
| 48. |
What do you mean by investment decision ? |
| Answer» Investment decision may be defined as those decision, which are relateed to investment of funds into different assets in amanner,s o that the firm is able to earn the highest possible returns for their investors. | |
| 49. |
what is meant by dividend decision ? Explain any four factors which affect the dividend decision of a company. |
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Answer» Dividend decision relates to how much of the company’s net profit is to be distributed to the shareholders and how much of it should be retained in the business for meeting the investment requirements.This decision should be taken, keeping in view the overall objective of maximising shareholders’ wealth. Factors affecting dividend decision : Amount of EarningsDividends are paid out of current and past earnings. Thus, earnings is a major determinant of dividend decision. Stability in EarningsA company having higher and stable earnings can declare higher dividends than a company with lower and unstable earnings. Stability of DividendsGenerally, companies try to stabilise dividends per share. A steady dividend is given each year. A change is only made, if the company’s earning potential has gone up and not just the earnings of the current year. Growth OpportunitiesCompanies having good growth opportunities retain more money out of their earnings so as to finance the required investment. The dividend declared in growth companies is, therefore, smaller than that in the non-growth companies. . |
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| 50. |
What do you mean by divided decision ? |
| Answer» Dividend decision relates to how much of the company, after tax profit is to be distributed tro the shareholders and how much of it should be retained in the busines for meeting the investment requirements. | |