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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.
| 51. |
What is the other name used for long -term investment decision ? |
| Answer» The other name for long -term investment decision is capital budgeting decision . | |
| 52. |
What is dividend ? |
| Answer» Dividend is that part of profit, which is diestributed among shareholders. | |
| 53. |
What do you mean by financing decision ? |
| Answer» Financing decision may be defined as the decision, which is related with deciding the amount to be raised and the source of finance. | |
| 54. |
What is fixed capital ? Enumerate any two of the factors determining the fixied capital requirements of an entreprise. |
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Answer» The capital invested in fixed assets like land and buildings, plant and machinery , furnuture and fixture, etc, is knowen as fixed capital. Fixed captial is the portian of the total cpaital which is represented by fixed captial which is represented by fixed assets. it is known as block capital, because it is blocked up in fixed assets for the life of the company. Fixed capital reoresents the permanent or long-term capital of an enterprise. Therefore, it is raised through long-term sources. like share, debentures , long-term loans and retained earings. factors determining fixed capital requirements are : (i) Nature of business A manufacturing enterprise requires a large amount of fixed capital as compared to a trading or commercial concern. (ii) Scale of operations A large scale entreprise generally requires fixed captial than a small scale enterprise . e.g a large scale steel enterprise like Tata Iran and steel company requires huge investment in fixed assets in comparison with a toy manufacturing unit. |
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| 55. |
When can a capital sturucture be considered optimum and what kind of capital structure is best for a firm ? |
| Answer» Capital structure refers to the composition of debt and equity. A capital structure is said to be optimum when the proportion of debvt and equity is such that, it results in increase in the wealth of shareholders. If the capital structure results in increasing or maximising the wealth of shareholders, then it is considered best for a firm. | |
| 56. |
Explain briefly any four factors which affect the choice of capital structure of company. |
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Answer» The following are some of the factors affecting choice of capital structure by a firm. 1. Position of cash flow: The cash flow position should be such that it must be able to fulfill its cash obligations and in addition is also left with some buffer. The capital structure of the company should be decided taking this factor into consideration. 2. Debt-service coverage ratio (DSCR): A higher DSCR indicates that the company is better able to meet its cash and interest obligations and thereby, can increase the component of debt in the capital structure. 3. Cost of debt: Cost of debt is the interest rate to be paid on debt. Higher the cost of debt, lower the proportion of debt in the capital structure and vice-versa. 4. Tax rate: As interest payable on debt is a tax deductible item, therefore tax rate directly affects the cost of debt and thereby, the proportion of debt in capital structure. Higher the tax rate, cheaper is the debt, thereby, higher can be the proportion of debt in capital structure. 5. Control considerations: Higher equity reduces the control of management in the company. Such considerations must be taken into account while taking the capital structure decisions. |
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| 57. |
what is working capital ? |
| Answer» Every business needs to take the decision regarding the investment in current assets i.e. the working capital. Current assets refer to the assets that are converted into cash or cash equivalents in a short period of time (less than or equal to one year). There are two broad concepts of working capital namely, Gross working capital and Net working capital.Gross working capital (or, simply working capital) refers to the investment done in the current assets. Net working capital, on the other hand, refers to the amount of current assets that is in excess of current liabilities. Herein, current liabilities are those obligatory payments which are due for payment such as bills payable, outstanding expenses, creditors, etc. Net Working Capital is calculated as the difference of current assets over current liabilities. i.e.NWC = Current Assets − Current Liabilities | |
| 58. |
Define fixed capital. |
| Answer» Fixed capital is capital or money that we invest in fixed assets. In other words, money that we invest in assets of a durable nature. These are assets that we repeatedly use over a long period. | |
| 59. |
Name any two essential ingredients of sound working capital mangement? |
| Answer» Some of the ingredients of a sound working capital management are efficient cash management, inventory management and receivable management. | |
| 60. |
Which is the riskless source of finace ? |
| Answer» There is no such compulsion in case of equity, which is therefore, considered riskless for the business. Higher use of debt increases the fixed financial charges of a business. As a result increased. use of debt increases the financial risk of a business | |
| 61. |
Why are capital budgeting decisions very crucial for any business ? |
| Answer» Because these affect the earning capacity of the business in the long run. The size of assets, the profitability and competitive are affected by the capital budgeting decisions. | |
| 62. |
A decision is taken in financial management to put capital of the company in different assets. What is the decision callled ? |
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Answer» Investment decision. Capital investment decisions involve the judgments made by a management team in regard to how funds will be spent to procure capital assets. Whether the cash flows from the investment will generate a positive return on investment. |
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| 63. |
For optimal procurement of funds, a finance manager identifies different available sources and compares those in terms of costs and associated risks, identify and state the concept highlighated in the above lines. |
| Answer» Financial management , which is concerned with management of flow of funds and involves, decisions relating to procurrent of funds, investement of funds in long term and short term assets and distribution of earnings to the owners. | |
| 64. |
How does the availability of leasing facilities in a developed financial market affect the fixed capital requirements of a firm ? For what kind of business, such a strategy is suitable ? |
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Answer» The requirement of fixed capital depends upon various factors which 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. 5. 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. 6. 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. 7. Availability of Finance and Leasing Facility: If 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. 8. 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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| 65. |
Tatal steel Acquires Corus. Tata Steel, biggest steel producer in the Indian private sector has acuired Courus, (formely know as British steel) in a deal worth ₹8.6 billion. This makes Tata Steel the fifth largest steel producer in the world. A financial decision of this magnitude has singificant implicitness for both Tata steel ans Corus as will a s their emloyeees and Shareholders. To mention some of them: Tta steel willl vecome the fith largest producer of steel in the world. Tata steel will rasise a debt of over ₹8 billion to finance the transaction. The deal will be paid for by Tata steel UK. a Special pruose Vehicle (SPV) set -up for the pruose. This SPV will get funds from Tata Steel route though a singapore subsidiary. Another company of the Rata Graoup, Tata Sons Ltd., Will invest ₹1 billion dollars for perference shares alongwith Tata steel which will invest an equal amount. Tata steel acquirer company , shall have to arrange about 36,500 crore of rupees to funance the take -over. Tata - Steel will have to raise this amount through debt or equity or a combination of both. Some amount may come from internal accuals also. This financing decision will affect the capital structure of Tata Steel. Tata Steel hpes to increase the production to 40 million tonnes and revenue to 32 billion US dollars by 2012. It may affect the compectitiveness of Tata Steel because the cost of production of steel in all probability, will change. The dividend paying capacity of Tata steel may be affected becasuse of this huge cash outflow and because of a singnificantly higher debt which would need to be seviced before paying any dividends to shareholders. The degree of risk shall also be affacted. Needless to emphaise, decisions like this affect the future of the organisation. These decionss are almost irrevocable after they have been formalised.gt Explain the factors that affect this decision.. |
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Answer» The factors that affect Capital Budgeting Decision are : (i) Cash flows of the project When a business ivestes huge amount of money in a certain project , then it expects regular and reasonable cash inflows from such as investment. Cash generated from operations are analysed in selecting the desired project. (ii) The rate of returen Each projects is elected after comparing expected returns of different projects and the degree of risk involved in them. (iii) The investment criteria involved The decision to invest in a particular project involves a number of caluations regarding the amount of investement interset ratem chs flows and rate of return. |
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| 66. |
Tatal steel Acquires Corus. Tata Steel, biggest steel producer in the Indian private sector has acuired Courus, (formely know as British steel) in a deal worth ₹8.6 billion. This makes Tata Steel the fifth largest steel producer in the world. A financial decision of this magnitude has singificant implicitness for both Tata steel ans Corus as will a s their emloyeees and Shareholders. To mention some of them: Tta steel willl vecome the fith largest producer of steel in the world. Tata steel will rasise a debt of over ₹8 billion to finance the transaction. The deal will be paid for by Tata steel UK. a Special pruose Vehicle (SPV) set -up for the pruose. This SPV will get funds from Tata Steel route though a singapore subsidiary. Another company of the Rata Graoup, Tata Sons Ltd., Will invest ₹1 billion dollars for perference shares alongwith Tata steel which will invest an equal amount. Tata steel acquirer company , shall have to arrange about 36,500 crore of rupees to funance the take -over. Tata - Steel will have to raise this amount through debt or equity or a combination of both. Some amount may come from internal accuals also. This financing decision will affect the capital structure of Tata Steel. Tata Steel hpes to increase the production to 40 million tonnes and revenue to 32 billion US dollars by 2012. It may affect the compectitiveness of Tata Steel because the cost of production of steel in all probability, will change. The dividend paying capacity of Tata steel may be affected becasuse of this huge cash outflow and because of a singnificantly higher debt which would need to be seviced before paying any dividends to shareholders. The degree of risk shall also be affacted. Needless to emphaise, decisions like this affect the future of the organisation. These decionss are almost irrevocable after they have been formalised. Name the finacnial decision deiscussed in the above cose. |
| Answer» Capital budgeting /Long-term investment decision. | |
| 67. |
Mahindra Ltd. Takes a decision to raise money for long -term capital needs of business from certain sources which type of decision is this ? |
| Answer» Correct Answer - Financing Decision | |
| 68. |
Tata International Ltd. Earned a net profit of `Rs 50` crore. Ankit the finance manger 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. |
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Answer» Divide Decision Factors affecting divided decision : (Explain any five) |
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| 69. |
These directions of a manufactering company are thinking of issusing `Rs 20` crore worth additional debentures 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 ? Explain any four factors other than risk do yo think the direcations should keep in view. |
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Answer» Financial risk (Exsplain) Other factors affecting capital structure : (Explain any four). |
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| 70. |
Mr. Rohit is into transport business. His buses are hired by schools for transportation of students. He is willing to expand and diversify his business to inter-state transportation purposes. Enumerate any six factors that will affect his fixed capital requirements. |
| Answer» Factors affecting fixed capital requirements are : (any six) | |
| 71. |
Saksham Ltd, a firm manufactruing textiles , wished to diversify their business. They were considering two optins, either to diversify into manufacturing tooth -paste switches.They wanted to invest in the purchase of land, to set up a manufactruing unit in the bacward areas of Gujarat, which would also lead to the generation of employment opportunities in the area , but only after fulfiling all legal requirements and taking appropriate steps to ensure that the envioronment was not pollutted. the finance manger of the company, Mr.Ramakant was aksed by the management to prepate a report on the factors which should be considered making the above investment decision. (a) State any two factors that Mr. Ramakant would give in his report. (b) Also state any one reson which makes it important for the above decision to be made carefully. (c) And state two values being fulfilled by Saksham Ltd. |
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Answer» (i) Factors that should be kept in mind by the company while making the inverstment decision. (a) The amount of cash flows should be carefully analyed before considering the decision. (b) The rate of return of the project based on expected return and assessment of the risk involved from each proposal should be analysed. (c) The decision to invest in a particualr project involves a number of calculations regarding the amount of investment, interest rate, cash flows and rate of return. (ii) The following are the reasons that make tha above decision to be made carefully. (a) These decisions have a bearing on the long term growth. (b) These decisions result in a substantial portion of capital funds being blocked in long -term project. (c) These decisions influence the overall business risk complexion of the firm. (d) These decisions once taken,are not reversible without incurring heavy losses. (iii) Following are the values fulfilled by Saksham Ltd. (any two) (a) Responsibility (b) Respect for law and order (c) Sensitivity to ebnvironment (d) Developement of backward regions (e) Generating employed oppertunities. |
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| 72. |
Companies with a higher growth pattern are likely toA. pay lower diviendsB. pay higher dividendsC. diviends are not affected by growth considerationsD. None of the above |
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Answer» Correct Answer - A (a) pay lower dividends |
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| 73. |
Financial leverage is called favourable ifA. Return on investment is lower than the cost of debtB. Rol is higher than the cost of debtC. Debt is easily availableD. If the degree of existing financial leverage is low |
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Answer» Correct Answer - B (b)Rol is higher than the cost of debt |
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| 74. |
When is financial leverage favourave ? |
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Answer» Financial leverage refers to the ratio of debt in the total capital of an organisation. Financial leverage is said to be favourable if the return on investment is more than the cost of debt such that the earnings per share increase. |
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| 75. |
How is financial leverage computed ? |
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Answer» Financial leverage refers to the proportion of debt in the total capital of the company. Algeraically, it can be calculated as as follows Financial leverage = Debt / Equity OR Debt / (Debt + Equity) |
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| 76. |
What is financial leverage ? |
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Answer» Financial leverage refers to the proportion of debt in the total capital of the company. Algeraically, it calculated as the ratio of debt and equity. Financial leverage = Debt / Equity OR Debt / (Debt + Equity) |
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| 77. |
As the financial leverage increases, what happens to the cost and risk ? |
| Answer» As the proportion of debt in the total capital (i.e., financial leverage) increase , the overall cost of capital declines but the financial risk (i.e., risk of default in payment of interest and principal amount) increases. | |
| 78. |
Explain the following as factors affecting dividend decision. (i) Stability of dividend (ii) shareholders preference (iii) Legal constraints (iv) Access to capital market |
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Answer» 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. 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 . Legal ConstraintsCertain provisions of the Companies Act, place restrictions on payouts as dividend. Such provisions must be adhered to, while declaring the dividend. 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. |
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| 79. |
Which component of capital strucutre determines the overall finalcial risk ? |
| Answer» Correct Answer - Debt | |
| 80. |
How are the shareholders of a company likely to gain dur to bebt component in the total capital ? Explain with an example. |
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Answer» Trading on equity is the financial process of using debt to produce gain for the residual owners. The practice is known as trading on equity because it is the equity shareholders who have only interest (or equity) in the business income.Effects of Trading on Equity: Trading on equity acts as a lever to magnify the influence of fluctuations in earnings. Any fluctuation in earnings before interest and taxes (EBIT) is magnified on the earnings per share (EPS) by operation of trading on equity larger the magnitude of debt in capital structure, the higher is the variation in EPS given any variation in EBIT. Example: Prakash Company is capitalized with Rs. 10, 00,000 dividends in 10,000 common shares of Rs. 100 each. The management wishes to raise another Rs. 10, 00,000 to finance a major programme of expansion through one of four possible financing plans. Then management A) may finance the company with all common stock, B). Rs. 5 lakhs in common stock and Rs. 5 lakhs in debt at 5% interest, C) all debt at 6% interest or D) Rs. 5 lakhs in common stock and Rs. 5 lakhs in preferred stock with 5-4 dividend. The company’s existing earnings before interest and taxes (EBIT) amounted to Rs. 12,00,000, corporation tax is assumed to be 50% Thus, when EBIT is Rs. 1,20,000 proposal B involving a total capitalisation of 75% common stock and 25% debt, would be the most favourable with respect to earnings per share. It may further be noted that proportion of common stock in total capitalisation is the same in both the proposals B and D but EPS is altogether different because of induction of preferred stock. |
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| 81. |
Trading on equity takes place when ___________A. (a)ROI is less than rate of interest on debtB. (b)ROI is more than the rate of interest on debtC. (c)ROI is less than the ROED. (D)ROI is more than ROE |
| Answer» (b)ROI is more than the rate of interest on debt | |
| 82. |
Define a current asset. Give four examples to such assests. |
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Answer» Current assests are those asserts, which get converted into cash within one year. Examples of current assests are : (i) cash in hand/cash at bank (ii) Bills receivables (iii) Debtors Raw materials |
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| 83. |
Higher debt -equity ratio results in ______________ a. lower financial risk b. higher degree of operating risk c. higher degree of financial risk d. higher EPS. |
| Answer» Correct Answer - (c) | |
| 84. |
The size of assets, the profitability and competitveness are affected by one of the financial decisions. Name and state the decision. |
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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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| 85. |
The size assests, the profitability and competitivensess are affected by one of the financial decision. |
| Answer» Capital budgeting decision , which involves allocation of funds to different projects or assets with long-term implications. | |
| 86. |
Which concept of financial management affects both the profitability and the financial risk ? |
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Answer» Capital structure. capital is the fund required to initiate the activities of any business. It is the foundation of business finance. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. |
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| 87. |
What is that part of current assets called which is financed thorugh long-term sourcess of funds ? |
| Answer» Net working capital, which is the excess of current assests over current liabilities. | |
| 88. |
What does higher business risk indicate ? |
| Answer» Higher business risk means higher fixed operating costs e.g.rent , salaries.etc. it lowers the capacity of the company to raise funds through debt. | |
| 89. |
The risk of default on payment of borrowed funds is known asA. operating riskB. financial riskC. busines riskD. None of these |
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Answer» Correct Answer - B (b) financial risk |
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| 90. |
Finanical planning tries to link the present with the future. Explain the importance of inancial planning in the light of this statement ? |
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Answer» Importance of financial planning is as follows: (a) It helps the company to prepare for the future. (b) It helps in avoiding business shocks and surprises. (c) It helps in co-ordinating various business functions. (d) It helps in reducing waste, duplication of efforts, gaps in planning and confusion (e) It links the present with the future. (f) It provides a link between investment and financing decisions. (g) It serves as a control technique. |
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| 91. |
Name the decision in financial management which influences the overall business risk complexion of the firm. |
| Answer» Capital budgeting decision (long-term investment decision) | |
| 92. |
Why does a financial manager consider wealth maximisation as the foremost objective ? |
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Answer» The main and foremost objective of financial management is to maximise the wealth of equity shareholders. The financial manager of a company taeks this decision because the shareholders are the owners of the company . Financial decision taken will dtermine the manner in which of the funds are invested. The return on investment will determine the value and prive of the shares. The market priece of the shares will increase if the benefit from th decision has exceeded its cost. Secondly, the odjective of increase in value of equity shares automatically fulfils many other objectives like , increasing the profitability , maintaining liquidity , effective utlisation of funds and providing for growth of the company. |
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| 93. |
Name and state the aspect of financial management that provides a link between investment and financing decisions. |
| Answer» Correct Answer - Financial planning | |
| 94. |
Name the decision is financial management which affects the grawth , profitability and risk of the business. |
| Answer» Capital budgeting decision (long-term investment decision) | |
| 95. |
Wealth maximisation objective of financial management leads to achievements of other objectives too. List any two such objectives . |
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Answer» Two such objectives are : (i) Profit maximisation (ii) Mainteneance of liquidity |
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| 96. |
which company is in a position to declare high dividends ? |
| Answer» A company having stable earnings can declare high dividends. | |
| 97. |
The objective of financial planning isA. to ensure timely availability of fundsB. to avoid idle fundsC. both (a) and (b)D. to maximise finacial costs |
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Answer» Correct Answer - C (c)both (a) and (b) |
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| 98. |
State one major objective of financial plannig ? |
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Answer» Financial Planning involves designing the blueprint of the financial operations of a firm. It ensures that just the right amount of funds are available for the organisational operations at the right time. Thereby, it ensures smooth functioning. Taking into consideration the growth and performance, through financial planning, firms tend to forecast what amount of fund would be required at what time. The following are the two highlighted objectives of financial planning. i) Ensure Availability of FundsEnsuring that the right amount of funds are available at the right time is one of the main objectives of financial planning. It involves estimating the right amount of funds that are required for various business operations in the long term as well for day to day operations. In addition, it also involves estimating the time at which the funds would be required. Thus, financial planning ensures that right amount of funds are available at the right time. Financial planning also points out the probable sources of funds. ii) Proper Utilisation of FundsFinancial Planning aims at full utilisation of funds. It ensures that both inadequate funds as well as excess funds are avoided. Inadequate funds hinders the smooth operations and the firm is unable to carry its commitments. On the other hand, excess funds add to the cost of business and encourage unnecessary wasteful expenditure. Thus, financial planning ensures that the funds are properly and optimally utilised. |
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| 99. |
Long -term financial planning is done ofrA. zero to one yearB. more than one yearC. ten to twenty yearsD. twenty to thirty years. |
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Answer» Correct Answer - B (b)more than one year |
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| 100. |
What are borrowed funds ? |
| Answer» Borrowed funds are the funds which are available in the form of loans, debentures, public deposits, etc. sourced from financial institutions,banks, debentureholders and public. | |