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Chapter 9 Financial Management Solutions

Question - 1 : - When is financial leverage considered favorable?

Answer - 1 : -  Financial leverage is considered favourable when return on investment is higher than the cost of debt.

Question - 2 : - why does financial risk arise?

Answer - 2 : - Interest on borrowed fund have to be paid regardless of whether or not you firm has made a profit. Moreover borrowed fund have to be repaid after a fixed time and it carries a charge on assets. This gives rise to financial risk.

Question - 3 : - How does production cycle effect working capital?

Answer - 3 : - working capital requirement is higher with longer production cycle.

Question - 4 : - Enumerate two objectives of financial management?

Answer - 4 : -

 (a)To ensure availability of required funds.
(b) to see that the firm does not raise resources unnecessarily.

Question - 5 : - What is the primary objectives of financial management?

Answer - 5 : - Wealth Maximisation.

Question - 6 : - The board of Directors has asked you to design the capital structure of the company. Explain any sin factors that you would consider while doing so. [6]

Answer - 6 : -

For design the capital structure of the company six factors are as following:-
1) Cash Flow Position.
2) Interest coverage ration(ICR)
3) Debt Service coverage ratio(DSCR)
4) Return on investment (ROI)
5) Cost of debt
6) Tax rate.

Question - 7 : - Every manager has to take three major decisions while performing the finance function. Explain them.

Answer - 7 : -

A manager take three following major decisions:-
1) financing Decision.
2) Investment Decision.
3) Dividend Decision.

Question - 8 : - What do you call the capital needed for day to day operations? Explain any 5 factors affecting such capital needs.

Answer - 8 : -

Capital needed for day to day operations is called working capital.{explain any 5 factors affecting such capital needs].
1) Nature of business
2) Scale of operations
3) Seasonal Factors
4) Production cycle
5) Credit allowed

Question - 9 : - The directors of a company have decided to expand their business activities by increasing the stock of raw materials and finished goods at an estimated cost of Rs. 50 lakhs, Describe the various ways open to the company to raise necessary finance for the purpose.

Answer - 9 : -

The company can raise necessary finance for the purpose of expansion
through the following function.
(a) Issue of shares
(b) Issue of debentures
(c) Loans from banks and financial institutions.
(d) Retained earnings.

Question - 10 : -
A capital budgeting decisions is capable of changing the financial fortune
of a business. Do you agree? Why or why not?

Answer - 10 : -

Hint Yes, I agree to this statement because of the following importance of
capitals budgeting decisions.
(a) long term growth and effects.
(b) Large amt of funds involved
(c) Risk involved
(d) Irreversible decisions.

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