Business Studies

Financial Management

Question:

Explain the term ‘trading on equity’. Why, when and how it can used by a business organisation?

Answer:

Trading on equity refers to the increase in profit earned by the equity shareholders due to presence of fixed financial charges. When the rate of earning or Return on Investment (ROI) of a company is higher than the rate of interest on borrowed funds only then a company should opt for trading on equity. Let us consider the following example
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It should be clear from the above example, that shareholders of the company ˜X' have a higher rate of return than company ˜Y' due to loan component in the total capital of the company.

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Financial Management

Q 1.

Explain factors affecting the dividend decision.

Q 2.

Discuss the two objectives of Financial Planning.

Q 3.

What are the factors which will affect the capital structure of this company?

Q 4.

Explain the importance of having a financial plan for this company. Give an imaginary plan to support your answer.

Q 5.

Discuss about working capital affecting both the liquidity as well as profitability of a business.

Q 6.

‘S’ Limited is manqufacturing steel at its plant in India. It is enjoying a buoyant demand for its products as economic growth is about 7%-8% and the demand for steel is growing. It is planning to set up a new steel plant to cash on the increased demand it is facing. It is estimated that it will require about ? 5,000 crores to set up and about t 500 crores of working capital to start the new plant.

 What is the role and objectives of financial management for this company?

Q 7.

What is the main objective of financial management? Explain briefly.

Q 8.

What is meant by capital structure?

Q 9.

Define a ‘current assets’ and give four examples.

Q 10.

Capital structure decision is essentially optimisation of risk-return relationship. Comment.

Q 11.

Financial management is based on three broad financial decisions. What are these?

Q 12.

Keeping in mind that it is a highly capital intensive sector what factors will affect the fixed and working capital. Give reasons with regard to both in support of your answer.

Q 13.

What is ‘financial risk? Why does it arise?

Q 14.

What is meant by working capital? How is it calculated?
Discuss five important determinants of working capital requirements.

Q 15.

A capital budgeting decision is capable of changing the financial fortune of a business. Do you agree? Why or why not?

Q 16.

Explain the term ‘trading on equity’. Why, when and how it can used by a business organisation?