Q.

(1) Identify the type of decisions:

1. Ravi wants to open a restaurant and is looking for
a proper place to open it. He is also thinking of the
amount of funds which will be required for some of
the set ups like food making and storing
machineries.
Ans. Investment decision
Because there will be an investment to fixed assets
for set ups like food making and storing
machineries.

2. Ravindra is running a toy manufacturing

company. He thinks of expanding his business. He
meets his uncle and asks him for a sum of Rs. 2
crores. His uncle asks for a high interest rate. He
agrees to it and promises to pay the money back
within 2 years.
Ans. Financing decision
Because he acquires fund of Rs. 2 crores from his
uncle as debt.
3. A leading marketing company has decided to
raise money through the stock market. It issued IPO
in the market last year. The company knows there
are going to be sizeable floatation costs involved in
it.
Ans. Financing decision
Because the company acquires funds from the stock
market as equity.

4. A company which has 10 branches in the city has

decided to open its 11th branch. The company has
taken this branch on rent. In this way the company
has saved money which it would otherwise have
invested in purchasing it.
Ans. Investment decision
Because here there’s a case of short term
investment.
5. A company has decided to plough back the
money in the form of retained earnings. This
decision will save the company at least ‘50 crores.
These funds can be used for the long term growth
of the business.

Ans. Dividend decision

Because the retained earnings will affect the
shareholder’s dividends.

6. ‘Rakesh Iron Works’ has been doing a great job in

the area of manufacturing iron. Within two years
the company has reached among the top 3
performers of the industry. The company has made
a lot of profit and decided to distribute its profits to
the shareholders who stood with it during the hard
times.
Ans. Dividend decision
Because there is a division of profits among the
shareholders who helped with the shares during the
crisis of the company.

7. Rajan Powerlooms, a leading company in its

industry has decided not to issue equity shares this
year as they want to keep the management control
in their own hands. The company’s management
already has only 60% shares in the company. So it
would avoid any further dilution of its stake in the
company. Company would prefer taking loan.

Ans. Financing decision

Because the company is preferring to acquire funds
in terms of loan.
8. A company has decided to issue debentures as it
knows that it will not lead to any additional costs.
These debentures will be carrying a very low rate of
return for the debenture holders but will be a
surety for them to get their money back. Investors
who want financial safety would like to go for this
option as there will be an assured definite return.
Ans. Financing decision
Because the company takes the decision of issuing
debentures

9. Shuddhi Steel Manufacturers has been a brand

but due to some HR related issues it came into
limelight for bad reasons. The issue was related
with non-payment of salaries of the employees but
now the company wants to sort this issue out. The
company has decided to pay the salary of all the
employees which were not paid their emoluments
since last six months. The company has done so to
avoid any image spoiling to take place.
Ans. Investment decision
Because it’s a decision of short term investment.

10.A soft drink company has decided to run an

advertisement campaign. It will hire many famous
Bollywood celebrities for this purpose. The
advertisement campaign could involve more than
150 crores. Every major newspaper is mentioning
about it.
Ans. Investment decision
Because running an advertisement campaign is a
long term investment.
Q. (2) ‘Adwitiya’ is a company enjoying market
leadership in the food brands Segment. It’s portfolio
includes three categories in the Foods business
namely Snack Foods, Juices and Confectionery.
Keeping in the with the growing Demand for
packaged food it now plans to introduce ready-To-
Eat Foods. Therefore, the company has planned to
undertake investments of Nearly Rs. 450 crores for
its new line of business. As per the current financial
Report, the interest coverage ratio of the company
and return on investment is Higher. Moreover, the
corporate tax rate is high. In context of the above
case:

1. As a financial manager of the company, which

source of finance will You opt for debt or
equity, to raise the required amount of Capital?
Explain by giving any two suitable reasons in
support of your answer.
Ans. As a financial manager of the company, I will
opt for debt to raise the required amount of capital.
I support my decision by giving the following
reasons:
Interest coverage ratio: The interest coverage ratio
of the company is high so it can easily meet its fixed
commitment of payment of interest and repayment
of capital.
Tax rate: The tax rate is high which makes debt
relatively cheaper as the amount of interest paid on
debt is treated as a tax deductible expense.

2. Why are the shareholder’s of the company like

to gain from the issue Of debt by the company?
Ans. The shareholders of the company are likely to
gain from the issue 6f debt by the company because
the return on investment is higher. It helps a
company to take advantage of trading on equity to
increase the earnings per share.