ASSIGNMENT NO.

: 1
SUBJECT: BUSINESS STUDIES
CLASS: XII COMMERCE
TOPIC: CHAPTER 9 FINANCIAL MANAGEMENT
Q1. ‘S’ Limited is manufacturing steel at its plant in India. It is enjoying a buoyant demand for its products as
economic growth is about 7–8 percent 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 estimated that it will require about Rs.5000 crores to set up and
about Rs.500 crores of working capital to start the new plant.
a. Describe the role and objectives of financial management for this company.
b. Explain the importance of having a financial plan for this company. Give an imaginary plan to support your
answer.
c. What are the factors which will affect the capital structure of this company?
d. Keeping in mind that it is a highly capital-intensive sector, what factors will affect the fixed and working
capital. Give reasons in support of your answer.

Q2Read the source given below and answer the following questions.
Sunrises Ltd. dealing in ready made garments, is planning to expand its business operations in order to cater to
international market. For this purpose the company needs additional Rs. 80, 00,000 for replacing machines with
modern machinery of higher production capacity. It involves committing the finance on a long term basis.
These decisions are very crucial for any business since they affect its earning capacity in the long run. The
company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost
of 10%. The EBIT for the previous year of the company was Rs. 8, 00,000 and total capital investment was Rs.
1,00,00,000. Instead of issuing 10% Debenture the Company can issue Equity Shares for raising the fund. The
financial manager of the company would normally opt for a source which is the cheapest
Answer the following questions:
(i) What is the other name of long term decision?
(ii) A decision for replacing machines with modern machinery of higher production capacity is a:
(a) Financing decision (b) Working capital decision (c) Investment decision (d) None of
the above
(iii) A decision for raising fund of Rs. 80,00,000 either from 10% Debenture or Equity Shares is a:
(a) Financing decision (b) Dividend decision (c) Investment decision (d) None of the above
(iv) The financing decisions are affected by various factors. Which one of the following factor is discussed in
the above case?

Q3Ravi has started a pizza base manufacturing business. The early morning schedule is very busy as the
product is dispatched as soon as it is made to keep it fresh and is sent to the various pizza making restaurants or
hotels. Daily fresh pizza base has to be delivered on the basis of estimated orders as there is no sure shot
consumption pattern in the city.What do you think is going to be the working capital requirement of this
business? Why?

Q4‘Hot Winters’ is a premium sweater making company. The sweaters are worn in many countries and they are
of very high quality. For six months of the year the company is almost without work but the remaining six
months it is busy in preparing almost 10 million sweaters for its customers in different parts of the world.
What do you think is going to be the working capital requirement of this company? Why?
Q5Bharat Express’ specialises in Courier Services. Its ‘wide range of express package and parcel service’ help
business firms to make sure that the goods are made le to the customers at the right place and at the right time.
State with reason, whether the working capital requirements of ‘Bharat Express’ will be high or low?

Q6 Identify the decision in the following situations.

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.
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.
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.
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.
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.
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.
7. Raj an 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.
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. ,
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.
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.
11. Tarachand and Sons has decided to open a new branch in the middle of the city in order to increase its
business.

Q7. A company was expecting a sale increase of 20% in comparison to the last year. However, due to poor
support from the economic situations around the increase turned out to be only 10%. The company however had
prepared itself for this situation. It knew how to change its expenses in financial case the sales increase goes
down in comparison to the expectations.

1. Identify the concept of financial management which is highlighted in the above case.
2. What should have been the action taken by the company if the situation had been different like increase in
revenue by 30%.

Q8.In the following cases identify the type of decision. Also identify the factors affecting the decisions:
 1. A company has decided to issue equity but it is concerned about the control management will lose. So after
a lot of brainstorming the board of directors decide to take loan from a bank and debt from other sources.
2. Keeping the concern of raising funds alive a company decides to go for debenture as the final choice. The
people who will be purchasing the debentures would be assured a definite return after a definite period of
time. The company’s credibility is good so they should not worry about the A company issues equity
shares but the expenses involved are quite a lot. The organisation has to be aware about the printing
charges, advertisement related expenses, underwriter’s commission and brokerage asked by the middle
men.
3. ‘Dheeraj Plants’, a manufacturing company, thinks of starting a project in South America. The company
knows that the project will be a successful venture in the years to come. It tries to figure out the revenue
generated by the project and the expenses which will be involved in it.
4. Suyash tries to evaluate two projects. The projects have equal level of risk. According to this parameter he
finds both projects at par. However, when it corhes to knowing the rate of return of the two projects he
finds that Project A will yield a rate of return of 10% and Project B will yield a rate of return of 12%. So
he decides to go ahead with the project B.
5. Shobhit wants to start a movie hall so he decides to evaluate the feasibility of starting the project. He finds
that at place A the movie hall will cost ?20 crore and at place B it will cost ?30 crore. He decides to go for
the first option—Project A.

Q9. Abhishek Ltd.’ is manufacturing cotton clothes. It has been consistently earning good profits for many
years. This year too, it has been able to generate ^ profits. There is availability of enough cash in the company
and good prospects for growth in future. It is a well managed organisation and believes in quality, equal
employment opportunities and good remuneration practices. It has many shareholders who prefer to receive a
regular income form their investments.It has taken a loan of Rs.50 lakhs from I.C.I.C.I Bank and is bound by
certain restrictions on the payment of dividend according to the terms of the loan agreement.
The above discussion about the company leads to various factors which decide how much of the profits should
be retained and how much has to be distributed by the company. Quoting the lines from the above discussion,
identify and explain any four such factors.

Q10. ‘Yiyo Ltd.’ is a company manufacturing textiles. It has a share capital of Rs.60 lakhs. The earning per
share in the previous year was Rs.0.50. For diversification, the company requires additional capital of ?40 lakhs.
The company raised funds by issuing 10% debentures for the same. During the current year the company earned
a profit of Rs.8 lakhs on capital employed. It paid tax @ 40%.
(a) State whether the shareholders gained or lost, in respect of earning per share on diversification. Show your
calculations clearly.
(b) Also, state any three factors that favour the issue of debentures by the company as part of its capital
structure.