FINANCIAL

MANAGEMENT
SOME IMPORTANT QUESTIONS
1)Which of the following is not concerned with
the Long term investment decision?
 (a)Inventory management
 (b)Research and Development Programmer
 (c)Opening a new branch
 (d)Management of fixed capital
ANSWER:
 (a)Inventory management
Explanation:
Long term investment decisions are also
called capital budgeting decisions which
include purchase of land and building, plant
and machinery,change of technology,
research and development and expenditure
of advertising campaign etc. Inventory
management comes under working capital
management decisions.
2)Shareholders funds refer to
________________ 
 (a)All of these
 (b)Reserves
 (c)Share capital
 (d)Surpluses and Retained Earnings
ANSWER:
 (a)All of these
Explanation:
The funds which remain invested in the
business for a longer period of time and
generally, not refunded during the life of the
business. For example equity shares,
retained earnings, reserves etc.
3)Long term investment decision is also known
as _____________ 
 (a)Working Capital
 (b)None of these
 (c)Capital Budgeting
 (d)Dividend Decision
ANSWER:

 (c)Capital
Budgeting
Explanation:
Long term investment decision involves
committing the finance on a long term basis. It is
also known as capital budgeting decision.
4)Which of the following is not a financial
Decision? 
 (a)Investment Decision
 (b)Financing Decision
 (c)Staffing Decision
 (d)Dividend Decision
ANSWER:
 (c)Staffing
Decision
Explanation:
Financial decisions include:
 Investment decision
 Financing decision
 Dividend decision
 Canara Bank wants to open a new branch of
its bank. What is this decision called?
ANSWER:
 This decision is termed as Investment
decision.
The cheapest source of finance:
 (a)Debenture
 (b)equity share capital
 (c)preference share
 (d)retained earnings
 Answer: retained earnings
 Current assets are those which are converted
into cash within?
(a)Six months
(b)One month
(c)Between one year and 3 years
(d)Within a year
ANSWER:
 (d)converted into cash within year
Explain the following as factors affecting
dividend decision
 Stability of earnings
 Growth opportunities
 Cash flow position
 Taxation policy 
 ANSWER:
Factors affecting dividend decision are:
 Stability of earnings-A company having stable earnings
can declare a higher dividend whereas a company having
unstable earnings is likely to pay smaller dividend.
 Growth opportunity- Companies which are intended to
grow and diversify its operations in new lines of
business, generally pay less dividend and retain more
money out of profits to invest in profitable projects.
 Cash Flow position-Availability of enough cash is
necessary for payment of declaration of dividends. If the
cash flow position is strong dividends can be paid. If cash
flow position is weak it is difficult to pay dividends.
 Constraints
 Taxation policy
 ‘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 line 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:
 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.
ANSWER:
 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.
 Computer Tech Ltd.,is one of the leading information
technology outsourcing services providers in India. The
company provides business consultancy and outsourcing
services to its clients. Over the past five years the
company has been paying dividends at high rate to its
shareholders. However, this year, although the
earnings of the company are high, its liquidity position
is not so good. Moreover, the company plans to
undertake new ventures in order to expand its
business.
In context of the above case: .
 Give any three reasons because of which you think
Computer Tech Ltd. has been paying dividends at high
rate to its shareholders over the past five years.
 Comment upon the likely dividend policy of the
company this year by stating any two reasons in
support of your answer.
ANSWER:
 Computer Tech Ltd. has been paying dividends at high rate to its
shareholders over the past five years because of the following
reasons:
 Earnings: The earnings of the company have been high. Since the
dividends are paid out of current and past earnings, there is a direct
relationship between the amount of earnings of the company and the
rate at which it declares dividend .
 Cash flow position: The cash flow position of the company must have
been good as in order to pay high dividends, more cash is required.
 Access to capital market: Because of its credit worthiness, the
company enjoyed an easy access to capital market. Therefore, it did
not feel the need to depend entirely on retained earnings to meet its
financial needs. Hence, it declared higher dividends in past.
 This year the company is likely to follow a conservative dividend
policy because of the following reasons:
 The cash flow position of the company is not good and dividends are
paid in cash.
 The company may like to retain profits to finance its expansion
projects. Retained profits do not involve any explicit cost and are
considered to be the cheapest source of finance.