CLASS XII CHAPTER 9
: FINANCIAL MANAGEMENT- CASE STUDIES
CASE 1
The demand for take away food business is increasing day-by-day. People working in multi-national companies have to work till night very often and they are reluctant to cook food. Taking advantage of this opportunity, Amit and Bijoy started Langar', a take away food business. The food became famous because of its good quality and standards of hygiene followed by them. Over the years, the business became very profitable. They decided to expand the business by opening more branches in different cities. To ensure consistent food quality at all branches and to maintain the hygiene and quality they planned to import machines with advanced technology. The cost of each machine was Rs. 12 crores. They knew that this decision has to be taken very carefully, as it involves a huge cost and that the decision, once taken is irreversible.
(i) Identify and state the financial decision discussed in the above para.
(ii) Explain any two factors affecting the decision identified in (i) above.
(ii) Explain any two factors affecting the decision identified in (i) above.
(i) Investment Decision / Capital Budgeting Decision: It involves deciding how the funds are invested in different assets. Here, it is a long-term investment decision.
(ii) Factors:
1. Cash flows of the project: Expected cash receipts and payments over the life of the investment.
2. Rate of return: The expected return from the project and the risk involved.
(ii) Factors:
1. Cash flows of the project: Expected cash receipts and payments over the life of the investment.
2. Rate of return: The expected return from the project and the risk involved.
CASE 2
Abhinav is working as a production manager in a steel manufacturing plant, 'KPG Ltd.' To compete in the market, he thought of replacing the existing machinery with new high-tech machinery. Abhinav discussed his idea with the Chief Executive Officer who asked him to prepare a proposal for the same and sent it to the finance manager. The finance manager said that this decision had to be evaluated carefully as it involved a huge amount of investment and was irreversible except at a huge cost.
Identify the decision which the finance manager would like to evaluate. State any two factors which may affect this decision.
Decision: Capital Budgeting Decision / Long-term Investment Decision.
Factors:
1. Rate of return of the project.
2. Investment criteria involved (calculations of interest rate, cash flows, etc.).
Factors:
1. Rate of return of the project.
2. Investment criteria involved (calculations of interest rate, cash flows, etc.).
CASE 3 (BrightTech Electronics)
BrightTech Electronics Ltd. manufactures home appliances such as refrigerators and washing machines. Due to increasing demand for energy-efficient appliances, the company is planning to set up a new manufacturing unit with advanced automated machines. The Finance Manager carefully analysed the cost of purchasing new machinery, expected demand for the products and the possible return that the company might earn in the coming years before taking the final decision.
(i) Identify and state the financial decision discussed in the above case.
(ii) Explain any two factors affecting the decision identified in (i) above.
(ii) Explain any two factors affecting the decision identified in (i) above.
(i) Investment Decision / Capital Budgeting Decision.
(ii) Factors: Cash flows of the project and Rate of Return.
(ii) Factors: Cash flows of the project and Rate of Return.
CASE 4 (UrbanRide Motors)
UrbanRide Motors manufactures electric scooters. The company has decided to expand its operations to several new cities. For this expansion, the company requires a large amount of capital. The Finance Manager is considering different sources such as issuing shares to the public, taking loans from banks or issuing debentures. The manager wants to select a source that will minimise the cost of capital and maintain a proper balance between risk and return.
(i) Identify and state the financial decision discussed in the above case.
(ii) Explain any two factors affecting the decision identified in (i) above.
(ii) Explain any two factors affecting the decision identified in (i) above.
(i) Financing Decision: It relates to the quantum of finance to be raised from various long-term sources (debt vs equity).
(ii) Factors:
1. Cost: The cost of raising funds from different sources.
2. Risk: The degree of risk associated with each source (debt is riskier).
(ii) Factors:
1. Cost: The cost of raising funds from different sources.
2. Risk: The degree of risk associated with each source (debt is riskier).
CASE 5 (GreenLife Foods)
GreenLife Foods Ltd. produces packaged organic food products. The company has earned a good profit during the financial year. The Board of Directors is now discussing whether the company should distribute a larger portion of profit among shareholders or retain a significant part of it for future expansion of the business.
(i) Identify and state the financial decision discussed in the above case.
(ii) Explain any two factors affecting the decision identified in (i) above.
(ii) Explain any two factors affecting the decision identified in (i) above.
(i) Dividend Decision: It involves deciding how much of the profit earned by the company is to be distributed to shareholders and how much should be retained.
(ii) Factors:
1. Growth Opportunities: Companies with good growth opportunities retain more money.
2. Amount of Earning: Dividends are paid out of current and past earnings.
(ii) Factors:
1. Growth Opportunities: Companies with good growth opportunities retain more money.
2. Amount of Earning: Dividends are paid out of current and past earnings.
CASE 6 (NextGen Technologies)
NextGen Technologies Ltd. develops innovative software products. The company is planning to introduce a new software platform for online businesses. For this purpose, the Finance Manager is evaluating whether the company should invest a large amount of money in research and development and purchase advanced computer systems required for the project.
(i) Identify the financial decision which the Finance Manager would like to evaluate.
(ii) State any two factors which may affect this decision.
(ii) State any two factors which may affect this decision.
(i) Investment Decision / Capital Budgeting Decision.
(ii) Factors: Cash flows of the project, Rate of return.
(ii) Factors: Cash flows of the project, Rate of return.
CASE 7 (GlobalStyle Garments)
GlobalStyle Garments Ltd. is a well-known clothing manufacturer. The company wants to modernise its factory by installing automated sewing machines. To finance this project, the Finance Manager is analysing different options such as using retained earnings, borrowing from financial institutions or issuing equity shares to the public.
(i) Identify the financial decision discussed in the above case.
(ii) Explain any two factors affecting the decision identified in (i) above.
(ii) Explain any two factors affecting the decision identified in (i) above.
(i) Financing Decision.
(ii) Factors: Cost, Risk, Cash flow position of the company.
(ii) Factors: Cost, Risk, Cash flow position of the company.
CASE 8 (FreshFarm Foods)
FreshFarm Foods Ltd. manufactures packaged fruit juices. During the current year, the company earned higher profits due to increased demand for its products. The management is now deciding how much of this profit should be distributed to shareholders as dividend and how much should be retained in the business to finance future projects.
(i) Identify and state the financial decision discussed in the above case.
(ii) Explain any two factors affecting the decision identified in (i) above.
(ii) Explain any two factors affecting the decision identified in (i) above.
(i) Dividend Decision.
(ii) Factors: Stability of earnings, Growth Opportunities.
(ii) Factors: Stability of earnings, Growth Opportunities.
CASE 9 (VK Ltd)
Financial Planning Concept and Importance
VK Ltd. is a fast moving consumer goods company. It has shareholders spread all over India. Most of its shareholders depend upon a regular income from their investment. VK Ltd. has been earning consistent profits. The management of the company keeps in mind the preference of the shareholders regarding payment of dividend. Since its shareholders, in general, desire that atleast a certain amount is paid as dividend to them every year, the company declares dividend every year. Atul, the Finance Manager of the company identified promising growth opportunities. He suggested to the Chief Executive Officer to retain the earnings to finance the required investments instead of declaring dividend every year. For this, the Chief Executive Officer decided to call a General Body Meeting of the shareholders.
(i) Identify two factors affecting dividend decision discussed above.
(ii) State two other factors that affect the dividend decision of a company.
(ii) State two other factors that affect the dividend decision of a company.
(i) Factors Discussed:
1. Shareholders' Preference: "shareholders depend upon a regular income... desire that atleast a certain amount is paid"
2. Growth Opportunities: "identified promising growth opportunities... retain the earnings"
(ii) Other Factors: Amount of earnings, Stability of earnings, Cash flow position.
1. Shareholders' Preference: "shareholders depend upon a regular income... desire that atleast a certain amount is paid"
2. Growth Opportunities: "identified promising growth opportunities... retain the earnings"
(ii) Other Factors: Amount of earnings, Stability of earnings, Cash flow position.
CASE 1 (GreenLife Foods)
GreenLife Foods Ltd. is a company that manufactures packaged organic food products. Due to increasing demand for healthy food items, the company planned to expand its production capacity by installing new machines and opening a new distribution centre. Before taking this step, the Finance Manager carefully estimated the amount of funds required for purchasing machinery, hiring workers and managing day-to-day business operations.
He also analysed the possible sources of funds and prepared a plan to ensure that adequate funds would be available whenever required. The management believed that such careful planning would help the company avoid shortage or excess of funds and ensure smooth functioning of business activities. With this plan in place, the company was able to expand its operations successfully without facing financial difficulties.
(i) Identify and explain the concept of financial management discussed in the above case.
(ii) Explain any two points of importance of the concept identified in (i) above.
(ii) Explain any two points of importance of the concept identified in (i) above.
(i) Financial Planning: It is the preparation of a financial blueprint of an organization's future operations. It ensures that enough funds are available at right time.
(ii) Importance:
1. Helps in avoiding business shocks and surprises.
2. Helps in coordinating various business functions.
(ii) Importance:
1. Helps in avoiding business shocks and surprises.
2. Helps in coordinating various business functions.
CASE 2 (BrightTech Electronics)
Capital Structure Concept and Factors
BrightTech Electronics Ltd. manufactures home appliances such as refrigerators and washing machines. The company planned to introduce a new range of energy-efficient appliances in the market. For this purpose, the management needed funds for research, purchase of new machinery, marketing activities and working capital requirements.
Before implementing the project, the Finance Manager prepared a detailed plan estimating the total funds required and the possible sources from which these funds could be arranged. This helped the company maintain a proper balance between different sources of finance and ensured that the business had sufficient funds to carry out its expansion plans. As a result, the company was able to start the new product line smoothly and manage its financial resources efficiently.
(i) Identify the concept related to estimating the financial requirements of a business and arranging funds accordingly.
(ii) Explain any two points of importance of this concept for an organisation.
(ii) Explain any two points of importance of this concept for an organisation.
(i) Financial Planning.
(ii) Importance: It links present with future, and helps in avoiding business shocks and surprises.
(ii) Importance: It links present with future, and helps in avoiding business shocks and surprises.
CASE 1 ('X Ltd.')
'X Ltd.' issued 14% Debentures of 4,00,000 and 10,000 Equity shares of 60 each. This investment resulted in a net profit of 2,00,000 before interest and tax. The tax rate was 50%.
(a) Calculate the 'Return on Investment' and Earning per Share' of 'X Ltd.'
(b) State with reason whether the above example is that of favourable or unfavourable financial leverage.
(b) State with reason whether the above example is that of favourable or unfavourable financial leverage.
(a) ROI & EPS Calculation:
Total Investment = 4,00,000 (Debt) + 6,00,000 (Equity) = 10,00,000.
ROI = (EBIT / Total Investment) * 100 = (2,00,000 / 10,00,000) * 100 = 20%.
Interest = 14% of 4,00,000 = 56,000.
EBT = 2,00,000 - 56,000 = 1,44,000.
Tax (50%) = 72,000. EAT = 72,000.
EPS = EAT / No. of shares = 72,000 / 10,000 = Rs. 7.20.
(b) Favourable Financial Leverage: Yes, because ROI (20%) is greater than the Cost of Debt (14%).
Total Investment = 4,00,000 (Debt) + 6,00,000 (Equity) = 10,00,000.
ROI = (EBIT / Total Investment) * 100 = (2,00,000 / 10,00,000) * 100 = 20%.
Interest = 14% of 4,00,000 = 56,000.
EBT = 2,00,000 - 56,000 = 1,44,000.
Tax (50%) = 72,000. EAT = 72,000.
EPS = EAT / No. of shares = 72,000 / 10,000 = Rs. 7.20.
(b) Favourable Financial Leverage: Yes, because ROI (20%) is greater than the Cost of Debt (14%).
CASE 2 (X Ltd. Manufacturing)
X Ltd. is a manufacturing company. The Finance Manager is analysing the capital structure of the company to understand the impact of the use of debt on shareholders’ earnings. The following information is available:
Total Investment = ₹10,00,000
Equity Share Capital = ₹6,00,000 (₹10 per share)
10% Debentures = ₹4,00,000
Earnings Before Interest and Tax (EBIT) = ₹2,00,000
Tax Rate = 30%
(a) Calculate the Return on Investment (ROI) and Earnings per Share (EPS) of X Ltd.
(b) State with reason whether the above example shows favourable or unfavourable financial leverage.
(b) State with reason whether the above example shows favourable or unfavourable financial leverage.
(a) Calculation:
ROI = (2,00,000 / 10,00,000) * 100 = 20%.
Interest = 10% of 4,00,000 = 40,000.
EBT = 2,00,000 - 40,000 = 1,60,000.
Tax (30%) = 48,000. EAT = 1,12,000.
EPS = 1,12,000 / 60,000 shares = Rs. 1.87 approx.
(b) Favourable: Because ROI (20%) > Cost of Debt (10%).
ROI = (2,00,000 / 10,00,000) * 100 = 20%.
Interest = 10% of 4,00,000 = 40,000.
EBT = 2,00,000 - 40,000 = 1,60,000.
Tax (30%) = 48,000. EAT = 1,12,000.
EPS = 1,12,000 / 60,000 shares = Rs. 1.87 approx.
(b) Favourable: Because ROI (20%) > Cost of Debt (10%).
CASE 3
The management of X Ltd. is evaluating whether the use of debt in the capital structure is beneficial for the company. The Finance Manager collected the following data:
Total Capital Employed = ₹12,00,000
Equity Share Capital = ₹8,00,000 (₹10 per share)
12% Debentures = ₹4,00,000
Earnings Before Interest and Tax (EBIT) = ₹1,20,000
Tax Rate = 30%
The manager wants to understand the impact of debt on the earnings of equity shareholders.
(a) Calculate the Return on Investment (ROI) and Earnings per Share (EPS).
(b) State with reason whether the financial leverage is favourable or unfavourable in the above case.
(b) State with reason whether the financial leverage is favourable or unfavourable in the above case.
(a) Calculation:
ROI = (1,20,000 / 12,00,000) * 100 = 10%.
Interest = 12% of 4,00,000 = 48,000.
EBT = 1,20,000 - 48,000 = 72,000.
Tax (30%) = 21,600. EAT = 50,400.
EPS = 50,400 / 80,000 shares = Rs. 0.63.
(b) Unfavourable: Because ROI (10%) < Cost of Debt (12%). Trading on equity is detrimental here.
ROI = (1,20,000 / 12,00,000) * 100 = 10%.
Interest = 12% of 4,00,000 = 48,000.
EBT = 1,20,000 - 48,000 = 72,000.
Tax (30%) = 21,600. EAT = 50,400.
EPS = 50,400 / 80,000 shares = Rs. 0.63.
(b) Unfavourable: Because ROI (10%) < Cost of Debt (12%). Trading on equity is detrimental here.
CASE 4
X Ltd. manufactures electrical appliances. The company uses both equity and borrowed funds to finance its operations. The Finance Manager wants to analyse whether the current capital structure is beneficial for shareholders.
The following information is available:
Total Investment = ₹15,00,000
Equity Share Capital = ₹9,00,000 (₹10 per share)
10% Debentures = ₹6,00,000
Earnings Before Interest and Tax (EBIT) = ₹3,00,000
Tax Rate = 30%
(a) Calculate the Return on Investment (ROI) and Earnings per Share (EPS).
(b) State with reason whether the use of debt results in favourable or unfavourable financial leverage.
(b) State with reason whether the use of debt results in favourable or unfavourable financial leverage.
(a) Calculation:
ROI = (3,00,000 / 15,00,000) * 100 = 20%.
Interest = 10% of 6,00,000 = 60,000.
EBT = 3,00,000 - 60,000 = 2,40,000.
Tax (30%) = 72,000. EAT = 1,68,000.
EPS = 1,68,000 / 90,000 shares = Rs. 1.87 approx.
(b) Favourable: Because ROI (20%) > Cost of Debt (10%).
ROI = (3,00,000 / 15,00,000) * 100 = 20%.
Interest = 10% of 6,00,000 = 60,000.
EBT = 3,00,000 - 60,000 = 2,40,000.
Tax (30%) = 72,000. EAT = 1,68,000.
EPS = 1,68,000 / 90,000 shares = Rs. 1.87 approx.
(b) Favourable: Because ROI (20%) > Cost of Debt (10%).
CASE 5
The Finance Manager of X Ltd. is reviewing the capital structure to decide whether the use of borrowed funds is beneficial for the company. The following details are available:
Total Capital Employed = ₹8,00,000
Equity Share Capital = ₹5,00,000 (₹10 per share)
10% Debentures = ₹3,00,000
Earnings Before Interest and Tax (EBIT) = ₹60,000
Tax Rate = 30%
(a) Calculate the Return on Investment (ROI) and Earnings per Share (EPS).
(b) State with reason whether the company is experiencing favourable or unfavourable financial leverage.
(b) State with reason whether the company is experiencing favourable or unfavourable financial leverage.
(a) Calculation:
ROI = (60,000 / 8,00,000) * 100 = 7.5%.
Interest = 10% of 3,00,000 = 30,000.
EBT = 60,000 - 30,000 = 30,000.
Tax (30%) = 9,000. EAT = 21,000.
EPS = 21,000 / 50,000 shares = Rs. 0.42.
(b) Unfavourable: Because ROI (7.5%) < Cost of Debt (10%).
ROI = (60,000 / 8,00,000) * 100 = 7.5%.
Interest = 10% of 3,00,000 = 30,000.
EBT = 60,000 - 30,000 = 30,000.
Tax (30%) = 9,000. EAT = 21,000.
EPS = 21,000 / 50,000 shares = Rs. 0.42.
(b) Unfavourable: Because ROI (7.5%) < Cost of Debt (10%).
CASE 6
X Ltd. is planning to evaluate its financial performance. The Finance Manager collected the following data to analyse the impact of the company’s capital structure on shareholders’ earnings.
Total Investment = ₹20,00,000
Equity Share Capital = ₹10,00,000 (₹10 per share)
12% Debentures = ₹10,00,000
Earnings Before Interest and Tax (EBIT) = ₹5,00,000
Tax Rate = 30%
(a) Calculate the Return on Investment (ROI) and Earnings per Share (EPS) of X Ltd.
(b) State with reason whether the financial leverage in the above case is favourable or unfavourable.
(b) State with reason whether the financial leverage in the above case is favourable or unfavourable.
(a) Calculation:
ROI = (5,00,000 / 20,00,000) * 100 = 25%.
Interest = 12% of 10,00,000 = 1,20,000.
EBT = 5,00,000 - 1,20,000 = 3,80,000.
Tax (30%) = 1,14,000. EAT = 2,66,000.
EPS = 2,66,000 / 1,00,000 shares = Rs. 2.66.
(b) Favourable: Because ROI (25%) > Cost of Debt (12%).
ROI = (5,00,000 / 20,00,000) * 100 = 25%.
Interest = 12% of 10,00,000 = 1,20,000.
EBT = 5,00,000 - 1,20,000 = 3,80,000.
Tax (30%) = 1,14,000. EAT = 2,66,000.
EPS = 2,66,000 / 1,00,000 shares = Rs. 2.66.
(b) Favourable: Because ROI (25%) > Cost of Debt (12%).
CASE 7 (Arun & Shyam)
After seeing an overwhelming response from people for their homes, Arun, the owner of a leading construction company 'Luxury At Home' decided to launch new projects in eight more cities across India. This decision would require additional investment of 150 crores. Shyam, the finance manager advised Arun that instead of raising the entire amount through equity, it would be better to raise funds with a judicious mix of 40% equity and 60% debt. Shyam explained that since the company was earning sufficient profits, they could also take advantage of trading on equity to maximise earning per share. He also suggested that raising this debt through a loan from a financial institution would be better as this would involve a lower cost. He further added that debt was also beneficial as it would not dilute the management's holding in the company. After giving due thought, Arun agreed to Shyam's suggestions.
(i) State the concept of financial management suggested by Shyam to Arun.
(ii) State any three factors discussed by Shyam in the above paragraph, affecting the concept identified in (i) above.
(ii) State any three factors discussed by Shyam in the above paragraph, affecting the concept identified in (i) above.
(i) Capital Structure: The mix between owners funds and borrowed funds.
(ii) Factors Discussed:
1. Return on Investment (Trading on Equity): "earning sufficient profits, they could also take advantage of trading on equity."
2. Cost of Debt: "loan from a financial institution would be better as this would involve a lower cost."
3. Control: "debt was also beneficial as it would not dilute the management's holding."
(ii) Factors Discussed:
1. Return on Investment (Trading on Equity): "earning sufficient profits, they could also take advantage of trading on equity."
2. Cost of Debt: "loan from a financial institution would be better as this would involve a lower cost."
3. Control: "debt was also beneficial as it would not dilute the management's holding."
CASE 8
Arun is the owner of BrightStyle Garments Ltd., a company that manufactures fashionable clothing. The company planned to expand its business by setting up a new production unit. For this project, Arun required a large amount of capital. He was confused about whether he should arrange the funds by issuing equity shares or by taking loans from banks.
Arun discussed the matter with his friend Shyam, who was a finance expert. Shyam advised him that while arranging funds, he should maintain a proper balance between owned funds and borrowed funds. Shyam explained that before taking the final decision, Arun should consider the cost of borrowing, the risk involved in using excessive debt and the stability of the company’s earnings. He also suggested that maintaining an appropriate mix of different sources of funds would help the company operate efficiently and increase the returns for shareholders.
(i) State the concept of financial management suggested by Shyam to Arun.
(ii) State any three factors discussed by Shyam in the above paragraph affecting the concept identified in (i) above.
(ii) State any three factors discussed by Shyam in the above paragraph affecting the concept identified in (i) above.
(i) Capital Structure.
(ii) Factors Discussed: 1. Cost of Debt (cost of borrowing). 2. Financial Risk (risk involved in using excessive debt). 3. Stability of Earnings (Cash Flow Position).
(ii) Factors Discussed: 1. Cost of Debt (cost of borrowing). 2. Financial Risk (risk involved in using excessive debt). 3. Stability of Earnings (Cash Flow Position).
CASE 9
Arun started a company named UrbanRide Motors which manufactures electric bicycles. As the demand for electric vehicles was increasing rapidly, Arun decided to expand his production capacity. For this purpose, he needed additional funds to purchase new machines and set up a larger factory.
Unsure about the best way to arrange funds, Arun approached his friend Shyam, who had good knowledge of finance. Shyam advised him that the company should decide the proportion of debt and equity carefully while arranging funds. He explained that Arun should take into account factors such as the expected return from the business, the level of risk associated with borrowing funds and the need to maintain control over the company. By considering these factors, the company would be able to choose a suitable combination of funds for its long-term growth.
(i) State the concept of financial management suggested by Shyam to Arun.
(ii) State any three factors discussed by Shyam in the above paragraph affecting the concept identified in (i) above.
(ii) State any three factors discussed by Shyam in the above paragraph affecting the concept identified in (i) above.
(i) Capital Structure.
(ii) Factors Discussed: 1. Return on Investment (expected return). 2. Financial Risk (risk associated with borrowing). 3. Control Consideration (need to maintain control).
(ii) Factors Discussed: 1. Return on Investment (expected return). 2. Financial Risk (risk associated with borrowing). 3. Control Consideration (need to maintain control).
CASE 10 (Amrit & Nimrit Ltd)
Fixed and Working Capital Concept and Factors
Amrit Ltd. and Nimrit Ltd. are two companies manufacturing automotive parts for automobile companies. Amrit Ltd. had a capital employed of 80 lakhs comprising of equity share capital of 40 lakhs divided into 40,000 shares of 100 each and debt of 40 lakhs at 6%. Nimrit Ltd. also had capital employed of 80 lakhs divided into 80,000 equity shares of 100 each. Return on Investment (ROI) of both the companies is 10% and tax rate is 50%.
(a) Calculate Earning Per Share (EPS) for both the companies.
(b) Which of the two companies has better Earning Per Share and why?
(b) Which of the two companies has better Earning Per Share and why?
(a) EPS Calculation:
EBIT for both = 10% of 80 Lakhs = 8,00,000.
Amrit Ltd: Interest = 6% of 40 Lakhs = 2,40,000. EBT = 5,60,000. Tax (50%) = 2,80,000. EAT = 2,80,000. EPS = 2,80,000 / 40,000 shares = Rs. 7.00.
Nimrit Ltd: Interest = Nil. EBT = 8,00,000. Tax (50%) = 4,00,000. EAT = 4,00,000. EPS = 4,00,000 / 80,000 shares = Rs. 5.00.
(b) Amrit Ltd has better EPS. This is because of Trading on Equity (favourable financial leverage) as ROI (10%) is greater than Cost of Debt (6%).
EBIT for both = 10% of 80 Lakhs = 8,00,000.
Amrit Ltd: Interest = 6% of 40 Lakhs = 2,40,000. EBT = 5,60,000. Tax (50%) = 2,80,000. EAT = 2,80,000. EPS = 2,80,000 / 40,000 shares = Rs. 7.00.
Nimrit Ltd: Interest = Nil. EBT = 8,00,000. Tax (50%) = 4,00,000. EAT = 4,00,000. EPS = 4,00,000 / 80,000 shares = Rs. 5.00.
(b) Amrit Ltd has better EPS. This is because of Trading on Equity (favourable financial leverage) as ROI (10%) is greater than Cost of Debt (6%).
CASE 1 (Kanav Solar)
Kanav, after passing out of college with specialization in renewable energy, was determined to start a solar power plant. The venture required heavy investment in plant and machinery and less on manual labour. Kanav invested in the latest solar panel technology and infrastructure and purchased the latest solar panels, inverters and battery storage systems. Despite the high risk and substantial investment, Kanav's business had good expansion possibilities. The world was increasingly moving towards clean energy solutions, and there was a growing demand for sustainable power sources. So, Kanav decided to create a higher capacity to meet the anticipated demand quickly. This entailed further investment in fixed assets which Kanav was able to arrange. As the years passed, the solar power plant did very well and played a pivotal role in the city's transition towards a greener and more sustainable future.
Identify and explain the two factors affecting the fixed capital requirements discussed in the above case.
1. Choice of Technique: "required heavy investment in plant and machinery and less on manual labour" (Capital intensive technique requires more fixed capital).
2. Growth Prospects: "business had good expansion possibilities... decided to create a higher capacity" (Higher growth potential requires higher fixed capital).
2. Growth Prospects: "business had good expansion possibilities... decided to create a higher capacity" (Higher growth potential requires higher fixed capital).
CASE 2 (KJ Ltd)
'KJ Ltd.' is a tile manufacturing company in Udaipur having its own stores in various cities of Rajasthan. Instead of having its own trucks, the company decides to use trucks on lease to transport its tiles to various stores.
Identify how the company's decision to lease trucks will affect its capital requirements:
(A) Decrease the fixed capital requirements
(B) Increase the fixed capital requirements
(C) Will not affect the fixed capital requirements
(D) Decrease the working capital requirements
(A) Decrease the fixed capital requirements
(B) Increase the fixed capital requirements
(C) Will not affect the fixed capital requirements
(D) Decrease the working capital requirements
Answer: (A) Decrease the fixed capital requirements. (Because leasing avoids the huge initial cost of purchasing trucks).
CASE 3 (Omara Ltd)
'Omara Ltd.', is a garments company that produces jackets from organic, recycled and sustainable materials. The sourcing of eco-friendly fabrics, slower production process and focus on ethical labour practices result in big time gap between receipt of fabrics and their conversion into jackets. Since 'Omara Ltd.' faces intense competition in the garment industry, it has to hold large stocks of jackets to meet urgent orders from customers. To further attract and retain customers, 'Omara Ltd.' offers liberal credit terms to them. Thus 'Omara Ltd.' is able to perform much better than its competitors.
(i) State whether the total working capital requirement of 'Omara Ltd.' will be high or low.
(ii) Justify your answer given in (i) above by identifying and stating any three factors affecting working capital requirements discussed in the above case.
(ii) Justify your answer given in (i) above by identifying and stating any three factors affecting working capital requirements discussed in the above case.
(i) High.
(ii) Factors:
1. Production Cycle: "big time gap between receipt of fabrics and their conversion" (Longer cycle requires more working capital).
2. Level of Competition: "faces intense competition... hold large stocks" (High competition requires maintaining huge inventory).
3. Credit Allowed: "offers liberal credit terms to them" (More credit allowed requires more working capital).
(ii) Factors:
1. Production Cycle: "big time gap between receipt of fabrics and their conversion" (Longer cycle requires more working capital).
2. Level of Competition: "faces intense competition... hold large stocks" (High competition requires maintaining huge inventory).
3. Credit Allowed: "offers liberal credit terms to them" (More credit allowed requires more working capital).
CASE 4 (Sankalp Builders)
After completing his civil engineering degree, Sankalp decided to start his own business. He started a construction company 'Sankalp Builders'. He entered into an agreement for construction of residential flats on a land of 30 acres. Building of the flats on such a large scale required expensive machinery like bulldozers, excavators, etc. He had the option to buy the machinery or take it on lease. Though Sankalp was in favour of buying, his father advised him to take the decision with caution as construction machinery becomes outdated very fast and needs to be replaced. He also told Sankalp that in future he may think of diversifying his operations and would need funds for that too.
Identify and state any four factors discussed above affecting the fixed capital requirements of 'Sankalp Builders'.
1. Scale of Operations: "Building of the flats on such a large scale"
2. Financing Alternatives: "option to buy the machinery or take it on lease"
3. Technology Upgradation: "machinery becomes outdated very fast and needs to be replaced"
4. Diversification: "in future he may think of diversifying his operations"
2. Financing Alternatives: "option to buy the machinery or take it on lease"
3. Technology Upgradation: "machinery becomes outdated very fast and needs to be replaced"
4. Diversification: "in future he may think of diversifying his operations"
CASE 5
BrightTech Electronics Ltd. manufactures refrigerators and washing machines. The company recently decided to increase its production capacity due to growing demand for its products. For this purpose, the management planned to purchase additional machinery and construct a new factory building. The company also decided to introduce advanced automated machines which required a higher initial investment but would increase production efficiency.
The Finance Manager explained that the nature of the business and the level of technology used in production would influence the amount of long-term funds required by the company.
(1) Identify and explain the two factors affecting the fixed capital requirements discussed in the above case.
1. Growth Prospects: "increase its production capacity due to growing demand"
2. Choice of Technique: "introduce advanced automated machines which required a higher initial investment"
2. Choice of Technique: "introduce advanced automated machines which required a higher initial investment"
CASE 6
UrbanRide Motors manufactures electric scooters. The company requires several trucks to transport its products to different cities. The Finance Manager suggested that instead of purchasing trucks, the company should take them on lease from a transport company. This would reduce the need for large investment in purchasing vehicles while allowing the company to focus on its core manufacturing activities.
(1) Identify how the company’s decision to lease trucks will affect its capital requirements:
(A) Decrease the fixed capital requirements
(B) Increase the fixed capital requirements
(C) Will not affect the fixed capital requirements
(D) Decrease the working capital requirements
(A) Decrease the fixed capital requirements
(B) Increase the fixed capital requirements
(C) Will not affect the fixed capital requirements
(D) Decrease the working capital requirements
Answer: (A) Decrease the fixed capital requirements.
CASE 7
GreenLife Foods Ltd. produces packaged organic food products. The company maintains a large stock of raw materials because agricultural products are available only during certain seasons. It also offers credit to retailers for two months to encourage them to purchase its products in larger quantities. As a result, a large amount of money remains tied up in inventory and debtors.
(1) (i) State whether the total working capital requirement of GreenLife Foods Ltd. will be high or low.
(ii) Justify your answer given in (i) above by identifying and stating any two factors affecting working capital requirements discussed in the above case.
(ii) Justify your answer given in (i) above by identifying and stating any two factors affecting working capital requirements discussed in the above case.
(i) High.
(ii) Factors: 1. Seasonal Factors: Availability of agricultural products in certain seasons requires stocking up. 2. Credit Allowed: Offering two months credit to retailers ties up funds in debtors.
(ii) Factors: 1. Seasonal Factors: Availability of agricultural products in certain seasons requires stocking up. 2. Credit Allowed: Offering two months credit to retailers ties up funds in debtors.
CASE 8
GlobalStyle Garments Ltd. manufactures fashionable clothing. The company produces garments throughout the year and sells them through a wide network of retailers. The production process involves several stages such as cutting, stitching, finishing and packaging, which takes considerable time before the final product is ready for sale. Due to this long production cycle, a large amount of funds remains blocked in work-in-progress inventory.
(1) Identify and explain two factors affecting the working capital requirements discussed in the above case.
1. Production Cycle: "involves several stages... which takes considerable time." A longer cycle requires more working capital.
2. Nature of Business: It is a manufacturing company which generally requires more working capital than a trading company.
2. Nature of Business: It is a manufacturing company which generally requires more working capital than a trading company.
CASE 9
FreshFarm Foods Ltd. produces fruit juices. The company uses modern automated machines which allow faster production and reduce the time taken to convert raw materials into finished goods. As a result, the company is able to sell its products quickly and recover cash from customers in a shorter period of time.
(1) Identify and explain two factors affecting the working capital requirements discussed in the above case.
1. Production Cycle: "faster production and reduce the time taken." A shorter cycle reduces working capital requirement.
2. Operating Cycle / Turn over: "able to sell its products quickly and recover cash... shorter period." A rapid operating cycle requires less working capital.
2. Operating Cycle / Turn over: "able to sell its products quickly and recover cash... shorter period." A rapid operating cycle requires less working capital.
CASE 10
NextGen Technologies Ltd. manufactures computer components. The company plans to expand its production by installing highly advanced machines. These machines are expensive but will allow the company to produce a large quantity of components with better quality. The management also expects that the demand for these products will increase significantly in the coming years.
(1) Identify and explain any two factors affecting the fixed capital requirements discussed in the above case.
1. Technology Upgradation / Choice of Technique: "installing highly advanced machines... expensive." Requires huge fixed capital.
2. Growth Prospects: "demand... will increase significantly." Expectation of growth requires higher investment in fixed assets.
2. Growth Prospects: "demand... will increase significantly." Expectation of growth requires higher investment in fixed assets.
© 2026-27 Business Studies Master | Authored by Rathin Kumar Bardhan
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