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Comprehension
Read the following passage and answer the questions.
A finance manager in an outlet raised Rs. 3.5 crore through a mix of debt and equity in a ratio of 4:3 to open a new outlet, but the actual amount required was Rs. 3 crore. The aim of the finance manager is to maximize the shareholder’s wealth. Keeping this in mind, he reinvested the excess amount of Rs. 50 lakh in a fixed deposit carrying 6% interest p.a. while the cost of capital is 10% p.a.
A finance manager in an outlet raised Rs. 3.5 crore through a mix of debt and equity in a ratio of 4:3 to open a new outlet, but the actual amount required was Rs. 3 crore. The aim of the finance manager is to maximize the shareholder’s wealth. Keeping this in mind, he reinvested the excess amount of Rs. 50 lakh in a fixed deposit carrying 6% interest p.a. while the cost of capital is 10% p.a.
Question: 1
To open a new outlet indicates which financial decision?
To open a new outlet indicates which financial decision?
Updated On: Nov 2, 2024
- Short-term investment decision
- Long-term investment decision
- Financing decision
- Dividend decision
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The Correct Option is B
Solution and Explanation
Opening a new outlet involves a long-term investment decision as it includes committing resources over an extended period for business growth.
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Question: 2
When a company's ROI is higher, it can use __ to ___ its EPS.
When a company's ROI is higher, it can use __ to ___ its EPS.
Updated On: Nov 2, 2024
- Equity, increase
- Earning, increase
- Equity, decrease
- Debt, increase
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The Correct Option is D
Solution and Explanation
When a company’s return on investment (ROI) is higher than the cost of debt, it can use debt financing to increase earnings per share (EPS) without diluting ownership.
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Question: 3
”The aim of the finance manager is to maximize the shareholder wealth.” It is reflected as an aim of:
”The aim of the finance manager is to maximize the shareholder wealth.” It is reflected as an aim of:
Updated On: Nov 2, 2024
- Financial Management
- Marketing Management
- Financial Leverage
- Capital Structure
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The Correct Option is A
Solution and Explanation
The goal of financial management is to maximize shareholder wealth by making decisions that increase the value of the company.
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Question: 4
To open an outlet, funds required was amounting to Rs. 3 crore, but the actual fund raised from the market was Rs. 3.5 crore. This situation is:
To open an outlet, funds required was amounting to Rs. 3 crore, but the actual fund raised from the market was Rs. 3.5 crore. This situation is:
Updated On: Nov 2, 2024
- Ideal Finance
- Idle Finance
- Debt Financing
- Equity Financing
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The Correct Option is B
Solution and Explanation
The excess amount raised but not required for the project results in idle finance, meaning the funds are not being used efficiently.
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Question: 5
Finance manager raised ___ through owner’s fund and ___ through borrowed fund.
Finance manager raised ___ through owner’s fund and ___ through borrowed fund.
Updated On: Nov 2, 2024
- Rs. 15,00,000, Rs. 20,00,000
- Rs. 20,00,000, Rs. 15,00,000
- Rs. 1,50,00,000, Rs. 2,00,00,000
- Rs. 2,00,00,000, Rs. 1,50,00,000
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The Correct Option is D
Solution and Explanation
Based on the 4:3 debt-equity ratio, Rs. 2 crore was raised through owner’s equity, and Rs. 1.5 crore was raised through debt (borrowed funds).
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