Question

To open a new outlet indicates which financial decision?

• A. Short-term investment decision
• B. Long-term investment decision
• C. Financing decision
• D. Dividend decision
• A. Equity, increase
• B. Earning, increase
• C. Equity, decrease
• D. Debt, increase
• A. Financial Management
• B. Marketing Management
• C. Financial Leverage
• D. Capital Structure
• A. Ideal Finance
• B. Idle Finance
• C. Debt Financing
• D. Equity Financing
• A. Rs. 15,00,000, Rs. 20,00,000
• B. Rs. 20,00,000, Rs. 15,00,000
• C. Rs. 1,50,00,000, Rs. 2,00,00,000
• D. Rs. 2,00,00,000, Rs. 1,50,00,000

Answer 1

The Correct Option is B

Opening a new outlet involves a long-term investment decision, as it includes committing significant resources over an extended period for business growth. This decision requires careful planning, budgeting, and forecasting, as the return on investment (ROI) typically takes time to materialize. It involves factors such as location, market demand, operational costs, and potential revenue, making it a strategic move for business expansion.

Answer 2

When a company’s return on investment (ROI) is higher than its cost of capital, it can use debt financing to increase its earnings per share (EPS). This is because debt has a fixed cost, meaning the company pays a set interest rate, and this cost does not change regardless of the company’s performance. Using debt allows the company to retain ownership and control, without diluting the shareholders’ equity. If the ROI exceeds the cost of debt, the company can increase profits without giving up ownership stakes.

Answer 3

The aim of financial management is to maximize shareholder wealth by making decisions that improve the value of the company. This involves careful management of the firm’s finances to ensure a high return on investment (ROI). Effective financial management focuses on optimizing the use of resources, managing risks, and making strategic investments that lead to increased profitability and long-term value for shareholders.

Answer 4

The excess amount raised, which was not immediately required for the project, results in idle finance. This means the extra funds are not being used efficiently at the moment, potentially leading to missed opportunities for investment or earning returns. Efficient financial management ensures that funds are allocated effectively, avoiding unnecessary idle cash and optimizing returns on the available capital.

Answer 5

Based on the given ratio of 4:3 (debt to equity), the finance manager raised Rs. 2 crore through owner’s equity and Rs. 1.5 crore through debt (borrowed funds).

To verify, the ratio of debt to equity should be:

\(Debt:Equity=1.52=0.75\text{Debt} : \text{Equity} = \frac{1.5}{2} = 0.75Debt:Equity=21.5​=0.75\)

Since the debt-to-equity ratio is 0.75, it aligns with the given ratio of 4:3 (or 1.33), which indicates that the company has borrowed a proportionate amount relative to the equity raised. This ensures the balance between debt and equity for financing purposes.