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 typically indicates a Long-term investment decision. Such decisions are involved in the allocation of funds to acquire long-term assets to expand or grow a business. These assets, like a new outlet, are anticipated to generate returns over multiple years, impacting the company's future growth and profitability. 

Breaking down the problem given in the business scenario:

• The finance manager raised Rs. 3.5 crore through debt and equity. This suggests strategic planning for financing the long-term investment.
• The decision to open a new outlet requires evaluation of expected returns versus costs over a prolonged time, aligning with long-term investment decisions.

Analysis of Excess Amount:
After fundraising, the finance manager had an excess amount of Rs. 50 lakh. The manager reinvested this in a fixed deposit at 6% interest p.a., though the cost of capital is 10% p.a. This action might not be optimal, as the fixed deposit return is less than the cost of capital, potentially impacting shareholder wealth negatively.
Conclusion:
Investing in a new outlet affects the company’s asset base and is treated as a long-term investment decision due to its implications on future earnings and growth. Therefore, the correct financial decision classification for opening a new outlet is a Long-term investment decision.

Answer 2

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 3

When a company's Return on Investment (ROI) is high, it indicates that the company is generating significant returns on the capital invested. In such scenarios, the company can increase its Earnings Per Share (EPS) by using debt to leverage its operations. Leveraging with debt means that the company borrows additional funds instead of issuing more equity. Here's why and how it works: 

1. Leveraging through Debt: When the ROI is higher than the cost of debt, the company can benefit financially by borrowing funds. This is because the earnings generated from the use of these borrowed funds will exceed the interest payments, thereby increasing overall profitability.

2. Impact on EPS: By using debt, the company can increase the amount of capital it has at its disposal without issuing more shares. Since the number of shares remains constant, any increase in net earnings will result in a higher EPS. Higher EPS can reflect positively to investors, often signaling a strong financial performance.

3. Cost Analysis: Consider a situation where a company has significant ROI. If it borrows funds at a cost lower than this ROI, the difference between the ROI and the interest rate multiplies the firm's earnings, thereby maximizing shareholder value.

Therefore, when a company's ROI is high, it can use debt to increase its EPS, making the correct option "Debt, increase."

Answer 4

The aim of the finance manager to maximize shareholder wealth reflects the primary goal of Financial Management. Financial management involves planning, organizing, directing, and controlling financial resources to achieve financial objectives. Maximizing shareholder wealth is a core principle of financial management, ensuring that the company's financial decisions increase the stock value and provide satisfactory returns to shareholders. 

The passage provided illustrates how a finance manager strategically raised Rs. 3.5 crore through a mix of debt and equity in a 4:3 ratio, exceeding the required Rs. 3 crore for opening a new outlet. This decision aligns with maintaining an optimal balance between equity and debt, referred to as capital structure, which indirectly relates to financial management by achieving lower costs and increasing wealth.

To further maximize wealth, the finance manager reinvested the excess Rs. 50 lakh in a fixed deposit earning 6% interest p.a., despite the cost of capital being 10% p.a. Although the reinvestment does not cover the cost of capital, it reflects a decision to minimize idle capital by obtaining a lower risk return, indicating a careful management of surplus funds typical of financial management.

Answer 5

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 6

To solve the question regarding the finance situation encountered by the outlet, let's break it down step-by-step. 

The scenario describes a situation where a finance manager needs Rs. 3 crore to open a new outlet but has raised Rs. 3.5 crore instead. This means that the funds raised exceed the required amount by Rs. 0.5 crore (or Rs. 50 lakh).

Analysis:

• The condition where funds raised are more than what is required is typically known as "Idle Finance." This term is used when there is excess money that is not needed to meet the initial requirements and remains unutilized.
• Despite the excess funds, the finance manager chose to reinvest this excess of Rs. 50 lakh in a fixed deposit at 6% interest per annum, while the cost of capital is higher at 10% per annum. This decision indicates that the funds are not being used efficiently, as the return on the fixed deposit is lower than the cost of the capital, potentially impacting shareholder wealth.

Conclusion:

The correct option in this context is "Idle Finance" because the extra funds of Rs. 50 lakh were raised but not effectively utilized in a manner that maximizes returns above the cost of capital.

Answer 7

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 8

The finance manager raised a total of Rs. 3.5 crore through a mix of debt and equity in the ratio of 4:3. To determine the specific amounts raised through owner's funds and borrowed funds, we can analyze the ratio: 

1. Calculate the total parts of the ratio: The ratio of owner's funds to borrowed funds is 3:4. Thus, the total parts = 3 + 4 = 7 parts.
2. Amount raised through owner’s funds: Owner’s funds are 3 parts. Therefore, the amount = (3/7) × 3.5 crore = Rs. 1.5 crore.
3. Amount raised through borrowed funds: Borrowed funds are 4 parts. Therefore, the amount = (4/7) × 3.5 crore = Rs. 2 crore.
4. The finance manager raised Rs. 2,00,00,000 (Rs. 2 crore) through borrowed funds, and Rs. 1,50,00,000 (Rs. 1.5 crore) through owner's funds, fitting the given answer option: Rs. 2,00,00,000, Rs. 1,50,00,000.

Source of Funds	Amount (Rs.)
Owner's Funds	1,50,00,000
Borrowed Funds	2,00,00,000

Answer 9

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.