Question

"A business that doesn‟t grow dies‟, says Mr. Shah, the owner of Shah Marble Ltd. with glorious 36 months of its grand success having a capital base of `80 crores. Within a short span of time, the company could generate cash flow which not only covered fixed cash payment obligations but also create sufficient buffer. The company is on the growth path and a new breed of consumers is eager to buy the Italian marble sold by Shah Marble Ltd. To meet the increasing demand, Mr. Shah decided to expand his business by acquiring a mine. This required an investment of `120 crores. To seek advice in this matter, he called his financial advisor Mr. Seth who advised him about the judicious mix of equity (40%) and Debt (60%). Mr. Seth also suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest on loan is a tax deductible expense for computation of tax liability. After due deliberations with Mr. Seth, Mr. Shah decided to raise funds from a financial institution. a) Identify and explain the concept of Financial Management as ,advised by Mr. Seth in the above situation. b),State the four factors affecting the concept as identified in ,part "a‟ above which have been discussed between Mr. Shah and Mr. Seth.

Answer 1

answer :-

a). concept of investment decisions.

factors affecting investment decisions are :-

1).cost of raising funds.

2).huge investment in fixed assets.

3).cash flow position

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