‘S’ Limited is manufacturing steel at its plant in India. It is enjoying a buoyant
demand for its products as economic growth is about 7%-8% and the demand
for steel is growing. It is planning to set up a new steel plant to cash on the
increased demand. It is estimated that it will require about
Rs. 5000 crores to set up and about Rs 500 crores of working capital to start
the new plant.
Questions
1. Describe the objectives of financial management for this company.
2. Explain the importance of having a financial plan for this company. Give
an imaginary plan to support your answer.
3. What are the factors which will affect the capital structure of this company?
4. Keeping in mind that it is a highly capital-intensive sector, what factors
will affect the fixed and working capital. Give reasons in support of your
answer.
Answers
SOLUTION :
1.The main objectives of financial management are :
(i) To ensure availability of required funds at reasonable cost.
(ii) To ensure maximization of shareholders funds often known as wealth maximisation concept.
(iii) To help increase market price of equity shares or maximise shareholders wealth.
(iv) To ensure the benefits of investment, exceed the cost of raising the funds.
(v) To ensure effective and optimum utilisation of the available funds
(vi) To ensure safety of funds through creation of reserve, ploughing back the profits into the business for returns.
2. Importance of financial plan :
(a)It ensures provision of adequate funds to meet working capital needs.
(b) It helps in reducing the financial resources.
(c) It helps in maintaining balance between inflows and outflows of funds.
(d) It shows increased produced through cost benefit analysis.
3. Factors affecting capital structure :
(a)Cash flow position of the company : If the cash flow position is sound company may go for debt funds.
(b) Cost of debt : The cost of equity is higher the cost of debt, the company should go to debt as it is enjoying favourable position the market.
(c)Risk considerations : The risk is higher in case of debt than equity but the company can take risk.
4. Working capital and fixed capital requirements of the company will be higher due to the following reasons :
(a)Heavy investment and needed for building a production.
(b) The business is capital extension so there be high amount of working capital needed.
(c)Longer operating cycle required large amount of working capital.
(d) Terms and conditions with the supplier and customers also affect the amount of working capital needed.
HOPE THIS ANSWER WILL HELP YOU…
Here are more questions of the same chapter :
Explain the term 'Trading on Equity'. Why, when and how it can be used by a company?
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Explain the factors affecting the dividend decision.
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Answer:
Explanation:
(a)It ensures provision of adequate funds to meet working capital needs.
(b) It helps in reducing the financial resources.
(c) It helps in maintaining balance between inflows and outflows of funds.
(d) It shows increased produced through cost benefit analysis.