Business Studies

Business Finance

Easy

Aval Ltd. is engaged in the business of the export of canvas goods and bags. In the past, the performance of the company was above expectations. In line with the latest demand in the market, the company decided to venture into leather goods for which it required specialized machinery. For this, the Finance Manager Prabhu prepared a financial blueprint for the organization's future operations to estimate the amount of funds required and the timings with the objective to ensure that enough funds are available at the right time. He also collected the relevant data about the profit estimates for the coming years. By doing this, he wanted to be sure about the availability of funds from the internal sources of the business. For the remaining funds, he is trying to find alternative sources from outside. The company is willing to go for a public issue of shares and debentures to be made under SEBI guidelines. Public issue of shares and debentures requires considerable outlay of funds too. Due to extensive operations, the manager is of the viewpoint that a company may have to ensure that earnings before interest and taxes of a company should cover the interest obligation. The manager also felt that the cash profits generated by the operations need to be compared with the total cash required for the service of the debentures and the preference share capital.

"Finance Manager Prabhu prepared a financial blueprint for the organization's future operations to estimate the amount of funds required and the timings with the objective to ensure that enough funds are available at the right time". Identify the concept of financial management highlighted in the aforesaid statement.

Financial Planning

Finance Management

Capital Structure

Financial leverage

✅ Correct Option: 1

Option 1 -> Financial Planning involves preparing a financial blueprint to estimate fund requirements, their timing, and ensuring availability when needed - exactly as described in the statement.

Option 2 -> Financial Management is a broader concept that encompasses all financial functions including planning, organizing, directing, and controlling financial activities of an organization, not just planning.

Option 3 -> Capital Structure refers to the mix of debt and equity used to finance operations, focusing on the proportion of funding sources rather than estimating fund requirements and timing.

Option 4 -> Financial Leverage refers to the use of borrowed funds (debt) to amplify returns on investment, not the process of estimating and planning for fund requirements.

Hence, Option 1: Financial Planning -> The statement specifically describes preparing a financial blueprint for future operations to estimate the amount and timing of funds required, ensuring availability at the right time. This is the core definition of Financial Planning, which is the process of framing financial policies in relation to procurement, investment and administration of funds to achieve organizational objectives -> correct

Question 46

"The company is willing to go for a public issue of shares and debentures to be made under SEBI guidelines". Identify the factor affecting capital structure highlighted in the aforesaid statement.

Question 48

"Public issue of shares and debentures requires considerable outlay of funds at the time of issue too". Identify the factor affecting capital structure highlighted in the aforesaid statement.

Question 49

"Due to extensive operations, the manager is of the viewpoint that a company may have to ensure that earnings before interest and taxes of a company should cover the interest obligation". Identify the factor affecting capital structure highlighted in the aforesaid statement.

Question 50

Which financial ratio will establish the relation between the cash profits generated by the operations and the total cash required for the service of the debentures and the preference share capital?

Solution

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