1. Optimal procurement of fundsthe manager compares sources on cost before raising them — 11% borrowed rather than delaying the project.
2. Effective utilisation of fundsthe ₹6 crore of idle cash was earning nothing; financial management aims at avoiding idle finance.
3. The decision passes the benefit > cost testa 17% return against an 11% cost adds value, so it raises the wealth of the owners.

1. (a) is financial management — effective utilisationa long-term commitment of funds to a fixed asset. This is an investment (capital budgeting) decision.
2. (c) is financial management — optimal procurementthe same amount of funds raised at a lower cost. This is a financing decision.
3. (b) is nothiring forty engineers is staffing — Chapter 6. It has a financial consequence, but the decision itself is a human resource decision.
4. The distinguishing testask "is the decision about the funds themselves?" Almost every management decision costs money; only some are about money.

1. The claim is wrongthe objective of financial management is wealth maximisation, not profit maximisation.
2. The correct measure is the share priceand it fell — the market value of the equity share went from ₹1,180 to ₹1,015.
3. Profit maximisation ignores the long termthe profit was bought by cutting an investment whose returns lay in future years.
4. Value was destroyed, not addedthe benefit (₹28 crore of profit) was smaller than the cost the market attached to the lost capability.

1. Rangoli has performed betterits market value per equity share rose by ₹28; Ashapura's fell by ₹31.
2. Profit is the wrong testthe objective is maximisation of shareholders' wealth, measured by the share price.
3. The source of the profit mattersAshapura's ₹19 crore is a one-off gain on an asset sale, not a repeatable operating return, so it adds nothing to the value of the business.
4. Selling an asset can even reduce capacitywhich is why the market marked the share down despite the larger reported profit.

1. The rate of returnthe deciding factor. The rule compares returns at the same level of risk — B's 19% is not comparable with A's 17% because B is riskier.
2. The investment criteria involvedthe firm applied capital budgeting techniques — payback period and net present value.
3. Cash flows of the projectstill to be examined in detail: the timing and amount of receipts and payments over the life of the lamination line.

1. Floatation cost₹45 lakh against ₹2.4 crore — the higher the floatation cost, the less attractive the source.
2. Control considerationsan equity issue would cut the family's holding from 54% to 41% and dilute control; debt has no such implication.
3. Cash flow positioninterest has been covered four times over for five years, so the firm can safely bear the fixed obligation.
4. Costdebt is the cheaper source, because interest is a tax-deductible expense and the lender's risk is lower.

1. Amount of earnings₹410 crore after tax — a large earning supports a dividend. Pushes up.
2. Stability of earningsnine profitable years in a row; a firm with stable earnings can declare a higher dividend. Pushes up.
3. Growth opportunitiesa ₹600 crore acquisition is a growth opportunity, and growth companies retain more. Pushes down.
4. Cash flow positiononly ₹95 crore is actually available — dividend requires cash, not profit. Pushes down, decisively.
5. Contractual constraintsthe bank covenant caps the payout at 30% of profit until 2028. Sets a ceiling.
6. Stability of dividends and shareholders' preference₹18 per share for six years has created an expectation; a cut would be read badly by the market. Sets a floor.

1. "already approved by the board"closes off the investment decision — what to spend on is settled, so the case cannot be read as capital budgeting.
2. "must choose between a term loan and a fresh issue of equity"this is the definition of the financing decision: the proportion of debt and equity.
3. "after-tax cost … 22% of ownership"names the two factors — cost and control considerations.
4. Nothing is said about profit distributionso no reading as a dividend decision is possible.

1. (i) Investment decision — capital budgetingfunds committed to a long-term asset; irreversible except at a huge loss.
2. (ii) Financing decisionthe proportion to be raised from borrowed funds and from shareholders' funds.
3. (iii) Dividend decisionhow much of the profit after tax is distributed and how much retained.
4. The tension is between (ii) and (iii)every rupee retained is a rupee the firm does not have to borrow — so the dividend decision changes the financing requirement.
5. Retention is cheaper but not freeretained earnings carry no floatation cost, but shareholders forgo current income and may mark the share down.
6. The tie-breaker is the objectivechoose the combination that maximises the market value of the equity share, not the one that maximises this year's dividend.

1. The concept is financial planningthe preparation of a financial blueprint estimating the fund requirement and specifying the sources.
2. Objective 1 — availabilityto ensure enough funds are available whenever they are required, in the right amount and at the right time.
3. Objective 2 — no excessto see that the firm does not raise resources unnecessarily, since idle funds add to cost.
4. Why skipping it hurtsthe firm is surprised by a shortage it could have foreseen, and must then borrow in a hurry at a worse rate — or abandon the project.

1. The conclusion is wrongfinancial planning does not claim to predict the future; it prepares the firm for it. A plan that is overtaken by events has still narrowed the gap the firm must close.
2. Objective 1 was breachedfunds were not available whenever they were required — the line stood idle for five months for want of the balance.
3. Objective 2 was not breachedthe firm did not raise resources unnecessarily; the shortfall was real, not a failure of over-funding.
4. Where the plan still earned its keep₹5.5 crore of the ₹7.1 crore was already arranged and its sources named in advance. Without the plan the whole amount would have had to be found in a hurry.
5. The real defect was in forecastingfinancial planning helps in forecasting only when alternative plans are drawn for different scenarios. Anagha assumed one steel price and prepared no second version.
6. And do not fuse the two termsfinancial planning estimated how much and when; the choice to take ₹4 crore of debt rather than issue equity was the financing decision. The plan did not fail because the decision was wrong.

1. Nikhil is describing the capital structure₹20 crore debt to ₹20 crore equity = 1 : 1. Creditors are excluded because they are short-term.
2. The auditor is describing the financial structure₹47 crore — capital structure plus the ₹7 crore of current liabilities.
3. Neither is wrongthey are answering different questions, which is exactly why the paper can set a case on it.

1. Compute ROI firstROI = 24 ÷ 240 × 100 = 10%. Always compute ROI before answering any trading-on-equity question.
2. ROI is below the cost of debt10% against 12%. Every rupee borrowed earns 10% and costs 12%, so trading on equity would be unfavourable and EPS would fall.
3. Business risk is already high62% fixed operating costs means high business risk; a firm with high business risk has a low capacity to take on financial risk.
4. Advicedo not raise the whole ₹20 crore as debt. Use equity or retained earnings, or defer until ROI is comfortably above 12%.

1. Nature of businessSuryakiran manufactures while the competitor only trades — a trading concern buys no plant and machinery.
2. Choice of techniquethe plant is fully automated, that is, capital intensive, so it relies on machines rather than labour.
3. Technology upgradationtesting equipment is replaced every four years because standards change, so replacement demands recur faster.

1. Suryakiran's is higheroutright purchase blocks ₹9 crore in a fixed asset; the lease blocks nothing.
2. The factor is financing alternativesavailability of leasing reduces the funds required to be invested in fixed assets.
3. Yes, for Vidarbhaleasing is especially suitable in high-risk lines of business, and the firm has explicitly named the risk — uncertain future demand for the design.
4. But it is not freethe lease rental is a fixed operating cost, so it raises Vidarbha's business risk and therefore lowers its capacity to take on debt. Lower fixed capital, tighter capital structure.

1. Nature of businessa manufacturing and exporting firm, not a trader — raw material must be converted before any sale is possible.
2. Production cycletanning alone takes eleven weeks; a long processing cycle blocks funds in work in progress.
3. Credit allowedbuyers pay 90 days after shipment, so a large amount stays locked in debtors.
4. Credit availedsuppliers demand payment on delivery, so none of the burden is passed back up the chain.
5. Level of competitionthree months of finished stock is held to beat two rivals to urgent orders.
6. Scale and growth of operationsexport volumes require larger inventories of hides and finished goods than a domestic job-work unit would.

1. "holds no raw material and no finished goods at all"a service business keeps no inventory, which is the textbook reason a service firm needs less working capital.
2. "nothing to store and nothing to convert"rules out production cycle as the answer, because there is no production cycle at all.
3. "pay a monthly retainer in advance"rules out credit allowed — there are effectively no debtors to finance.
4. Nothing is said about size or efficiencyso neither scale of operations nor operating efficiency can be argued from the text.

1. ₹95 lakh is fixed capitala machine lasting twelve years is a fixed asset; the decision is a capital budgeting decision.
2. ₹35 lakh is working capitalhides are raw material — a current asset that becomes cash within the year through the operating cycle.
3. The mismatch on the machinean 18-month loan would fall due long before a twelve-year machine has earned its cost back — fixed assets must be financed from long-term sources.
4. The mismatch on the hidesan 18-month loan for a 5-month need means paying interest for a year on money the firm no longer requires.
5. The correct structurea long-term loan or equity for the ₹95 lakh, and a short-term facility — cash credit or a bill discounting line — for the ₹35 lakh.
6. Why this matters beyond the arithmeticfinancing long assets short is the classic route to a liquidity crisis in an otherwise profitable firm.

1. Wealth maximisation — maximising the market value of the equity share.
2. Trading on equity.
3. Net working capital = Current assets − Current liabilities.
4. Capital budgeting decision.
5. To ensure availability of funds whenever required, and to see that the firm does not raise resources unnecessarily.

1. Meaningfinancial risk is the chance that a firm will fail to meet its fixed financial obligations — interest, preference dividend and repayment of principal.
2. Why it arisesit arises from the use of debt, which creates fixed financial charges payable whether or not the firm earns a profit.
3. How it behavesit rises as the proportion of debt in the capital structure rises, and a firm with zero debt has no financial risk.

1. Long-term growththe funds are committed to assets that will determine the firm's earning capacity for years ahead.
2. Large amount of funds involveda substantial part of the firm's capital is blocked in one project.
3. Risk involveda commitment of that size changes the business risk of the whole firm, not just of the project.
4. Irreversiblethe decision cannot be undone except at a huge loss, so a wrong choice cannot be corrected the following year.

Open with "Yes, I agree" and close with one line: "hence a single wrong capital budgeting decision can damage the financial fortunes of a business."

1. Meaningtrading on equity is the increase in the EPS of equity shareholders due to the presence of fixed financial charges like interest.
2. Why — debt is cheaperthe lender's risk is lower and interest is a tax-deductible expense, so debt costs less than equity.
3. Why — the surplus belongs to equityanything the borrowed funds earn above the fixed interest rate accrues to a smaller number of equity shares.
4. When — only if ROI > interest rateif ROI is 15% and interest 10%, EPS rises; if ROI is 8% and interest 10%, EPS falls and leverage becomes unfavourable.
5. How — by raising the debt-equity ratiothe firm finances part of its requirement with debentures or loans instead of fresh equity.
6. The limitevery rupee of debt raises financial risk, so the firm must stop at the risk-return combination that maximises shareholders' wealth — the optimum capital structure.

1. (a) ₹1,200 crore is fixed capitalinvested in long-term assets; the decision is capital budgeting and it is irreversible except at a huge loss.
2. (a) ₹90 crore is working capitalinvested in current assets to finance day-to-day operations until collections begin.
3. (b) Use debt substantiallyROI 18% comfortably exceeds the 9% cost of debt, so trading on equity is favourable and EPS will rise.
4. (b) Control considerations reinforce ita fresh equity issue would push the promoters below 50%, which they have ruled out; debt does not dilute control.
5. (b) But not entirely debtthe firm must retain flexibility to borrow later and keep financial risk within what its cash flows can service.
6. (c) Credit availed exceeds credit allowedclients pay in 30 days while vendors are paid in 60, so suppliers finance part of the cycle; being a service business, it also carries no inventory.

1. The finance director is correctthe dividend should be raised modestly, not tripled from ₹3 to ₹9 — that would pay out ₹18 crore of a ₹22 crore profit.
2. Stability of dividendsdividend per share is raised only when the management is confident the earning potential has risen — not when a single year's earnings jump temporarily.
3. Stability of earningsthe surge is explicitly one-off; a company with unstable earnings declares a smaller dividend.
4. Growth opportunities and cash flow positionthe ₹60 crore plant is half unpaid, so the profit is needed inside the business — growth companies retain more.

The board's side is not empty: shareholders' preference and stock market reaction both favour a rise. The answer that names both sides and then decides is the one that scores full marks.