Explain the term ‘Trading on Equity’? Why, when and how it can be used by company.
Trading on equity means the use of fixed cost sources of finance such as preference shares, debentures and long-term loans in the capital structure, so as to increase the return on equity shares. This is also known as financial leverage. It is advisable to use trading on equity when the rate of return on investment is more than the rate of interest payable on debentures and loans. The use of more debt along with equity increases Earning per share(EPS). Let us take an example of companies A and B.
Company A | Company B | |
---|---|---|
Share capital (100 each) Loan @ 15% p.a. |
₹ 10,00,000 | ₹ 4,00,000 |
- | ₹ 6,00,000 | |
Total Capital | ₹ 10,00,000 | ₹ 10.00.000 |
Profit Before Interest and Tax (30% ROI) (-) Interest (15% of ₹ 6,00,000) Profit Before Tax (-) Tax @ 50% |
₹ 3,00,000 | ₹ 3,00,000 |
Nil | ₹ 90,000 | |
₹ 3,00,000 | ₹ 2,10,000 | |
₹ 1,50,000 | ₹ 1,05,000 | |
Profit After Tax | ₹ 1,50,000 | ₹ 1,05,000 |
Earning per Share (EPS) = Profit After Tax ÷ Number of Equity Shares
A = 150000 ÷ 10000 = ₹ 15
B= 105000 ÷ 4000 = ₹ 26.25
Thus, from the above example, it is clear that shareholders of company B receive higher EPS than the shareholders of company A due to more debt in the total capital of company B.
Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional ₹ 80,00,000 for replacing machines with modern machinery of higher production capacity. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was ₹ 8,00,000 and total capital investment was ₹ 1,00,00,000. Suggest whether issue of debenture would be considered a rational decision by the company. Give reason to justify your answer. (Ans. No, Cost of Debt (10%) is more than ROI which is 8%).
Aval Ltd. is engaged in the business of export of canvas goods and bags. In the past, the performance of the company had been upto the expectations. In line with the latest demand in the market, the company decided to venture into leather goods for which it required specialised machinery. For this, the Finance Manager Prabhu prepared a financial blueprint of the organisation’s future operations to estimate the amount of funds required and the timings with the objective to ensure that enough funds are available at right time. He also collected the relevant data about the profit estimates in 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 out alternative sources from outside.
a. Identify the financial concept discussed in the above paragraph. Also, state the objectives to be achieved by the use of financial concept so identified. ( Financial Planning).
b. ‘There is no restriction on payment of dividend by a company’. Comment. ( Legal & Contractual Constraints)
Ramnath is into the business of assembling and selling of televisions. Recently he has adopted a new policy of purchasing the components on three months credit and selling the complete product in cash. Will it affect the requirement of working capital? Give reason in support of your answer.
Amrit is running a ‘transport service’ and earning good returns by providing this service to industries. Giving reason, state whether the working capital requirement of the firm will be ‘less’ or ‘more’.
‘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 per cent 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 `5000 crores to set up and about `500 crores of working capital to start the new plant.
a. Describe the role and objectives of financial management for this company.
b. Explain the importance of having a financial plan for this company. Give an imaginary plan to support your answer.
c. What are the factors which will affect the capital structure of this company?
d. 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.
What are the main objectives of financial management? Briefly explain.
Explain the factors affecting dividend decision?
What is financial risk? Why does it arise?
“A capital budgeting decision is capable of changing the financial fortunes of a business.” Do you agree? Give reasons for your answer?
“Capital structure decision is essentially optimisation of risk-return relationship.” Comment.
How does planning provide direction?
What is meant by staffing?
Identify the network of social relationships which arises spontaneously due to interaction at work.
What is informal communication?
State the meaning of controlling.
What is meant by management?
What is a Treasury Bill?
State any two advantages of branding to marketers of goods and services?
What makes principles of management flexible?
Under which consumer right does a business firm set up consumer grievance cell?
Lalita wants to buy shares of Akbar Enterprises, through her broker Kushvinder. She has a Demat Account and a bank account for cash transactions in the securities market. Discuss the subsequent steps involved in the screen-based trading for buying and selling of securities in this case.
Explain the objectives and functions of the SEBI.
Why are rules considered to be plans?
What are semantic barriers of communication?
Why is controlling considered a backward-looking function?
Describe the functions of labeling in the marketing of products.
The workers of a factory remain idle because of lack of knowledge of hi-tech machines. Frequent visit of engineer is made which causes high overhead charges. How can this problem be removed. (vestibule training)
Explain the principle of ‘Scalar Chain’ and gang plank.
State any two circumstances under which the functional structure will prove to be an appropriate choice.
India’s largest domestic investor Life Insurance Corporation of India has once again come to government’s rescue by subscribing 70% of Hindustan Aeronautics’ ₹4,200-crore initial public offering.
a. Which market is being reflected in the above case?
b. State which method of floatation in the above identified market is being highlighted in the case? (Primary Market)
c. Explain any two other methods of floatation. (Private Placement, Offer through prospectus, offer for sale).