Read the following text and answer the following questions on the basis of the same:
Mr. A. Bose is running a successful business. Mr. Bose is the owner of R. K. Cement Ltd. Mr. Bose decided to expand his business by acquiring a Steel Factory. This required an investment of Rs. 60 crores.
To seek advice in this matter, he called his financial advisor Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%). Employ more of cheaper debt may enhance the EPS. Mr. Ghosh 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. Ghosh, Mr. Bose decided to raise funds from a financial institution.
1. Identify the concept of Financial Management as advised by Mr. Ghosh in the above situation.
(A) Capital Budgeting
(B) Capital Structure
(C) Dividend Decision
(D) Working Capital Decision
2. In the above case Mr. Ghosh suggested to raised more fund from debt. Higher debt-equity ratio results in:
(A) Lower financial risk
(B) Higher degree of operating risk
(C) Higher degree of financial risk
(D) Higher Earning of profit.
3. “Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%)” The proportion of debt in the overall capital is called.........
(A) Working Capital
(B) Financial Leverage
(C) Total Assets
(D) None of these
4. Employ more of cheaper debt may enhance the EPS. Such practice is called:
(A) Equity Trading
(B) Financial Leverage
(C) Investment Decision
(D) Trading on Equity
