‘Bright Appliances Ltd.’ plans to launch a new product line of energy-efficient air purifiers. To ensure a smooth launch of the air purifiers, the company needs to arrange adequate funds. For this, the Finance Manager estimates the fund requirements and specifies the source of funds the company should use. The process followed by the Finance Manager is called :
‘Bright Appliances Ltd.’ plans to launch a new product line of energy-efficient air purifiers. To ensure a smooth launch of the air purifiers, the company needs to arrange adequate funds. For this, the Finance Manager estimates the fund requirements and specifies the source of funds the company should use. The process followed by the Finance Manager is called :
Show Hint
- Financial planning
- Financial management
- Financial leverage
- Investment decision
The Correct Option is A
Solution and Explanation
Bright Appliances is launching a new product line and needs funds.
The finance manager first estimates the amount needed and then decides the sources from which to raise it.
The question asks for the name of this process.
Step 2: Define the correct term:
Financial planning means estimating the funds needed by a business and deciding the sources to raise them.
Its aim is to have enough funds at the right time. So option (A) Financial planning is correct.
Step 3: Check option (B) Financial management:
Financial management is the wider job of planning, raising, using and controlling funds. The case describes only the estimation and sourcing step, which is planning. So (B) is not the best fit.
Step 4: Check options (C) and (D):
(C) Financial leverage is the use of debt to raise returns to equity holders.
(D) Investment decision is the choice of where to put funds, such as which asset to buy.
The case is about how much money is needed and from where, so both are wrong.
Final Answer:
Estimating fund needs and specifying their sources is financial planning, option (A).
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What is the Planning Process?
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Read the following statements : Assertion (A) and Reason (R).
Assertion (A) : The cost of debt is higher than the cost of equity for a firm.
Reason (R) : The lender’s risk is lower than the equity shareholder’s risk, since the lender earns an assured return and repayment of capital.
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‘Quality Foods Ltd.’, a company manufacturing packaged snacks has been in business for the last 10 years. It enjoys a good reputation and has a loyal customer base. This financial year, the profits of the company increased manifold as the company introduced a new range of baked snacks that became very popular. As the year came to an end, the company had to decide how much dividend to pay to its shareholders. In view of the above and with the understanding that investors, in general, view an increase in dividend as good news and stock prices react positively to it, the Board of Directors were keen on declaring a high dividend. However, the Chief Finance Officer of the company pointed out that they need to keep many considerations in mind before declaring dividend. He drew the attention of the Board of Directors to the loan that the company has taken, containing a clause that imposes restriction on the payment of dividend. Further, he pointed out that even though the profits were high, a large amount of money was tied to the amounts receivables from the debtors. Without enough cash in hand, announcing a high dividend may not be practical. He also reminded the Board of Directors that ‘Quality Foods Ltd.’ was planning to expand into the breakfast cereal market. Since this new project will require a huge investment, the company will need to retain more money out of their earnings to finance it.
(a) Identify and explain any two factors affecting dividend decision that would have influenced the decision of the Board of Directors to pay a high dividend.
(b) Identify and explain any two factors to which the Chief Finance Officer drew the attention of the Board of Directors.
A position when a company is unable to meet its fixed financial charges like interest payment, dividend on preference shares and repayment obligations is referred to as ______ .
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