Financial Management – Leverage and Capital Structure at Steel Industries
Financial Management
Section A: Short Answers (20 Marks) – Attempt any 4. Be sure to cover topics including Leverage and Capital Structure when preparing your answers.
- Define financial management and explain its key objectives.
- What is the difference between profit maximization and wealth maximization?
- Explain the concept of the time value of money and its importance in financial decision-making.
- What are the primary financial statements, and what information do they provide about a company?
- Discuss the trade-offs between equity and debt financing.
- What factors influence a company’s dividend policy?
Section B : Case Studies (60 Marks)
Case Study 1 : Leverage and Capital Structure at Steel Industries (20 marks)
Steel Industries is evaluating its capital structure. The company currently has a debt-to-equity ratio of 0.6 and is considering increasing its debt to finance an expansion project. The interest rate on new debt would be 8%, and the company’s tax rate is 30%.
- Discuss the implications of increasing financial leverage on Steel Industries’ capital structure.
- Calculate the after-tax cost of debt for Steel Industries.
Case Study 2: Dividend Policy at BlueChip Corp (20 Marks)
BlueChip Corp has consistently generated strong profits and is considering changing its dividend policy. Currently, the company pays out 40% of its earnings as dividends, but the board of directors is debating whether to increase the pay-out ratio to 50% or to invest more in expansion projects. The company’s investors are dividend-oriented, and the stock price has been stagnant.
- Discuss the factors that BlueChip Corp should consider before changing its dividend policy.
- Analyse the potential impact of an increased dividend pay-out on the company’s share price and investor base.
- Recommend a dividend policy that balances the interests of shareholders, the company’s growth prospects, and its financial stability.
Case Study 3 : Financial Analysis of Aura-Parts India Ltd.(20 Marks)
Aura-Parts India Ltd. is an automotive components manufacturing company. Below is an excerpt from its balance sheet as of March 31, 2023.
Aura-Parts India Ltd. Balance Sheet Excerpt- As of March 31, 2023
Assets:
– Current Assets:
– Cash and Cash Equivalents: ₹5,00,000
– Accounts Receivable: ₹10,00,000
– Inventory: ₹15,00,000
– Non-Current Assets:
– Property, Plant, and Equipment (net of depreciation): ₹50,00,000
– Long-Term Investments: ₹10,00,000
Liabilities:
– Current Liabilities:
– Accounts Payable: ₹8,00,000
– Short-Term Debt: ₹10,00,000
– Non-Current Liabilities:
– Long-Term Debt: ₹20,00,000
– Deferred Tax Liabilities: ₹5,00,000
Shareholders’ Equity:
– Equity Share Capital: ₹10,00,000
– Retained Earnings: ₹17,00,000
Total Liabilities and Equity: ₹97,00,000
- Calculate the current ratio and quick ratio for Aura-Parts India Ltd. What do these ratios indicate about the company’s liquidity position?
- Determine the company’s debt-to-equity ratio. What insights does this ratio provide about Aura-Parts India Ltd.’s capital structure and leverage?
- Analyse the balance sheet and provide a brief overview of Aura-Parts India Ltd’s financial health based on the information given.
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