Financial Services
Question : Case Study: XYZ Ltd. - Raising Finance for Expansion
XYZ Ltd. is a growing company that manufactures electronic gadgets. The company has been successful in the market and is planning to expand its operations. To finance this expansion, XYZ Ltd. is considering various sources of business finance.
Questions : Equity Shares and Preference Shares
Preference shareholders of XYZ Ltd. are entitled to:
Option 1: Convert their shares into debentures
Option 2: Voting rights in company decisions
Option 3: A fixed dividend before equity shareholders
Option 4: A share of the company's profits after equity shareholders
Correct Answer: A fixed dividend before equity shareholders
Solution : The correct answer is (c) A fixed dividend before equity shareholders
Preference shareholders are entitled to receive a fixed dividend at a predetermined rate before any dividend is paid to equity shareholders. This characteristic distinguishes them from equity shareholders, who may receive variable dividends based on the company's profitability and decisions made by the board of directors. However, preference shareholders typically do not have voting rights in the company's decisions, and their shares usually cannot be converted into debentures.
Question : A business that produces a well-known toy brand has a solid market reputation. Production, Marketing, Finance, Human Resources, and Research and Development are all handled by various divisions. Recently, it has considered expanding into the production of a new line of electronic toys for which a new market is growing in order to capitalise on new commercial opportunities while also utilising its brand name. The organisational structure that the business should use.
Option 1: Functional structure
Option 2: Divisional structure
Option 3: Formal Organisation Structure
Option 4: Informal Organisation Structure
Correct Answer: Divisional structure
Solution : As the organisation looks to diversify into the production of a new line of toys, it should switch from a functional structure to a divisional structure. Access to the performance will be simple. Hence, the correct option is 2.
Question : Delhi-based Zamato Ltd. produces electronics products. It deals in both laptops and mobile phones in addition to products like books, musical instruments, videotapes, etc. The business was organised functionally, with separate divisions for production, marketing, and finance. The products were being looked after by all the functional heads, while occasionally their tasks crossed over. Conflicts between departments and issues with cooperation resulted from this. Ramesh, the CEO of the company, chose to categorise laptops and mobile phones under "consumer electronics" and books, musical instruments, and videotapes under "Media" to facilitate specialisation. Ramesh has completed a step in the process of one of the managerial function while doing this. Identify the step.
Option 1: Identifying and dividing the work
Option 2: Departmentalisation
Option 3: Assignment of duties to job positions
Option 4: Estabilisation reporting relationships
Correct Answer: Departmentalisation
Solution : Departmentalization: Departmentalisation means a grouping of activities similar in nature a department. Hence, the correct option is 2.
Questions : Debentures and Financial Instruments
What is the primary difference between debentures and equity shares?
Option 1: Debentures provide ownership rights
Option 2: Equity shares pay fixed interest
Option 3: Debentures are issued to employees only
Option 4: Equity shares require repayment at maturit
Correct Answer: Debentures provide ownership rights
Solution : The correct answer is (a) Debentures provide ownership rights
Debentures represent a form of debt where the holders (debenture holders) are creditors to the company and do not possess ownership rights in the company. They are entitled to receive a fixed rate of interest and the repayment of the principal amount at maturity.
On the other hand, equity shares represent ownership in the company and provide shareholders with ownership rights, including voting rights and the right to share in the company's profits (through dividends). Unlike debentures, equity shares do not involve fixed interest payments or repayment at maturity.
Question : Case Study: ABC Corporation - Financing Growth Strategies
ABC Corporation, a leading manufacturing company, is looking to finance its growth strategies. The company is exploring various sources of business finance to achieve its expansion goals.
What distinguishes debentures from equity shares in terms of ownership and returns?
Option 2: Debentures pay fixed dividends
Option 3: Equity shares have fixed interest rates
Option 4: Equity shares are a form of long-term borrowing
Correct Answer: Debentures pay fixed dividends
Solution : The correct answer is (b) Debentures pay fixed interest
Debentures pay fixed interest to the debenture holders, as they are a form of debt and represent a loan from the debenture holder to the issuing company. In contrast, equity shares represent ownership in the company and do not guarantee fixed dividend payments; the dividends paid to equity shareholders are typically based on the company's profitability and decisions made by the board of directors.
Question : Case Study 5:
LMN Corporation is a multinational conglomerate looking to manage its currency exposure effectively.
Question :
If LMN Corporation decides to issue short-term debt to finance its international operations, which money market instrument might it use?
Option 1: Corporate bond
Option 2: Call money
Option 3: Treasury bill
Option 4: Commercial paper
Correct Answer: Commercial paper
Solution : The correct answer is (d) Commercial paper
If LMN Corporation decides to issue short-term debt to finance its international operations, it might use commercial paper as a money market instrument. Commercial paper is a short-term unsecured promissory note issued by corporations and financial institutions to meet short-term funding needs. It is a common choice for companies seeking short-term financing to support their operations, including international ventures. Commercial paper typically has maturities ranging from a few days to 270 days.
How are GDRs and ADRs similar in terms of their purpose?
Option 1: Both represent debt securities
Option 2: Both are issued in domestic markets
Option 3: Both allow companies to raise funds in their home country
Option 4: Both enable companies to raise capital in international markets
Correct Answer: Both enable companies to raise capital in international markets
Solution : The correct answer is (d) Both enable companies to raise capital in international markets
GDRs and ADRs allow companies to access international capital markets by issuing their shares in the form of depository receipts. GDRs are traded outside the United States, and ADRs are traded in the United States. Both serve as instruments to raise capital by attracting investment from international investors and expanding the company's investor base beyond its home country.
Why would XYZ Ltd. choose to issue preference shares rather than equity shares?
Option 1: To gain voting control
Option 2: To avoid paying dividends
Option 3: To secure higher interest payments
Option 4: To raise funds without diluting voting rights
Correct Answer: To raise funds without diluting voting rights
Solution : The correct answer is (d) To raise funds without diluting voting rights
Preference shares allow companies to raise funds from investors without diluting the voting control or ownership of the existing shareholders. Unlike equity shares, preference shares usually do not carry voting rights, enabling the company to secure funding while keeping voting control concentrated among the current ownership or management. Preference shares also provide the company with the flexibility to offer a fixed dividend to investors, ensuring a predictable cash outflow to shareholders, which can be appealing to certain investors and can aid in financial planning.
Hi aspirant,
There are several prestigious institutions in India that provide an online MBA in finance. Here is a list of a few of the reputed institutions offering this course:
1. Xavier School of Management (XLRI)
2. Management Development Institute (MDI)
3. Indian Institute of Foreign Trade (IIFT)
4. Indian Institute of Management (IIM), Raipur
5. Great Lakes Institute of Management (GLIM)
All the best!
Question : Case Study 22:
DEF Ltd. is a well-established company planning to expand its global operations through acquisitions.
To finance its acquisition plans, DEF Ltd. is evaluating short-term financing options. Which money market instrument might it use?
Option 1: Commercial paper
Option 4: Corporate bond
Solution : The correct answer is (a) Commercial paper
Commercial paper is a short-term unsecured promissory note issued by corporations to raise funds quickly. It is a common choice for businesses looking for short-term financing to support various operational needs, including acquisitions. It provides a quick and cost-effective way to access funds, making it suitable for financing acquisition plans in the short term.
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