Read the following text and answer the following questions on the basis of the same.
Charvi, after acquiring a degree in Hotel Management and Business Administration took over her family food processing company of manufacturing pickles, jams and squashes. The business was established by her great grandmother and was doing reasonably well. However, the fixed operating costs of the business were high and the cash flow position was weak. She wanted to undertake modernization of the existing business to introduce the latest manufacturing processes and diversify into the market of chocolates and candies. She was very enthusiastic and approached a Financial Consultant, who told her that approximately Rs. 50 lakhs would be required for undertaking the modernization and expansion programme. The Financial Consultant advised her about the judicious mix of equity (40%) and Debt (60%). He also suggested her to take loan from 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 her 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 the Financial Consultant, Charvi decided to raise funds from a Financial Institution.
“She was very enthusiastic and approached a Financial Consultant, who told her that approximately Rs. 50 lakhs would be required for undertaking the modernization and expansion programme.”
Identify the concept of Financial Management which helped in deciding the quantum of finance required.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Financial Planning
Option (1) Financial Leverage — Incorrect. Financial leverage is the proportion of debt in the total capital. It tells how funds are made up, not how much is needed.
Option (2) Trading on Equity — Incorrect. Trading on equity means using debt to raise the return to equity shareholders, which works when the return on investment is higher than the rate of interest. The passage mentions this elsewhere, but not in this line.
Option (3) Capital Structure — Incorrect. Capital structure is the mix of debt and equity, here 40 : 60. It is decided after the amount needed is known.
Option (4) Financial Planning — Correct. Financial planning means estimating how much money the business will need and deciding where it will come from. It makes sure that the funds are available at the right time. Working out that about Rs. 50 lakhs is needed for modernisation and expansion is the first part of financial planning.
NCERT (2026-27 Edition): “Financial Planning Financial planning is essentially the preparation of a financial blueprint of an organisation’s future operations. The objective of financial planning is to ensure that enough funds are available at right time. …” “…Financial planning process tries to forecast all the items which are likely to undergo changes. It enables the management to foresee the fund requirements both the quantum as well as the timing. …” |