'Case S1udies I 0. I
Analysing, Evaluating & Creating Type Questions
Q.l A_ditya _Khosla, the Managing Director of 'D.L.W. Ltd.' and Rajesh Pur~, the Finance Manager "'ere
discussmg about the avenues of investing the idle funds of the company. Aditya Khosa was of the opini0
that ~oney should be invested in the capital market whereas Rajesh Puri, being more conservative, fee~
that it would be better if the investment was made in money market.
Since the economy was buoyant, the Managing Director convinced Rajesh that they should take
advantage of it and invest in the capital market to get good returns. Ultimately it was decided to invest
the idle funds in the capital market.
(a) What kind of instruments should the company buy?
(b) Why is the capital market expected to give a better return in a buoyant economy? State the reason,
(c) Why and how safe are the securities in this market as compared to money market? (4 Dlarka)
Ans. (a) Shares, debentures, bonds
(b) Capital market is expected to give a better return in a buoyant economy as:
(i) The securities are held for a longer duration
(ii) There is a scope of earning capital gains on shares. .
(c) Securities in capital market are riskier with respect to return and principal repayment. Issuing company
may fail to perform as promoters may defraud investors.
Q.2 Financial market is a market for creation and exchange of financial assets. It helps to link the savers
with the investors and directs available funds into their most productive investment opportunity. It also
facilitates easy purchase and sale of financial assets through the stock exchange. The stock exchange
not only facilitates buying and selling of existing securities but also educates public about how their
investments in the financial market can yield good retµrns.
(a) State two functions performed by financial market in the above case.
(b) Explain four more functions of the stock exchange, other than those stated in the above case. (6 marks)
Ans. (a) Functions performed by Financial market:
(i) It mobilises savings and channelises them into most productive use.
(ii) It provides liquidity to financial assets by facilitating easy purchase and sale of securities through stock
exchanges.
(b) Functions of stock exchange, other than those stated in the above case:
(i) Pricing of securities
(ii) Ensures safety of transactions
(iii) Contributes to economic growth
(iv) Provides scope for speculation(explain these functions)
Q.3 India's largest domestic investor Life Insurance Corporation of India has once again come to govenunent's
rescue by subscribing 70% of Hindustan Aeronautics' t 4,200-crore initial public offering.
(a) Which market is being reflected in the above case?
(b) State which method of floatation in the above identified market is being highlighted in the case?
(c) Explain any three other methods of floatation. (5 01arks)
Ans. (a) Primary Market (New Issues Market)
(b) e-IPOs: It refers to issue of capital to the public through the on-line system of the stock exchange. .
111
(c) Other methods of floating new issues in the primary market: (Expla J
(i) Private Placement (ii) Offer through prospectus (iii) Offer for sale
Q.4 With the explosive growth of its subscriber base, to fuel its expansion plan Afro Telecom Co. Ltd, waJlts
to raise f 500 crore by issuing equity shares.
(a) Identify and state the market Afro Telecom Co. Ltd. will look for to raise funds worth <'500 croff co
fuel its expansion plan. Give reason in support of your answer.
(b) Explain any four methods through which Afro Telecom Co. Ltd. can issue equity shares. (6 J11al1'5)
, Ans. (a) Primary market
Primary market is a type of capital market in which new securities are issued by the companies. Since Airo
Telecom Co. Ltd. wants to raise 500 crore by issuing new equity shares, it will look for the primary
market.
(b) Methods through which Airo Telecom Co. Ltd. can issue equity shares are: (Explain any four)
(i) Offer through prospectus
(ii) Offer for sales
(iii) Private placement
(iv) Rights issue
(v) e-IPOs
Q.5 Saqib Ltd. is a large credit worthy company operating in the Kashmir Valley. It is an export oriented
unit, dealing in exclusive embroidered shawls. The floods in the Valley have created many problems for
the company. Many craftsmen and workers have been dislocated and raw material has been destroyed.
The firm is therefore, unable to get an uninterrupted supply of raw material, and the duration of the
production cycle has also increased. To add to the problems of the organisation, the suppliers of raw
material who were earlier selling on credit are asking the company, for advance payment or cash payment
on delivery. The company is facing a liqui4-ity crisis. The CEO of the company feels that taking a bank
loan is the only option with the company to meet its short term shortage of cash.
As a finance manager of the company name and explain the alternative to b:mk borrowing that the
company can use to resolve the crisis. (3 marks)
Ans. Commercial Paper: (Exp/,ain)
Q.6 Sika Ltd., a reputed industrial machines manufacturer, needs Rupees twenty crores as additional capital
to expand the business. Mr. Amit Joshi, the chief Executive Officer (CEO) of the company wants to raise
funds through equity. The finance Manager, Mr. Narender Singh, suggested that the shares may be sold to
investing public through intermediaries, as the same will be less expensive.
Name the method through which the company decided to raise additional capital. (I mack)
Ans. Offer for Sale.
Q.7 An investor wanted to invest 20,000 in Treasury Bills for a period of 91 days. When he approached the
Reserve Bank of India for this purpose he came to know that it was not possible.
Identify the reason why the investor could not invest in the Treasury Bill. (1 mack)
Ans. The investor could not invest in the Treasury Bills as they can be issued for a minimum amount of ~25,000
and its multiples thereof.
Q.8 Varunica Ltd., a reputed truck manufacturing company, needs rupees twenty crores as additional capital
to expand its business. Mr.Alind Jindal, the CEO of the company, wants to raise funds through equity.
The Finance Manager, Mr. Nikhil Sachdeva, suggests that the existing shareholders be offered the privilege
to subscribe to new issue of shares as per the terms and conditions of the company which was agreed by
Mr.Alind Jindal. Name the method through which the company decided to raise additional capital.
(1 mark)
Ans. Rights Issue
Q.9 Shreya Ltd. is a large credit-worthy company manufacturing automobiles for the Indian market .It now
wants to cater to the other market and decided to invest in new machines. For this, it requires long-
term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge
floatation cost. To meet the expenses of floatation cost the company decides to tap the money market.
(a) Name and discuss the money market instrument the company can use for the above purpose.
(b) What is the duration for which the company can get funds through this instrument?
(c) State any other purpose for which this instrument can be used. (4 marks)
Ans. (a) Commercial paper - it is a short term unsecured promissory note, negotiable and transferable by
endorsement and delivery with a fixed maturity period.
(b) 15 days to one year.
(c) It is used to provide short term funds for seasonal and working capital needs of the business.
Analysing, Evaluating & Creating Type Questions
Q.l A_ditya _Khosla, the Managing Director of 'D.L.W. Ltd.' and Rajesh Pur~, the Finance Manager "'ere
discussmg about the avenues of investing the idle funds of the company. Aditya Khosa was of the opini0
that ~oney should be invested in the capital market whereas Rajesh Puri, being more conservative, fee~
that it would be better if the investment was made in money market.
Since the economy was buoyant, the Managing Director convinced Rajesh that they should take
advantage of it and invest in the capital market to get good returns. Ultimately it was decided to invest
the idle funds in the capital market.
(a) What kind of instruments should the company buy?
(b) Why is the capital market expected to give a better return in a buoyant economy? State the reason,
(c) Why and how safe are the securities in this market as compared to money market? (4 Dlarka)
Ans. (a) Shares, debentures, bonds
(b) Capital market is expected to give a better return in a buoyant economy as:
(i) The securities are held for a longer duration
(ii) There is a scope of earning capital gains on shares. .
(c) Securities in capital market are riskier with respect to return and principal repayment. Issuing company
may fail to perform as promoters may defraud investors.
Q.2 Financial market is a market for creation and exchange of financial assets. It helps to link the savers
with the investors and directs available funds into their most productive investment opportunity. It also
facilitates easy purchase and sale of financial assets through the stock exchange. The stock exchange
not only facilitates buying and selling of existing securities but also educates public about how their
investments in the financial market can yield good retµrns.
(a) State two functions performed by financial market in the above case.
(b) Explain four more functions of the stock exchange, other than those stated in the above case. (6 marks)
Ans. (a) Functions performed by Financial market:
(i) It mobilises savings and channelises them into most productive use.
(ii) It provides liquidity to financial assets by facilitating easy purchase and sale of securities through stock
exchanges.
(b) Functions of stock exchange, other than those stated in the above case:
(i) Pricing of securities
(ii) Ensures safety of transactions
(iii) Contributes to economic growth
(iv) Provides scope for speculation(explain these functions)
Q.3 India's largest domestic investor Life Insurance Corporation of India has once again come to govenunent's
rescue by subscribing 70% of Hindustan Aeronautics' t 4,200-crore initial public offering.
(a) Which market is being reflected in the above case?
(b) State which method of floatation in the above identified market is being highlighted in the case?
(c) Explain any three other methods of floatation. (5 01arks)
Ans. (a) Primary Market (New Issues Market)
(b) e-IPOs: It refers to issue of capital to the public through the on-line system of the stock exchange. .
111
(c) Other methods of floating new issues in the primary market: (Expla J
(i) Private Placement (ii) Offer through prospectus (iii) Offer for sale
Q.4 With the explosive growth of its subscriber base, to fuel its expansion plan Afro Telecom Co. Ltd, waJlts
to raise f 500 crore by issuing equity shares.
(a) Identify and state the market Afro Telecom Co. Ltd. will look for to raise funds worth <'500 croff co
fuel its expansion plan. Give reason in support of your answer.
(b) Explain any four methods through which Afro Telecom Co. Ltd. can issue equity shares. (6 J11al1'5)
, Ans. (a) Primary market
Primary market is a type of capital market in which new securities are issued by the companies. Since Airo
Telecom Co. Ltd. wants to raise 500 crore by issuing new equity shares, it will look for the primary
market.
(b) Methods through which Airo Telecom Co. Ltd. can issue equity shares are: (Explain any four)
(i) Offer through prospectus
(ii) Offer for sales
(iii) Private placement
(iv) Rights issue
(v) e-IPOs
Q.5 Saqib Ltd. is a large credit worthy company operating in the Kashmir Valley. It is an export oriented
unit, dealing in exclusive embroidered shawls. The floods in the Valley have created many problems for
the company. Many craftsmen and workers have been dislocated and raw material has been destroyed.
The firm is therefore, unable to get an uninterrupted supply of raw material, and the duration of the
production cycle has also increased. To add to the problems of the organisation, the suppliers of raw
material who were earlier selling on credit are asking the company, for advance payment or cash payment
on delivery. The company is facing a liqui4-ity crisis. The CEO of the company feels that taking a bank
loan is the only option with the company to meet its short term shortage of cash.
As a finance manager of the company name and explain the alternative to b:mk borrowing that the
company can use to resolve the crisis. (3 marks)
Ans. Commercial Paper: (Exp/,ain)
Q.6 Sika Ltd., a reputed industrial machines manufacturer, needs Rupees twenty crores as additional capital
to expand the business. Mr. Amit Joshi, the chief Executive Officer (CEO) of the company wants to raise
funds through equity. The finance Manager, Mr. Narender Singh, suggested that the shares may be sold to
investing public through intermediaries, as the same will be less expensive.
Name the method through which the company decided to raise additional capital. (I mack)
Ans. Offer for Sale.
Q.7 An investor wanted to invest 20,000 in Treasury Bills for a period of 91 days. When he approached the
Reserve Bank of India for this purpose he came to know that it was not possible.
Identify the reason why the investor could not invest in the Treasury Bill. (1 mack)
Ans. The investor could not invest in the Treasury Bills as they can be issued for a minimum amount of ~25,000
and its multiples thereof.
Q.8 Varunica Ltd., a reputed truck manufacturing company, needs rupees twenty crores as additional capital
to expand its business. Mr.Alind Jindal, the CEO of the company, wants to raise funds through equity.
The Finance Manager, Mr. Nikhil Sachdeva, suggests that the existing shareholders be offered the privilege
to subscribe to new issue of shares as per the terms and conditions of the company which was agreed by
Mr.Alind Jindal. Name the method through which the company decided to raise additional capital.
(1 mark)
Ans. Rights Issue
Q.9 Shreya Ltd. is a large credit-worthy company manufacturing automobiles for the Indian market .It now
wants to cater to the other market and decided to invest in new machines. For this, it requires long-
term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge
floatation cost. To meet the expenses of floatation cost the company decides to tap the money market.
(a) Name and discuss the money market instrument the company can use for the above purpose.
(b) What is the duration for which the company can get funds through this instrument?
(c) State any other purpose for which this instrument can be used. (4 marks)
Ans. (a) Commercial paper - it is a short term unsecured promissory note, negotiable and transferable by
endorsement and delivery with a fixed maturity period.
(b) 15 days to one year.
(c) It is used to provide short term funds for seasonal and working capital needs of the business.
