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END OF SECTION A
Section B : Problems/Caselets (50 Marks)
• • This section consists of questions with serial number 1 – 6.
• • Answer all questions.
• • Marks are indicated against each question.
• • Detailed workings should form part of your answer.
• • Do not spend more than 110 - 120 minutes on Section B.
Caselet 1
1. What are the advantages and disadvantages of having less debt in the capital structure?
2. According to Modigliani-Miller hypothesis, is it better to have a lower debt in the presence of taxes? Justify.
Theories suggest that one of the most important elements affecting leverage is corporate tax rate. Debt derives much of
its attractiveness from the tax deduction available on interest payments, a benefit not available on dividends.
Myth: Companies paying high rates of corporate tax would have high proportion of debt in their capital structure.
Reality: Corporate tax rates do not have an effect on the capital structure.
Tax factor
Tax (%) Leverage Interest coverage
Bajaj Auto 29.00 0.14 60.27
Colgate Palmolive 46.00 0.01 265.83
Glaxo 30.00 0.18 17.59
Reliance Industries 0.08 0.56 12.86
Telco 31.00 0.53 4.97
Tisco 0.10 1.05 2.37
A study conducted on debt-equity ratios indicates a different picture. Glaxo which paid a tax of 30 per cent in fiscal ‘95
had a low debt- equity ratio of 0.18 while Asea Brown Boveri, wh ich paid a tax of 37 per cent for the same year had a
similarly low debt-equity ratio of 0.18. The leverage of ICI India, another major tax payer has been declining over the
last three years and now stands at a low 0.17. Colgate-Palmolive, a virtually zero debt company has negligible leverage
despite paying a tax of 46 per cent.
This scenario is not restricted to multinational companies alone. A number of Indian players in the high tax bracket also
have low leverages. Bajaj Auto paid a tax of 29 per cent in March ‘96. Over the last three years, its leverage has been
reducing and currently stands at a low 0.14. Telco, which paid a tax of 31 per cent in fiscal ‘96 had a low debt-equity
ratio of 0.13. Hindalco with a leverage of 0.27 paid a tax of more than 37 per cent in fiscal ‘96.
The set of high tax paying companies with relatively low leverage includes Hindalco, Indo-Gulf Fertilizers, Motor
Industries Corporation, Asea Brown Boveri, East India Hotels, ICI India, Smithkline Beecham Consumer Products,
Punjab Tractors, Ingersoll-Rand, and Britannia.
Though it would be risky to generalize, it has been observed that most high tax paying companies are well established
and are major players in their respective industries. Their operations are focused and most of the fund requirements are
met through internal sources sparing the need for debt.
Interest coverage ratio measures the margin of safety the firm enjoys with respect to its interest burden. A low interest
coverage may lead to financial embarrassment when earnings before interest and taxes decline. In this respect, firms
like Bajaj Auto, Glaxo and Reliance have comfortable interest coverage. In contrast, Tisco has a coverage of 2.37 while
Telco has a slightly higher coverage of 4.97.
The same assumption has not proved to be completely incorrect. There are companies like Indian Oil Corporation,
Grasim, Nocil, SKF Bearings, MRF, Siemens, Tata Chemicals, Crompton Greaves, and Nestle India which are in the
high tax bracket and also have relatively high debt-equity ratios.
Caselet 2
3. Describe the composition of current assets that is likely to be observed in the three divisions of the company.
Unicorn Industries Ltd. has been in existence for quite sometime. The company initially started off with the
manufacture of processed agricultural products and has diversified into other lines of business over a period of time.
Presently it is involved in the processing of agricultural products, retailing and travel management. Three separate
divisions of the company manage these three lines of business.
The agricultural processing division purchases raw agricultural produce from the farmers through its purchase agents.
The raw materials for this division are pronouncedly seasonal in nature; hence their supply is not uniform over the year.
However, the processing activity continues throughout the year. This division has well-established trade relationships
with its clients and its clientele mainly consists of hotels, restaurants, and consumer cooperatives. Sales are made
throughout the year on credit basis and the remittances from the clients come in a regular manner over the year.
The retailing division of the company operates a chain of retail stores spread out mostly in the northern part of the
country. This division purchases in bulk a large variety of finished products from different manufacturers, and sells
them to retail customers, largely on a cash basis. The purchases as well as sales are spread out uniformly throughout the
year.
The travel management division of the company is mainly involved in the business of air-ticketing and conducting
package tours. The sales of this division are largely on credit basis and major portion of the business of this division
comes from corporate clients. Moreover, the package tour business, which makes a significant contribution to the
revenues of this division, is seasonal in nature.
4. Mr. Ajoy Rathor is planning to purchase a house which costs Rs.8,00,000. He contacted two housing finance
companies viz, City Housing Finance Ltd. (CHFL) and Southern Finance Company Ltd. (SFCL). CHFL has
offered for 100% financing for a period of 7 years. Mr. Rathor has to repay the loan along with interest in equated
monthly installments of Rs.18,500 each, payable at the end of every month over a period of 7 years.
SFCL has offered to provide 90% finance for a period of 8 years. Mr. Rathor has to bring in 10% of the cost of the
house at the time of purchase. He will borrow the amount of his contribution from one of his relatives and will pay
back his relative Rs.40,000 and Rs.50,000 (which include the amount borrowed and the interest) at the end of the
first year and the second year respectively. The amount borrowed from SFCL has to be repaid along with interest
in equated monthly installments of Rs.12,800 each, payable at the end of every month over a period of 8 years.
You are required to find out the effective rates of interest for both the financing alternatives and advise Mr.
Rathor accordingly.
(10 marks) < Answer >
There are 100,00,000 equity shares of Rs.10 each fully paid up. Presently the shares have a market price of Rs.30
per share. The company has recently paid dividends to its equity shareholders amounting to Rs.3 crore. The
dividends have been growing at the rate of 4% over the years and this growth rate is expected to continue in future.
Debentures:
There are 14,00,000 debentures of Rs.100 each which are redeemable at a premium of 5% after five years. The
coupon rate on these debentures is 12% and the current yield on these debentures is 14%. The net amount realized
per debenture is Rs.95.
Term loan:
The amount of term loan is Rs.58 crore and carries an interest rate of 14%. The market value of the term loan is
equal to its book value.
6. An investment advisor has been monitoring the equity share of Spicy Foods Ltd. (SFL) over the past one year. On
the basis of his assessment of the fundamentals of the company and his expectations on the stock market
conditions during the next six months, he has provided the following projections:
Probability (%) Return from SFL share (%) Return on the market index (%)
10 10 12
15 16 16
20 20 18
25 26 22
20 30 24
10 36 30
You are required to calculate the following:
a. The expected return and risk of the SFL share.
b. The expected return and risk of the market index.
c. The beta coefficient of the SFL share.
(3 + 3 + 3 = 9 marks) < Answer >
END OF SECTION B
Section C : Applied Theory (20 Marks)
• • This section consists of questions with serial number 7 - 9.
• • Answer all questions.
• • Marks are indicated against each question.
• • Do not spend more than 25 -30 minutes on section C.
8. Many business organizations undertake business largely on a credit basis. Briefly explain the costs associated with
maintaining receivables arising out of credit sales.
9. The managers in an enterprise are responsible for the proper utilization of the resources under their control. Since
the resources are acquired in exchange for money, the decisions of the managers will ultimately affect the financial
condition of the organization. In this sense it can be said that the finance function interfaces with other major
functions of the enterprise as well as the top management. Briefly explain the interfaces of the finance function
with the marketing and production functions, and the top management.
END OF SECTION C
Reason: Reduction of tax rate by the government will affect all the companies in the market and
so can be considered as a systematic risk. While the factors mentioned in the other
options will affect a particular company or the companies belonging to a particular
industry. Hence, these factors may be termed as non-systematic risk.
2. Answer: (e) < TOP >
Reason: If a security’s return plots above the security market line (SML) then the return on the
security is more than the required rate of return on the security according to the SML. A
greater return means a lesser price of the security than its intrinsic value that implies the
security is under priced and hence that should be bought immediately to book profit in
future as its price increases.
3. Answer: (d) < TOP >
Reason: The amount that a company can realize if it sells its business as an operating one is
called going concern value. Replacement value indicates the value that a company
would be required to spend if it were to replace its existing assets in the present
situation. Liquidation value is the amount that a company could realize by selling its
assets following the termination of its business. Market value of an asset is the current
market price at which it may be sold or bought in the market.
5. Answer: (b) < TOP >
Reason: The following statements are correct with respect to the degree of operating leverage
(DOL) for the operations of a company:
• • Each level of output has a distinct DOL
• • DOL is always negative below the operating break even point
• • DOL is always positive above the operating break even point
• • DOL is undefined at the operating break even point.
Hence, the option (b) is the answer.
6. Answer: (c) < TOP >
Reason: Debt-equity ratio and debt-asset ratio are leverage ratios for a company. Return on
equity and return on investment represents the profitability ratios of a business entity.
Acid test ratio indicates the liquidity status of a company.
7. Answer: (b) < TOP >
Reason: According to the objective of financial management to increase the wealth of the
shareholders means to increase in the market value of the shares issued by the firm.
Increasing the physical assets or current assets of the company may not provide
adequate returns to the shareholders, if it is done through incremental borrowing.
Increasing cash balance imparts more liquidity to a company but decreases the returns
on investments. Increase in the total number of outstanding shares of the company does
not make any impact on the total value of the firm.
8. Answer: (d) < TOP >
(1.0075) 60 − 1
FVIFA (0.75%, 60) = 0.0075 (1.0075)
= 75.99
∴ Amount receivable in future = 75.99 × 2000 = Rs.1,51,980
(Note that 9% compounded monthly means 0.75% interest for each month for 12 × 5
= 60 months).
9. Answer: (b) < TOP >
Reason: All the participants in the call money market are split into two categories. The first
compris es of the entities who can borrow as well as lend in the market and the second
comprises of only lenders i.e. the participants in the second category cannot borrow in
the call money market. RBI, DFHI, STCIL and commercial banks belong to the first
category and all the financial institutions and mutual funds belong to the second. Hence,
(b) cannot borrow in the call money market
10. Answer: (b) < TOP >
Averagestockoffinishedgoods
36,00,000
∴5 = 360
or Average stock of finished goods = 5 x10,000 = Rs. 50,000
Reason: As per net operating income approach the cost of capital of the company reduces with
the increasing introduction of debt and becomes asymptotic to kd parallel to X-axis.
As per traditional approach cost of capital decreases upto a certain point, remains more
or less unchanged for moderate increases in leverage and rises beyond a certain point.
This advocates an optimum capital structure for the firm.
Both, Net Operating Income approach and Miller and Modigliani approach advocate that
overall capitalization rate remains constant for all degrees of leverage. Therefore, there
is no optimal capital structure.
12. Answer: (b) < TOP >
Reason: It is assumed that the risk characterizing the new project under consideration is almost
same as the risk characterizing the existing investment of the firm. Therefore, statement
(I) is not correct. It is assumed that the firm will continue to pursue the same financing
policy, i.e. the debt-equity mix in the capital structure. Hence, (II) is correct.
Further, no assumption is made regarding the management of firm to remain same.
13. Answer: (a) < TOP >
Reason: Primary market allows the corporate houses to raise long term funds by issuing new
securities like, shares – equity and preference as well as debentures. The venture capital
funding companies generally dilute their stakes in a company by selling their holdings in
any company to the investors through secondary capital market route.
14. Answer: (c) < TOP >
Reason: Inter Corporate deposits are not traded in the market. The instruments as mentioned in
the other options are traded in the respective financial markets
15. Answer: (a) < TOP >
Reason: Savings function encourages the household sector to save money through the various
channels in the financial system like, banks, insurance companies, capital markets, etc.
These funds are ultimately channelised to the productive sector that needs money. The
other functions do not play any role in this context
16. Answer: (c) < TOP >
Reason: In a bonus issue, the additional shares are issued to the existing shareholders on pro rata
basis without taking any money from them while an equivalent amount of reserves and
surpluses are transferred to the capital of the issuing company. In the other issues,
money is collected from the investors in order to issue the securities
17. Answer: (d) < TOP >
Reason: Leading involves advancing a payment. That is making a payment before it is due.
Lagging on the other hand refers to postponing a payment. A company can lead
payments required to be made in a currency that is likely to appreciate and lag the
payments that it needs to make in a currency that is likely to depreciate. This strategy is
called leading and lagging.
Netting means matching receivables with payables in the same currency to arrive at the
net amount. Correct answer is (d).
18. Answer: (b) < TOP >
Reason: Expected daily usage during the lead time is 300 × 0.25 + 500 × 0.50 + 700 × 0.25 = 500
units while the expected lead time is 6 × 0.30 + 8 × 0.40 + 10 × 0.30 = 8 days. Hence,
the normal consumption during the lead time = 500 × 8 = 4,000 units
19. Answer: (a) < TOP >
Reason: Contribution margin increases by Rs.100 lakh and hence the corresponding amount of
net cash flow will also go up by Rs.100 lakh × (1 - 0.35) = Rs.65 lakh.
Rs.65
Hence, the NPV of the project will also increase by 1.10 = Rs.59.09 lakh or Rs.59
lakh
20. Answer: (b) < TOP >
Reason: Excise duties on the capital equipments influence the initial cost of the machineries, not
the operating cycle for the operation of a company. Sudden increase in the demand for
the product of a company, adoption of better technology and the sudden stoppage of the
supply of a major raw material affect the finished goods storage period, work in process
period and the raw material storage period respectively. While an increase in the short
term interest rate will increase the interest expenses of the firm against the borrowings
for the current assets. So, the option (a) is correct.
< TOP >
22. Answer: (c)
Reason: A ‘float’, in the context of cash management, arises when a bank does not credit its
customer’s account in its book despite a cheque was being deposited or does not debit its
customer’s account against the issue of a cheque. This fact is mentioned in the option
(c).
< TOP >
23. Answer: (b)
D1
Reason: Intrinsic Value, Po = − g
k
Using CAPM
= 12.175%
3.5 ×1.075
P = 0.12175 − 0.075 = 80.48
Reason: When a company is the target of an un wanted bid or the threat of a bid from a potential
acquirer, it may seek the help of a white knight or another company which is more
acceptable suitor for target This method of takeover defense is called white knight.
Poison pills is a defense strategy which involves issuing new securities which would be
convertible into equity at low price in event of an hostile take over of the firm.
Crown jewels strategy involves creating mechanism to ensure that a raider, in event of a
hostile takeover, is denied access to the jewels.
Golden parachutes are agreement that provides for payment of huge severance packages
to the senior management executives in case of takeover of the firm.
Green mail is a form of targeted share repurchase. It refers to the repurchase of a block
of shares from specific share holder(s), at a substantial premium, to prevent a hostile
tender offer on the company.
25. Answer: (e) < TOP >
Reason: Economic exposure refers to the impact on the value of firms operations due to
unanticipated changes in the exchange rates.
Transaction exposure arises out of day-to-day activities of a company.
Translation exposure arises due to the need to translate the foreign currency values of
assets and liabilities into the domestic currency
Currency exposure refers to the currency which is to be received/or paid.
Correct answer is (e).
26. Answer: (b) < TOP >
1+ 0.02 / 4
Reason: 1.6640 × 1 + 0.03 / 4 = 1.6599.
27. Answer: (d) < TOP >
175
Present value of benefit = 0. 08 = 2187.5
2187 . 5
BCR = 2000 = 1.09
28. Answer: (e) < TOP >
Reason: As per M&M approach, if bankruptcy costs are considered, the expected cost of
bankruptcy increases when the debt equity ratio increases.
30. Answer: (d) < TOP >
Reason: If the benefit cost ratio is equal to one, the present value of the cash flows at the cost of
capital is equal to the initial investment. This implies all the stakeholders of the project
have enjoyed the return expected. Hence the option (d) is false. However, the other
statements are correct with respect to the capital expenditure.
Section B: Problems
800000
or PVIFA = 18500 = 43.243
(1.017 ) 84 − 1
84
For, r = 1.7%, PVIFA = 0. 017 (1.017 ) = 44.548
(1. 018 ) 84 − 1
84
For, r = 1.8%, PVIFA = 0. 018(1. 018 ) = 43.141
(1.8 − 1.7)
1.7 + × ( 43. 243 − 44. 548)
∴ r= ( 43. 141 − 44 .548 ) = 1.793%
Effective interest rate = (1 + r)12 – 1 = (1.01793)12 – 1 = 23.77% p.a. (approx.)
Financing by SFCL and relative of Mr. Rathor :
Let the interest rate be ‘r’.
Amount of finance from SFCL = 8,00,000 × 0.90 = Rs.7,20,000
Amount of finance from relative = Rs.80,000
Total amount of financing = Rs.7,20,000 + Rs.80,000 = Rs.8,00,000
Amount payable at the end of every month to SFCL = Rs.12,800
Number of months for which payments have to be made to SFCL = 8 × 12 = 96 months
Amount payable to relative :
At the end of one year (i.e. 12 months) = Rs.40,000
At the end of two years (i.e. 24 months) = Rs.50,000
(1. 2 − 1. 1)
∴ r = 1.1 + (799488 − 830064 .2) × (800000 – 830064.2) = 1.198%
∴ Effective interest rate per annum = (1 + r)12 – 1 = (1.01198)12 – 1 = 0.1536 i.e. 15.36%.
We find from above that if Mr. Rathor borrows 90% of the cost of the house from SFCL and borrows the remaining
amount from his relative he faces a lesser effective rate of interest (15.36% per annum ) than the effective rate of interest
(23.77% per annum)he faces if he borrows 100% of the cost of the house from CHFL. Hence he should borrow 90% of
the cost of the house from SFCL and the remaining amount from his relative.
D1
+g
ke = P0
D1 = D0 (1 + g)
Rs.3crore
D0 = Current dividend per share = Rs.1crore = Rs3 (Number of equity shares = 100,00,000 = 1 crore)
3(1.04)
+ 0.04
∴ ke = 30 = 0.144 i.e., 14.4%.
Cost of retained earnings i.e., reserves and surplus (kr):
Kr = ke = 14.4%
Cost of debenture capital (kd ):
F− P
I(1− t ) +
kd = n
F+P
2
I = Rs.12 (given)
t = 0.50 (given)
F = 100 + 5 = Rs.105
P = Rs.95
n = 5 years
(105 − 95)
12(1 − 0.50) +
5
105 + 95
∴ kd = 2 =8%
Cost of term loan (kt ):
kt = 14(1− 0.50) = 7%
b. Computation of market values:
(Rs. in crores)
Equity share capital: Rs.30 × 1 crore 30
Coupon amount
x Number of debentures
Debenture capital : Current yield
12
x1400000
= 0.14
= Rs.120000000 i.e., 12
Term loan 58
Reserve and surplus 50
Total market value 150
Computation of weights:
30
0.20
Weight for equity by capital (we) = 150
12
0.08
Weight for debenture capital (wd ) = 150
58
0.39
Weight for term loan (wt ) = 150
50
Weight for retained earning(Wr) = 150 0.33
1.00
Weighted average cost of capital
= we ke + wd kd + wt kt
= (0.2) (14.4) + (0.08) (8) + (0.39) (7)+(0.33)(14.4)
= 11% (approximately)
< TOP >
6. a. SFL share:
Expected rate of return = (10 × 0.10) + (16 × 0.15) + (20 × 0.20) + (26 × 0.25) + (30 × 0.20) + (36 × 0.10)
= 23.5%
1
(10 − 23.5) 2 0.10 + (16 − 23.5 ) 2 0.15 + ( 20 − 23.5 )2 0.20 + ( 26 − 23.5) 2 0.25 + (30 − 23.5 )2 0.20 + ( 36 − 23.5 )2 0.10 2
Risk= σi
1
= (
182.25 × 0.10) + ( 56.25 × 0.15) + (12.25× 0.20)+ (6.25× 0.25) + (42.25 × 0.20) + (156.25 × 0.10) 2
= 7.399 ; 7.4%
b. b. Market index:
Expected return = (12 × 0.10) + (16 × 0.15) + (18 × 0.20) + (22 × 0.25) + (24 × 0.20) + (30 × 0.10) = 20.5%
Risk = σm
1
(12 − 20.5)2 0.10 + (16 − 20.5 ) 2 0.15 + (18 − 20.5) 2 0.20 + ( 22 − 20.5 ) 2 0.25 + ( 24 − 20.5 ) 2 0.20 + ( 30 − 20.5 )2 0.10 2
=
1
= (
72.25× 0.10) + ( 20.25 × 0.15) + ( 6.25 × 0.20 ) + ( 2.25 × 0.25) + (12.25 × 0.20 ) + ( 90.25 × 0.10) 2
= 4.85%
c. c. Beta coefficient of SFL share:
Cov(i,m)
Beta = σ 2m
Cov (i,m) = (10 – 23.5) (12 – 20.5)0.10 + (16 – 23.5)(16 – 20.5)0.15 + (20 – 23.5)(18 – 20.5)0.20 +
(26 – 23.5)(22 – 20.5) 0.25 + (30 – 23.5)(24 – 20.5) 0.20 + (36 – 23.5)(30 – 20.5)0.10
= (– 13.5 × – 8.5 × 0.10 ) + (– 7.5 × – 4.5 × 0.15) + (– 3.5 × – 2.5 × 0.20) + (2.5 × 1.5 × 0.25 ) + ( 6.5
× 3.5 × 0.20) + ( 12.5 × 9.5 × 0.10)
= 11.475 + 5.0625 + 1.75 + 0.9375 + 4.55 + 11.875
= 35.65
35.65
= 1.514 ; 1.51
∴ Beta = 23.55
Consolidation: It is a form of business combination caused by the fusion of two or more firms, resulting in the
formation of anew firm. In this combination, all the firms involved loose their individual identity. A new firm which was
hitherto not in existense, comes into being. For example, the combination of two Swiss firms Sandoz and Ciba Geigy
resulted in the formation of Novartis. This form is generally applied in combinations of firms of equal size. In India,
consolidation are generally referred to as amalgamations.
Merger: The terms ‘ merger’ is often abused, by being loosely applied to refer to any form of business combinations. It
has however got a specific connotation. A merger refers to a business combination of two or more firms in which only
one firm survives and the other firms go out of existense. In a merger, the surviving firm acquires the assets and liabilities
of the other firm(s) . For example, the recent marger of HDFC Bank and Times Bank. After the merger, Times Bank will
go out of existense and expanded HDFC Bank the firms involved in the combination are of unequal size. The
larger/stronger firm continues to exist because of its stronger bargaining power and the smaller/ weaker firms go out of
existense. Another form of merger is the subsidiary merger. In a subsidiary merger, the target firm becomes a subsidiary
or is merged with subsidiary of the acquirer. A variation of the subsidiary merger is the reverse subsidiary merger. In a
reverse subsidiary merger, a subsidiary firm of the acquirer is merged into the target firm of the acquirer is merged into
the target firm. In India, mergers are generally referred to as absorptions.
Takeovers: Takeovers refers to the process of acquiring control over the management of a firm by acquiring a substantial
portion of its equity. After a takeover, the individual firms continue to exist but under a new management. For example,
the acquisition of the leading American investment bank First Boston by the Credit Suisse group of Switzerland. CS First
Boston continues to be a separate legal entity but under the management control of the Credit Suisse group . A takeover
may be a prelude to full fledged merger or consolidation. The topic of takeover is dealt in detail in a subsequent section.
Asset Purchases: This is the simplest form of business combination from the legal point of view. In this case, the
acquirer buys out a division or an asset of the firm. Both the firms continue to exist but there is a transfer of the business
or the asset. For example, the recent acquisition of the cement division of Tata Steel by Laffarge of France. Laffarge
acquired only the 1.7 million tonnne coment plant and its releated assets form Tata Steel. The asset being purchased may
be intangible in nature. For example, Coca-cole paid Rs.170 crore to Parle to acquire its soft drinks brands like Thumps
Up. Limca, Gold Spot etc.
9. One common factor among all managers is that they use resources and since resources are obtained in exchange for
money, they are in effect making the investment decision and in the process of ensuring that the investment is effectively
utilized they are also performing the control function. The interfaces between the finance function and the marketing and
production functions, as well as the top management are given below:
Marketing-Finance Interface
There are many decisions which the Marketing Manager takes which have a significant impact on the profitability of the
firm. For example, he should have a clear understanding of the impact the credit extended to the customers on the profits
of the company. Otherwise in his eagerness to meet the sales targets he is likely to extend liberal terms of credit which
may put the profit plans out of gear. Similarly, he should weigh the benefits of keeping a large inventory of finished
goods in anticipation of sales against the costs of maintaining that inventory. Other key decisions of the Marketing
Manager which have financial implications are pricing, product promotion and advertisement, choice of product mix and
distribution policy.
Production-Finance Interface
In any manufacturing firm, the Production Manager controls a major part of the investment in the form of equipment,
materials and men. He should so organize his department that the equipments under his control are used most
productively, the inventory of work-in-process or unfinished goods and stores and spares is optimized and the idle time
and work stoppages are minimized. If the production manager can achieve this, he would be holding the cost of the
output under control and thereby help in maximizing profits. He has to appreciate the fact that whereas the price at which
the output can be sold is largely determined by factors external to the firm like competition, government regulations, etc.
the cost of production is more amenable to his control. Similarly, he would have to make decisions regarding make or
buy, buy or lease, etc. for which he has to evaluate the financial implications before arriving at a decision.
Top Management-Finance Interface
The top management, which is interested in ensuring that the firm’s long-term goals are met, finds it convenient to use
the financial statements as a means for keeping itself informed of the overall effectiveness of the organization. We have
so far briefly reviewed the interface of finance with the non-finance functional disciplines like production, marketing, etc.
Besides these, the finance function also has a strong linkage with the functions of the top management. Strategic planning
and management control are two important functions of the top management. Finance function provides the basic inputs
needed for undertaking these activities.
< TOP >