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Financial Management Decisions
QUESTION FOR PRACTICE

Q.1. Explain the tax consideration to be kept in mind while deciding dividend policy of a company.

Q.2. “The loan capital contributes to tax saving resulting a higher rate of return on owner’s equity.” Do you agree with the statement? If not, illustrate your answer by a suitable example.

Q.3. What is a ‘bonus share’? How can a shareholders reduce his tax liability regarding bonus shares?

Q.4. Mr. Ram needs Rs. 2,00,000 to purchase a car for his personal use. He can borrow this money, from a closely-held company in which he has substantial interest @ 8% p.a. or from a finance company @ 10%. The business of the closely-held company is not money lending but it has sufficient accumulated profits to grate the loan. Suggest from tax point of view, whether he should borrow from the closely-held company or the finance company.

Q.5. Discuss the tax considerations in dividend policy and issue of bonus shares.

Q.6. Suggest tax planning measures in the following cases from the view point of shareholders:
(a) Green Ltd., a closely-held company, engaged in dealership business is, approached by a shareholders having substantial interest for a short-term loan of Rs. 50,000. The company prossesses accumulated profit of Rs. 75,000.
(b) Should the income tax position be different if following the above case the main business of Green Ltd. is money-lending.

Q.7. From the point of view of tax considerations which one of the following would you prefer and why :
(i) Payment of dividend or Issue of bonus shares;
(ii) Issue of shares or Issue of debentures.

Q.8. X Ltd., a domestic company, furnishes the following particulars of its income and payments for the previous year 2011-12 :
Rs.
Profits of business (computed) 5,00,000
Dividend from Y Ltd., a domestic company 2,00,000
Dividend from Z Ltd., a foreign company 5,00,000
Dividend paid to shareholders of X Ltd. on 1.10.2011 4,00,000
Ans. Total Income Rs. 10,00,000 Tax = Rs. 3,09,000.'
Note : Company is also liable to pay tax @ 16.2225% on the amount of dividend distributed.

Q.9. X holds 12.5% shares carrying voting power in a domestic company in which public are not substantially interested. On 1st Jan., 2012, he obtained a loan of Rs. 5 lakh at 10% interest per annum from the company. As on that date, the company had accumulated profits of Rs.4 lakh. Explain the tax implications of the transaction for X and also the company.
Hints:
Shareholders : Deemed dividend Rs. 4,00,000; Taxable in his hands. Company : TDS @ 10%; Deposit this account this amount in Govt. account within prescribed period.

Q.10. Explain the concept of ‘Deemed dividend’ under Section 2(22) of the Income-tax Act.

Q.11. X Ltd. (a closely-held company engaged in trading) having accumulated profits of Rs.10,00,000, advanced a loan of Rs.3,00,000 to a partnership firm on July 26, 2011. Mr. A possesses 14% equity shares in X Ltd. and has 25% shares in the profits of the firm. Explain the tax consequences for Mr. A and X Ltd.

Q.12. Mr. P is holding 12% equity shares in A Ltd., a company in which public are not substantially interested. P needs Rs.5,00,000 to purchase a car for his personal use. He can either borrow this money at an interest rate of 10% p.a from A Ltd. or from a finance company @ 13% p.a. Business of A Ltd. is not money lending but it has sufficient accumulated profits to advance the requisite loan. Suggest from tax point of view, whether he should borrow from A Ltd. or the finance company?

Q.13. Rahul holds 25% shares of X Pvt. Ltd. and also holds 30% shares of S Pvt. Ltd. On 15.3.2012 X Pvt. Ltd. gives a loan of Rs.80,000 to S Pvt. Ltd. On that date X Pvt. Ltd. had accumulated profits of Rs.4,70,000. Discuss the tax implications of this transaction.

Q.14. Mr. A holds shares carrying 25% of voting power in a domestic company in which the public are not substantially interested. On 1st September, 2011 he got a loan of Rs.6 lack @ 12% from the company and as on date the company had an accumulated profit of Rs. 5 lac. Explain the tax implications in the hands of the company as well as in the hands of the shareholder.

Q.16. Explain the concept of deemed dividend under Section 2(22) of Income tax Act. How can a company reduce its tax liability regarding payment of dividend?

Q.17. A company has share capital of Rs.60 lakhs. It is planning a major expansion for which additional Rs.60 lakhs is required. The company has 3 options:
(i) Raise entire Rs.60 lakhs. By issue of equity shares.
(ii) Raise Rss.30 lakhs through equity shares and remaining 30 lakhs to be cooected by issue of 12% debentures.
(iii) To borrow Rs.15 lakhs from market @ 20%, issue 12% debentures of Rs.30 lakhs and balance amount to be raised through equity shares.
Determine which option the company should opt for, assuming expected rate of return is 25%.
Ans. Profit % after dividend distribution tax (i) 14.86%; (ii) 22.59%; (iii) 33.29%.
Hint :
A. Y. 2013-14 (i) Rate of tax – 30%; S.C. Nil E.C . 3%; (ii) Rate of dividend distribution tax – 15%; S.C. 5%; E.C 3%.

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