Don’t Worry About

Failure; You Only Have

To Be Right ONCE
Chapter 9: Financial Management
 Concept and objective of Financial Management.
 Financial Decisions: investment, financing and dividend- Meaning and factors
affecting.
 Financial Planning- concept and importance.
 Capital Structure - Concept.
 Fixed and Working Capital - Concept and factors affecting their requirements.

Factors affecting capital budgeting decisions- cash flows of the project, the rate of return,
investment criteria involved.
Factors affecting financing decision-cash flow position of the company, cost, risk, floatation costs,
fixed operating costs, control considerations, state of the capital market, Return on investment, tax
rate, flexibility, regulatory framework .
Factors affecting dividend decision- amount of earnings, stability of earnings, stability of
dividends, growth opportunities, cash flow position, shareholder's preference, taxation policy,
stock market reaction, access to capital market, legal constraints, contractual constraints.
Factors affecting fixed capital requirement- Nature of business, scale of operations, choice of
technique, technology upgradation, growth prospects, diversification, financing alternatives, level
of collaboration.
Working capital- concept of operating cycle, factors affecting working capital requirement- Nature
of business, scale of operations, business cycle, seasonal factors, production cycle, credit allowed,
credit availed, availability of raw material.

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 Business Finance: Money required for carrying out business activities is called business finance.
 It is needed to run business, to modernize it, to expand it or to diversify it.
 Availability of adequate finance is thus very crucial for the survival and growth of the
business.

Financial Management: Financial mgt may be defined as planning, organizing, directing and
controlling of financial activities in a business enterprise. It involves decision making in three
areas:

(i) Investment of funds.

(ii) Financing of different activities.
(iii) Disposal of profits.

Financial Management is concerned with optimal procurement as well as usage of finance.

 For optimal procurement, different available sources of finance are identified and compared in
terms of their costs and associated risks.
 Similarly, the finance so procured needs to be invested in a manner that the returns from the
investment exceed the cost at which procurement has taken place.

Objectives of financial management:

1) Procurement of funds: The first objective of financial management is to procure sufficient

funds. Financial manager has to ensure sufficient and regular supply of funds at reasonable rate.

2) Utilisation of funds: Financial mgt has to ensure the effective utilisation of funds keeping
in mind the overall objectives of the organisation. A proper balance of profitability, liquidity
and safety is to be maintained.

3) Return to shareholders: Maximization of shareholders wealth is accepted as an important

goal of financial mgt., which is largely dependent on the overall performance of the company.

Note: The primary aim of financial mgt is to maximize shareholder’s wealth, which is referred
to as the wealth maximization concept. It means maximization of the market value of the equity
shares.

Financial Decisions: It means selection of the best financing alternative or best investment
alternative. It involves decision-making in three important areas:

A) Investment Decision: The first & foremost decision which business has to take is to allocate
resources or capital to different investment proposals. Different investment proposals are
evaluated on the basis of their expected returns and risks involved.

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 Investment decision can be of two types:

a) Capital Budgeting decision:

 A long term investment decision is called Capital Budgeting decision.
 It involves committing the finance on a long term basis.
 For ex—making investment in a new machine to replace an existing one or to acquiring
a new fixed asset etc.
 These decisions are very crucial for any business since they affect its earning capacity
over the long run.

b) Working capital Decisions:

 A short term investment decision concerned with the decisions such as levels of cash,
inventories and debts, is called Working capital Decisions.
 These affect the day to day working of a business.
 These affect the liquidity and profitability of a business.
 Efficient cash management, inventory management and receivables management are
essential ingredients of sound working capital management.

Factors affecting Capital Budgeting decisions: A number of projects are always available to a
business to invest in. But each project has to be evaluated carefully and depending upon the
returns, a particular project is either selected or rejected.

1) Cash flows of the project: The cash flows from a project are in the form of a series of cash
receipts and payments over the life of an investment. The amount of these cash flows should be
carefully analysed before considering a capital budgeting decision.

2) The Rate of return: The most important criteria is the rate of return of the project. These
calculations are based on the expected returns from each proposal and the assessment of risk
involved. Suppose, there are two projects A and B (with the same risk involved) with a rate of
return of 10 per cent and 12 per cent, respectively, then under normal circumstance, project B
will be selected.

3) The Investment criteria involved: There are different techniques to evaluate proposals
which are known as capital budgeting techniques. These techniques are applied to each proposal
before selecting a particular project. There are different techniques to evaluate investment
proposals which are known as capital budgeting techniques.

B) Finance Decision: This decision is about the quantum of finance to be raised from various
long-term sources
 It involves identification of various available sources. The main sources of funds for a firm are
shareholders funds and borrowed funds.
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 Shareholders’ funds refer to equity capital and retained earnings. Borrowed funds refer to finance
raised as debentures or other forms of debt.
 A firm has to decide the proportion of funds to be raised from either source based on their basic
characteristics.
 Interests on borrowed funds have to be paid regardless of whether or not a firm has made a profit.
Likewise, borrowed funds have to be repaid at a fixed time.
 The risk of default on payment is known as financial risk which has to be considered by a firm
likely to have insufficient shareholders to make these fixed payments.
 Shareholders’ funds on the other hand involve no commitment regarding payment of returns or
repayment of capital.
 The cost of each type of finance is estimated. Some sources may be cheaper than others. For
example, debt is considered the cheapest of all sources; tax deductibility of interest makes it still
cheaper.
 The fund raising exercise also costs something. This cost is called floatation cost. It also must be
considered while evaluating different sources.
 Associated risk is also different for each source, e.g., it is necessary to pay interest on debt and redeem the principal amount on
maturity. There is no such compulsion to pay any dividend on equity shares.

Factors affecting Financing Decision:

1) Costs:
 The costs of raising the fund from different sources are different.
 A prudent financial manager would normally opt for a source which is the cheapest.

2) Risks:
 The risk associated with different sources is different.
 This should also be taken into consideration before making a choice.

3) Floatation costs:
 The cost incurred on raising the fund is called Floatation costs
 Higher the floatation costs, less attractive the source becomes.

4) Cash flow position of the Business:

 A stronger cash flow position may make debt financing more viable than funding through
equity.

5) Level of fixed Operating costs:

 If the business has a high level of fixed operating costs e.g., building rent, insurance
premium, high salaries etc than it must opt for lower financing costs.
 Hence lower debt financing is better and vice-versa.
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6) Control Considerations:
 Issues of more equity may lead to dilution of management’s control over the business.
 Debt financing has no such implications.
 Thus, companies prefer debt to equity, so that control could be retained.

7) State of capital markets:

 Health of the capital market may also affect the choice of the source of fund during the
period.
 When stock market is rising; more people are ready to invest in equity.
 However, depressed capital market may make issue of equity shares difficult for any
company.

C) Dividend Decision:
 The decision involved here is how much of the profit earned by company (after paying
tax) is to be distributed to the shareholders and how much of it should be retained in the
business for meeting the investment requirements.
 Profits are required for a no. of purposes. Some amount of profit has to be recycled in the
business for reinvestment. This part is called Retained earnings.
 The rest of the profit than has to be distributed among the shareholders in the form of
Dividends.
 The decision has to be taken is to decide the proportion of retained earnings and
dividends in the profit.

Factors affecting Dividends Decision:

1) Amount of Earnings:
 Dividends are paid out of current and past earning.
 Therefore, earnings are major determinant of the decision about dividend.

2) Stability of earnings:
 A co. having stable earning is in a position to declare higher dividends.
 As against this, a co. having unstable earnings is likely to pay smaller dividends.

3) Growth opportunities:
 Companies having good growth opportunities retain more money out of their earnings so
as to finance the required investment.
 The dividend in such co. is smaller.

4) Cash flow position:

 Dividends involve an outflow of cash.
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  A company may be profitable but short of cash.
 Availability of enough cash in the co. is necessary for declaration of dividend by it.

5) Legal Constraint:
 Certain provisions of the companies Act place restrictions on payouts as dividend.
 Such provisions must be followed while declaring the dividends.

6) Shareholders Preference:
 While declaring dividends, mgt usually keep in mind the preferences of the shareholders
in this regard.
 If the shareholders in general desire that at least a certain amount is paid as dividend, the
co. is likely to declare the same.

7) Access to capital market:

 Large and reputed co. has easy access to the capital market and therefore may depend less
on retained earnings to finance their growth.
 These companies tend to pay higher dividends than the smaller companies.

8) Stock Market Reaction:

 Investors, in general, view an increase in dividend as good news and stock prices react
positively to it.
 Similarly, a decrease in dividend may have a negative impact on the prices in the stock
market.

9) Taxation Policy:
 Though the dividends are free of tax in the hands of shareholders a dividend distribution
tax is levied on companies.
 If tax on dividend is higher it would be better to pay less by way of dividends. As
compared to this, higher dividends may be declared if tax rates are relatively

10) Contractual Constraints:

 While granting loans to a company, sometimes the lender may impose certain restrictions
on the payment of dividends in future.
 The companies are required to ensure that the dividends does not violate the terms of the
loan agreement in this regard.

Financial Planning: Financial planning is essentially preparation of a financial blueprint of an

organization’s future operations.
 Financial planning refers to the process of determining the objectives, polices, procedures,
Programmes and budgets to deal with financial activities of an enterprises.
 The objective of financial planning is to ensure that enough funds are available at the right time.
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 This process of estimating the fund requirement of a business and specifying the sources of funds
is called financial planning.
 This process of estimating the fund requirement of a business and specifying the sources of funds
is called financial planning. Thus, financial planning strives to achieve the following twin
objectives:

1) To ensure availability of funds whenever these are required: This includes a proper
estimation of the funds required for different purposes. It also tries to specify possible sources
of these funds.
2) To see that the firm does not raise resources unnecessarily: Excess funding is almost as
bad as inadequate funding. Good financial planning would use excess funds to the best possible
use so that the financial resources are not left idle.

Note: It must be kept in mind that financial planning is not equivalent to or a substitute for
financial management. Financial management aims at choosing the best investment and
financing alternatives by focusing on their costs and benefits. Its objective is to increase the
shareholders wealth. Financial planning on the other hand aims at smooth operations by
focusing on fund requirements and their availability in the light of financial decisions.

Plans made for periods of one year or less are termed as budgets. Budgets are example of
financial planning

Importance of Financial Planning:

(i) It tries to forecast what may happen in future under different business situations. By doing
so, it helps the firms to face the eventual situation in a better way. In other words, it makes the
firm better prepared to face the future.
(ii) It helps in avoiding business shocks and surprises and helps the company in preparing for
the future.
(iii) If helps in co-ordinating various business functions e.g., sales and production functions, by
providing clear policies and procedures.
(iv) Detailed plans of action prepared under financial planning reduce waste, duplication of
efforts, and gaps in planning.
(v) It tries to link the present with the future.
(vi) It provides a link between investment and financing decisions on a continuous basis.
(vii) By spelling out detailed objectives for various business segments, it makes the evaluation
of actual performance easier.

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 Financial planning includes both short term as well as long-term planning. Long-term planning
relates to long term growth and investment. It focuses on capital expenditure programmes.
Short-term planning covers short-term financial plan called budget.

Financial planning usually begins with the preparation of a sales forecast.

On the basis of ownership, the sources of business finance can be broadly classified into two
categories viz., ‘owner’s funds’ and ‘borrowed funds’. Owner’s funds consist of equity share
capital, preference share capital and reserves and surpluses or retained earnings.
Borrowed funds can be in the form of loans, debentures, public deposits etc. These may be
borrowed from banks, other financial institutions, debenture holders and public.

Capital Structure: Capital structure refers to the mix between owners and borrowed funds. In
other words, it refers to the composition or make up of long term sources of funds such as
equity shares, preference shares, debentures and long term loans.

It can be calculated as:

Debt or Debt
Equity Debt+Equity

 Cost of debt is lower than cost of equity for a firm because lender’s risk is lower than equity
shareholder’s risk, since lenders earn on assured return and repayment of capital and, therefore,
they should require a lower rate of return.

 Debt is cheaper but is more risky for a business because payment of interest and the return of
principal is obligatory for the business.

 There is no such compulsion in case of equity, which is therefore, considered riskless for the
business.

 Higher use of debt increases the fixed financial charges of a business. As a result, increased use
of debt increases the financial risk of a business.

 The proportion of debt in the overall capital is also called financial leverage. Financial leverage is
computed as
D/E or D/D+ E when D is the Debt and E is the Equity.

 The impact of financial leverage on the profitability of a business can be seen through EBIT-
EPS (Earning before Interest and Taxes-Earning per Share)

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Factors affecting the choice of Capital Structure:

1) Cash flow position:

 Cash flow must not only cover fixed cash payment obligations but there must be sufficient
buffer also.
 Cash flows must not only cover fixed cash payment obligations but there must be sufficient
buffer also.

2) Interests Coverage Ratio:

 The ICR refers to the no. of times earnings before interests and taxes covers the interest’s
obligation. This may be calculated as follows:
ICR= EBIT
Interests
 The higher the ratio, lower is the risk for the company failing to meet its interests
obligations.

3) Debt Service Coverage Ratio:

 DSCR takes care of the deficiencies in the ICR.
 Profit after tax + Depreciation + Interest + Non Cash exp.
Pref. Div + Interest +Repayment obligation
 A higher DSCR indicates better ability to meet cash commitments and consequently the
company’s potential to increase debt component in its capital structure.

4) Return on Investment (RoI):

 If the RoI of the company is higher, it can choose to use trading on equity to increase its
EPS, i.e., its ability to use debt is greater.
 It shows that, RoI is an important determinant of the company’s ability to use Trading on
equity and thus the capital structure.

5) Cost of Debt:
 A firm’s ability to borrow at a lower rate increases its capacity to employ higher debt.
 Thus, more debt can be employed if debt can be raised at a lower cost.

6) Floatation Costs:
 Process of raising resources also involves some costs.
 Public issue of shares and debentures requires considerable expenditure.
 Getting a loan from a financial institution may not cost so much.

7) Flexibility:
 If a firm uses its debt potential to the full, it loses flexibility to issue further debt.
 To maintain flexibility, it must maintain some borrowing power to take care of
circumstances.
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8) Control:
 Debt normally does not cause a dilution of control. A public issue of equity may reduce the
managements’ holding in the company and make it vulnerable to takeover.
 This factor also influences the choice between debt and equity

9) Stock Market Conditions:

 If the stock markets are bullish, equity shares are more easily sold even at a higher price.
 Use of equity is often preferred by companies in such a situation.
 However, during a bearish phase, a company may find raising of equity capital more
difficult and it may opt for debt.

10) Tax Rate:

 Since interest is a deductible expense, cost of debt is affected by the tax rate.
 A higher tax rate, thus, makes debt relatively cheaper and increases its attraction vis-à-vis
equity.

11) Cost of Equity:

 When a company increases debt, the financial risk faced by the equity holders, increases.
Consequently, their desired rate of return may increase.
 It is for this reason that a company cannot use debt beyond a point.
 If debt is used beyond that point, cost of equity may go up sharply and share price may rise
in spite of increased EPS.

12) Regulatory Framework:

 Every company operates within a regulatory framework provided by the law e.g.
 Public issue of shares and debentures has to be made under SEBI guidelines.
 Raising funds from banks and other financial institutions require fulfillment of other norms.

13)Capital Structure of other Companies:

 A useful guideline in the capital structure planning is the debt equity ratios of other
companies in the same industry. There are usually some industry norms which may help.
 Care however must be taken that the company does not follow the industry norms blindly.

Fixed Capital:
 Every business needs funds to finance its fixed assets.
 Fixed capital refers to investment in long-term assets.
 These decisions are called investment decisions or capital budgeting decisions and affect
the growth, profitability and risk of the business in the long run.

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  It must be financed through long-term sources of capital such as equity or preference
shares, debentures, long-term loans and retained earnings of the business. Fixed Assets
should never be financed through short-term sources.

Importance:

1) Long-term growth & effects:

 These decisions have bearing on the long term growth. The funds invested in long term
assets are likely to yield returns in the future.
 These affect future possibilities and prospectus of the business.

2) Large amount of funds involved:

 These decisions result in a substantial portion of capital funds being locked in the long
term projects.
 Therefore, these investment programmed are planned after a detailed analysis is
undertaken.

3) Risks Involved:
 Fixed capital involves investment of huge amounts.
 Therefore, the investment decisions involving fixed capital influence the overall business
risk complexion of the firm.

4) Irreversible Decisions:
 These decisions once taken are not reversible without incurring heavy losses.
 Abandoning a project after heavy investment is made is quite costly in terms of waste of
funds.

Factors affecting Fixed capital:

1) Nature of Business:
 The type of business has a bearing upon the fixed capital requirements.
 A trading concern needs lower investment in fixed assets compared with a manufacturing
organisation.

2) Scale of Operation:
 A larger organisation operating at a higher scale needs bigger plant, more space etc.
 Therefore, requires higher investment in fixed assets when compared with small
organisation.

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3) Choice of Technique:
 Some organizations are capital intensive whereas other is labour intensive.
 A capital-intensive organisation requires higher investment in plant and machinery as it
relies less on manual labour. The requirement of fixed capital is higher for such
organizations.
 Labour intensive organizations on the other hand require less investment in fixed assets.
Hence, their fixed capital requirement is lower.

4) Technology Up gradation:
 In certain industries .assets becomes obsolete sooner. Consequently, their replacements
become due faster.
 Higher investment in fixed assets may, therefore, be required in such cases.
 Thus, such organizations which use assets which are prone to obsolescence require higher
fixed capital to purchase such assets.

5) Growth Prospectus:
 Higher growth of an organisation requires higher investment in fixed assets.
 Even when such growth is expected, a business may choose to create higher capacity to
meet anticipated higher demand quicker.
 This entails larger investment in fixed assets and consequently larger fixed capital.

6) Diversification:
 A firm may choose to diversify its operations for various reasons. With diversification
fixed capital requirements increases.
 A textile company is diversifying and starting a cement manufacturing plant.
 Its investment in fixed capital will increase.

7) Financing Alternatives:
 A developed financial market may provide leasing facilities as an alternative to outright
purchase.
 Availability of leasing facilities thus may reduce the funds required to finance fixed
assets, thereby reducing the fixed capital requirements.

8) Level of Collaboration:
 At times, certain business organizations share each other’s facilities.
 For ex—a bank may use another’s ATM or some of them may jointly establish a
particular facility.
 Such collaboration reduces the level of investment in fixed assets.

Working Capital:

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  Working capital may be defined as the amount required to run day-to-day busies
activities. It is required to purchase current assets.
 Net working capital is the difference between current assets and current liabilities.

Examples of current assets, in order of their liquidity, are as under.

1. Cash in hand/Cash at Bank 2. Marketable securities 3. Bills receivable

4. Debtors 5. Finished goods inventory 6. Work in progress 7.
Raw materials 8. Prepaid expenses

Factors affecting Working capital:

1) Nature of Business:
 The basic nature of the business influences the amount of working capital needed.
 Certain products to be manufactured require heavy capital investment in plant &
machinery. They may not require much working capital.
 Similarly, service industries which usually do not have to maintain inventory require less
working capital.

2) Scale of operations:
 For organizations which operate on a high scale of operation, the quantum of inventory,
debtors required is generally high.
 Such organizations therefore require large working capital as compared to the
organizations which operate on a lower scale.

3) Business cycle:
 Different phases of business cycle affect requirement of working capital by a firm.
 In case of boom, the sales as well as production are likely to be higher and therefore,
higher amount of working capital is required.
 As against this the requirement for working capital will be lower during period of
depression as the sales as well as production will be low.

4) Production Cycle:
 Operating cycle or Production cycle is the time required to convert raw materials into
finished goods. If this period is longer, it would need more working capital and vice-
versa.
 Duration and the length of production cycle, affects the amount of funds required for raw
materials and expenses.
 Consequently, working capital requirement is higher in firms with longer processing
cycle and lower in firms with shorter processing cycle.

5) Credit Allowed:
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  Good are usually sold on credit. These depend upon the level of competition that a firm
faces as well as the credit worthiness of their clientele.
 A liberal credit policy results in higher amount of debtors, increasing the amount of working
capital.

6) Growth prospects:
 If the growth potential of the concern is perceived to be higher, than it will require higher
amount of working capital.
 So that it is able to meet higher production and sales target.

7) Seasonal factors:
 Most business has some seasonality in their operations.
 In peak season, because of higher level of productivity, higher amount of working capital
is required.
 As against this, the level of activity as well as the requirement for working capital will be
lower during the lean season.

8) Level of competition:
 Higher level of competition may necessitate higher stocks of finished goods to met urgent
orders from customers. This increases the working capital requirements.
 Competition may also force the firm to extend liberal credit terms.

9) Inflation:
 With rising prices, higher amounts are required even to maintain a constant volume of
production and sales.
 The working capital requirement of a business thus, becomes higher with higher rate of
inflation.

10) Availability of Raw Material:

 If the raw materials and other required materials are available freely and continuously,
lower stock levels may suffice.
 If, however, raw materials do not have a record of un-interrupted availability, higher
stock levels may be required.
 In addition, the time lag between the placement of order and actual receipt of the materials
(also called lead time) is also relevant. Higher the lead time, higher the quantity of material
to be stored and higher is the amount of working capital requirement.

11) Operating Efficiencies:

 Firms manage their operations with varied degrees of efficiency.
 Such efficiencies may reduce the level of raw materials, finished goods and debtors
resulting in lower requirement of working capital.
12) Credit Availed:
 Just as a firm allows credit to its customers it also may get credit from its suppliers.
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  To the extent, it avails the credit on its purchases; the working capital requirement is
reduced.

Note: The time lag between the placement of order and actual receipt of the materials is called
lead time

Trading on Equity:
It refers to the use of fixed sources of finance such as debentures and preference capital in the
capital structure as to increase the return on equity shares. This is also known as leverage effect

The proportion of debt in the overall capital is also called financial leverage. Financial leverage is
computed as:

D/E or D/D+E

When D is the Debt and E is the Equity.

Also refer book

Q1: What is crucial for the survival and growth of the business?
Ans: Adequate Finance.
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Q2: What should be done for optimal Procurement?
Ans: different available sources of finance are identified and compared in terms of their costs and associated risks.

Q3: What is the aim of financial management?

Ans: Financial Management aims at reducing the cost of funds procured, keeping the risk under control and
achieving effective deployment of such funds.

Q4: How the overall financial health of a company is determined?

Ans: By the quality of its financial management.

Q5: What is the primary aim of financial management or what is wealth maximization concept?
Ans: To maximize shareholder’s wealth, also known as wealth maximization concept.

Q6: Define wealth maximization concept.

Ans: It means maximization of the market price of the equity shares.
Q7: What is the aim of all financial decisions?
Ans7: All financial decisions aim at ensuring that each decision is efficient and add some value.
Q8: Define financial decisions.
Ans8: In a financial context, it means the selection of best financing alternative or best investment alternative.
Q9:Why capital budgeting decisions are crucial for any business?
Ans9: Because they affect its earning capacity in the long run.
Q10: What is the other name for short term investment decisions?
Ans10: Working capital decisions.
Q11: Which decision affects the liquidity and profitability of a business?
Ans11: Working Capital decisions.
Q12: What are the essential ingredients of a sound working capital?
Ans12: Efficient cash management, inventory management and receivables management.
Q13: Define capital budgeting techniques.
Ans13: there are different techniques to evaluate investment proposals which are known as capital budgeting
techniques e.g. cash flow of the project, rate of return.
Q14: What is financial risk?
Ans14: The risk of default of payment
Q15: Which is the cheapest source of finance?
Ans15: Debt, because tax deductibility of interests makes it cheaper.
Q16: On what overall financial risk depends?
Ans16: proportion of debt in the total capital.
Q17: What is floatation costs?
Ans17: The fund raising exercise also costs something. This is called floatation costs.
Q18: What is the difference between financial planning and financial management?
Ans18: Financial management aims at choosing the best investment and financing alternatives by focusing on
their cost and objective.
Financial planning aims at smooth operations by focusing on fund requirements and their availability in the light
of financial decisions.
Q19: What is the time period of financial planning?
Ans19: 3 to 5 years.
Q20: Define budget.
Ans20: Plans made for one year or less. Budgets are example of financial planning.
Q21: What is prepared to start financial planning?
Ans21: sales forecast.

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 Q22: Classify the sources of finance on the basis of ownership.
Ans22: Owner’s fund and borrowed fund.
Q23: Why the cost is debt is lower than the cost of equity?
Ans23: Because the lender’s risk is lower than the equity shareholder’s risk. Since the lender earns an assured
return and repayment of capital.
Q24: Debt is cheaper, but more risky. Why?
Ans24: Because payment of interests and the return of principal is obligatory for the business.
Q25: Which source of riskless for the business?
Ans25: Equity.
Q26: What is affected by capital structure?
Ans26: profitability and financial risk
Q27: What is financial leverage?
Ans27: The proportion of debt in the overall capital is also called financial leverage.
Q28: As the financial leverage increases, the cost of fund declines. Why
Ans28: because of increased use of cheaper debt.
Q29: Define trading on equity?
Ans29: It refers to the increase in profit earned by the equity shareholders due to presence of fixed financial charges
like interests.
Q30: Define optimum capital structure.
Ans30: a company must choose that risk-return combination which maximizes shareholders wealth. The debt-
equity mix which achieves it, is the optimum capital structure

2007
Q1: Explain the term ‘Financial management’. Briefly explain any three of its objectives.
Q2: what is meant by the term ‘Capital structure’? Breifly explain any three factors that affect the capital structure
of a company.
5

2008
Q1: a company wants to establish a new unit in which machinery worth Rs. 10 lakhs is involved. Identify the type
of decision involved in financial management. 1
Q2: name the concept which increases the return on equity shares with a change in the capital structure of a
company. 1
Q3: What is required to tackle uncertainty in respect of availability and timings of funds? Name the concept
involves and explain any three points of its importance. 4
Q4: Name the process which helps in determining the objectives, policies, procedures, programmes and budgets to
deal with the financial activities of an enterprise. Explain its three points of importance. 4
Q5: Explain any four factors affecting working capital requirements of a business. 6
Q5: Explain any four factors affecting capital structure of a company. 6

2009
Q1: Explain the objectives of financial management. 3
Q2: What is meant by financial management? State any two financial decisions taken by a financial manager. 3
Q3: State the objective of financial management. 3
Q4: Explain any four factors affecting working capital requirements of a business. 6
Q4: “Determination of capital structure of a company is influenced by a number of factors.” Explain any four such
factors .6
2010
Q1: Name the financial decision which will help a business man in opening a new branch of business. 1

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Q2: ‘Cost of debt’ is lower than ‘Cost of Equity’. Give reason why even than a company cannot work only with the
debt. 1
Q3: Explain the meaning and objectives of financial management. 4
Q4: What is meant by Dividend decision? State any four factors affecting dividend decision. 6
Q4: What is meant by financing decision? State any four factors affecting the financing decision. 6
2011
Q1: Define financial management. 1
Q2: “Determining the relative proportion of various types of funds depends upon various factors.” Explain any five
such factors. 5
Q3: “Sound financial planning is essential for the success of any business enterprise.” Explain this statement by
giving any six reasons. 6
Q4: You are the financial manager of a newly established company. The Directors have asked you to determine the
amount of working capital requirement for the company. Explain any four factors that you will consider while
determining the working capital requirements for the company. 6
2012
Q1: What is meant by financial planning? State any two points of importance of financial planning. 3
Q2: What is meant by financial management? State the primary objective of financial management. 3
Q3: What is meant by capital structure? State any two factors which affect the capital structure of a company. 3
Q4: Explain the following factors affecting financing decision:
a) Cost b) Cash flow position c) Level of fixed operating cost d) Control considerations. 4
Q5: Neelabh is engaged in ‘Transport business’ and transports fruits and vegetables to different states. Stating the
reason in support of your answer,
a) Identify the working capital requirements of Neelabh.
b) Neelabh also wants to expand and diversify his business. Explain any two factors that will affect his fixed
capital requirements. 5
2013
Q1: Explain the concept and objective of financial management. 4
Q2: Explain any four factors which affect the fixed capital requirements of a company. 4
Q3: What is meant by investment decision? State any three factors which affect the investment decision. 4
Q4: Describe any four factors which affect the Dividend decision of a company. 4
Q5: What is meant by financial planning? State any three points of its importance. 4
Q6: Explain any four factors which affect the working capital requirements of a company. 4
2014
Q1: What is meant by financial risk? 1
Q2: State the objective of Financial management. 1
Q3: Give the meaning of investment and financing decision of financial management. 4
Q4: Explain the following factors affecting the requirements of working capital:
a) Nature of business b) Scale of operations c) Seasonal factors d) Production Cycle. 6
Q5: Explain the following factors affecting the choice of capital structure:
a) Cash flow position b) Cost of equity c) Floatation Cost d) Stock market conditions. 6

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