Question

class 12th chapter financial management notes. business studies.

Answer 1

1) Business Finance :- Money required for carrying out business activities is called Business Finance.

2) Financial Management :- It refers to efficient acquisition of finance, efficient utilisation of finance and efficient distributing and disposal of surplus for smooth working of company.

According to Howard and Upton, “Financial management involves the application of general management principles to a particular financial operation.

3) Role of Financial Management:-

Size and composition of fixed assets

Amount and composition of current assets

The amount of long term and short financing

Fixing debt equity ratio in capital

All items in Profit and Loss account

5)Objectives of Financial Management

6) Financial Decisions

The financial functions relate to three major decisions which very finance manager has to take

Investment decision

Financing decision

Dividend decision

7)Investment Decision (Capital Budgeting Decision)

This decision relates to careful selection of assets in which funds will be invested by the firms.

Factors affecting investment/capital budgeting decisions are

Cash flow of the project

Return on investment

Risk involved

Investment criteria

8) Financing Decision This relates to composition of various securities in the capital structure of the company. Mainly sources of finance can be divided into two categories

Owners fund

Borrowed fund

Factors affecting financing decisions are

Cost

Risk

Cash flow position

Control consideration

Floatation cost

Fixed operating cost

State of capital market

9)Dividend Decision This relates earned. The major alternatives are to distribution of to retain the earnings profit or to distribute to the shareholders.

Factors affecting dividend decisions are

Earning

Stability of earning

Cash flow position

Growth opportunities

Stability of dividend

Preference of shareholders

Taxation policy

Access to capital market consideration

Legal restrictions

Contractual constraints

Stock market reaction

10) Financial Planning It means deciding in advance how much to spend, on what to spend according to the funds at your disposal.

11) Objectives of Financial Planning

To ensure availability of funds whenever these are required.

To see that firm does not raise resources unnecessarily.

12) Importance of Financial Planning

It facilitates collection of optimum funds.

It helps in fixing the most appropriate capital structure.

13)Capital Structure Capital structure means the proportion of dept and equity used for financing the operations of business.

Capital Structure = (Debt/Equity)

14) Financial Leverage It refers to proportion of debt in the overall capital

Financial Leverage = (D/E)

Where, D = Debt, E = Equity

15) Factors Determining the Capital Structure

Cash flow position

Interest Coverage Ratio (lCR) = (EBIT/Interest)

Debt Service Coverage Ratio (DSCR)

Return on investment

Cost of debt

Tax rate

Cost of equity

Floatation cost

Risk consideration

Flexibility

Control

Regulatory framework

Stock market condition

Capital structure of other companies

16)Fixed Capital Fixed Capital involves allocation of firm’s capital to long term assets or projects.

17)Importance or Scope of Capital Budgeting Decision

Long term growth

Large amount of funds involved

Risk involved

Irreversible decision

18) Factors Affecting Requirement of Fixed Capital

Nature of business

Scale of operation

Technique of production

Technology upgradation

Growth prospects

Diversification

Availability of finance and leasing facility

Level of collaboration/joint ventures

19)Working Capital Working Capital refers to excess of Current assets over Current liabilities.

There are two types of working capital

Gross working capital

Net working capital.