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Q1.Define Financial management.

Ans: Corporation finance or broadly speaking business finance or F.M. can be defined as
the process of rising, providing and administrating of all money, fund to be used in a
corporate (Business) enterprise. / According to Wheeler F.M = “that business activity
which is concerned with the acquisition and conservation of capital funds in meeting
the financial needs and overall objectives of business enterprise.”

Q2. Importance / Role of F.M.

Ans: Finance is the life blood and nerve center of a business, just as circulation blood is
essential in the human body for maintaining life, finance is a very essential to smooth
running of the business. It is been rightly termed as universal lubricant which keeps the
enterprise dynamic. No business, whether big or small can be started without an
adequate amount of finance. The importance of F.M. has arisen because of the fact that
the present day of business activates are predominately carried on company or
corporate form of organisation. The advent of corporate enterprise has resulted into. 1.
The increase in size and influence of the business enterprises. 2. Wide distribution of
corporate ownership. 3. Separation of ownership and management.

Q 3. Aims of F.M.
Ans: The primary aim of finance function is o arrange as much funds for the business as
are required from time to time. This function has the following aims: / 1. Acquiring
sufficient funds: The main aim of finance function is to assess the financial needs of an
enterprise and then finding out suitable coerces for raising them. The sources should
be commensurate with the needs of the business. /2. Proper utilization of funds: The
raising of funds is important but their effective utilisation is more important. The funds
should be used in such as way that maximise benefit is derived from them. / 3.
Increasing profitability: The planning and control of finance function aims at increasing
profitability of the concern. It is true that money generates money. To increase
profitability sufficient funds will have to invest. Finance function should be so planed
that the concern neither suffer from inadequacy of funds nor wastage more funds that

Q. 4. Define Finance function? Scope or contents of finance function.

Ans: Finance function is the most important of all business functions. I remain a focus
of all activities. It is not possible to substitute or eliminate this function. Because the
business will close down in absence of finance. The need for money is continuous. It
starts with the setting up of an enterprise and remains at all time. The development
and expansion of business rather need more commitment of funds. The funds will have
to collect from various sources. The money once received should repay. So the funds
should be used in such so that the repay will be easy otherwise it will create difficulty
for the business. That management should have the idea of using the funds in a proper

Nature of F.M.
Corporation finance or broadly speaking business finance or F.M. can be defined as the
process of rising, providing and administrating of all money, fund to be used in a
corporate (Business) enterprise. / The term nature applied in F.M. refers to its
relationship with the closely related field of economic and accounting i.e. its function,
scope & objectives: - / Functions: - F.M. help in financial planning and successful
promotion of an enterprise b) Acquisition of fund as and when required at minimum
possible cost. C) Proper use and allocation of funds Is another objective of F.M. d) F.M.
takes sound financial decisions e) Improving the profitability through financial control.
F) It Increase the wealth of investor and nation. / Scope: - a) Estimating financial
requirement: - The first task of F. manager is to estimate short term & long term
requirement of its business. For this propose he will prepare a F. plan for present as
well as for future. B) Deciding capital structure: - The C.S. refers to the kind and
proportion of different securities for raising funds. C) Selecting a source of Finance: -
After preparing a C.S. an appropriate S.O.F. is selected various sources from which
finance may be raise include were such as share capital, debenture, F. institutions,
commercial banks, and public debts. Etc. d) Selecting a pattern of investor: - When
funds have been produced then a decision about investment pattern is to be taken. E)
Proper cash management: - C.M. is also an imp. Task of F. Manager. He has to asses
various cash need at different time and then make arrangement for arranging cash. F)
Proper use of surplus: - The utilization of profit and surplus is an imp. Factor in F.M. /
Objectives: - The objective of F.M. is classified under 2 heads Profit maximization and
wealth maximization. P.M.: - P.M. evaluates how are used and procured. In cases it
involves a sound judgment, combined with a logical approach to decision making. The
core of financial policy is to maximize earning in the long run and optimize in the short
term. This call for an evolution of condition alternative use of funds and allocation of
resources with consideration of production and marketing interrelationship. Profit is a
barometer through which the performance of a business unit can be measured. / W.M.:
- The goal of F.M. may be such that they should be beneficial to the owner,
management, employ and customer. This goal may be achieved only by maximize the
value of the firm. W.M. is a clear term. Here the present values of the cash flow are
taken into consideration it also consider the concept of time value money and It take
care of interest of institutions, owner, employee and society at large.

Approaches to F.M
1) Traditional Approach: - the T.A. to the Financial function relates to the initial
stages of its evolution during 1920s and 1930s when the term corporate finance was
used to describe what is known in the academic world today as the F.M. According to
this approach the scope of finance function confined to only procurement of funds
needed by a business on most suitable term. / The T.A. to the scope & function has now
been from much serious limitation / 1) it is out side looking in approach that completely
ignores internal decision making as to proper utilization of funds. 2. The focus of T.A.
was on procurement of long term fund. Thus it ignores the important issue o working
capital finance & management. 3. The issue of allocation of funds, which is so
important today, is completely ignored. 4. it does not lay focus on day to day financial
problems of an organization. / Modern Approach: - The M.A. views, finance function in
brooder scene. It includes both rising of funds as well as their effective utilization under
the preview of finance. The F.F. does not stop only by finding out sources of raising
enough fund, their proper utilization is also to be considered. The cost of raising funds&
the return from their use should raised should be able to give more return than the cost
included in procuring them. The utilization of funds required decision making. Finance
has to be considered as an integral part of overall management.

Aims of Finance Function

1. Acquiring sufficient funds; - The main aims of F.F. is to assess the financial need
to an enterprise and then finding out suitable sources for raising them. The sources
should be commensurate with the needs of the business. 2. Proper utilization of
funds: - though raising of funds is imp. Both their effective utilization is more imp. The
fund should be used in such a way that maximizing benefit is derived from then. 3.
Increasing profitability: - The planning & control of F.F. aims at increasing
profitability of the concern. It is true that money generates money. To increase
profitability sufficient fund will have to be invested. 4. Maximising Firm Value; -
Finance function also aims at maximising the value of the firm. It is generally said that
a concern value is linked with its profitability.

Define Cost of capital

The COC of a firm is the minimum rate of return, expected by its investors. It is the
weighted average cost of various sources of finance used by a firm. The capital used by
a firm may be in the form of debt, preference capital, retained earning and share
capital. COC may be defined of the cost of obtaining funds, i.e. the avg. rate of return
that th investor in a firm would expect for supplying funds to the firm. According to
Solomon Ezra” the COC is the minimum required rate of earning or the cut off rate of
capital exp.

Significant of COC
COC is an: 1) Acceptance criterion in capital budgeting. 2) Determining of capital fund
in capital structure decision. 3) Basis for evaluating the financial performance. 4) Basis
for taking other financial decision.
Problem in determining the COC
Conceptual Controversies regarding the relationship between the COC and
the capital structure: - Difference author has propounded different theories
regarding this topic. According to the net income approach and the traditional
approach both the COC as well the values of the firm have a direct relationship with the
method & level of financing. 2) Historical Cost & Future Cost: - Another problem in
determining the COC arises on a/c of the difference of opinion as regard the concept of
cost. Itself it is argued that historic cost are book costs which are related to the past
and are irrelevant in the decision making. 3) Problem in computing cost of Equity:
- The COCOE capital depends upon the expected rate of return by its investor. But the
qualification of the expectation of equity shares holders is a very difficult task because
these are many factors which influenced their value about firm. 4) Problem in
computation of Cost of retained Earning: - it is sometime agreed that RE do not
involved any cost. But in reality, it is the opportunity cost of dividend foregone by its
shareholders. For this reason it becomes very difficult to compute CORE. 5) Problem
In assigning weighted: - For determining the weighted average cost of capital,
weighted have to be assigned to the specific cost of individual source of finance. The
choice of using the book value of the source or the market value of the sources posses
another problem in the determination of COC.

WC refers to that part of a firm’s capital which is required for financing short term or
current attest such as cash, Marketable securities, Debentures & investors. According
to Shobin “WC is the amt. o fund necessary to cover the cost of operating the
Factor determining the requirement of Working capital
1) The WCR of a firm basically depends upon the nature of its business. Public utility
undertaking like electricity, water supply, and railway needs very limited WC because
they offer cash sale only and supply services not product. On the other hand trading
and financial firm required larger amount of cash assts, which require large amt. of
WC / Size of business or scale of operation: -the WCR of a concern are directly
influenced by the size of its business which may be measured in terms of scale of
operation. Greater the size o business unit required greater amount of WC. / 3)
Production Policy: - In certain industries the demand & subject to wide fluctuation
due to reasonable variation. The requirement of WC depends upon the production
policy. The production could be kept either instead by accumulating inventories during
slack period with a view to meet the demand during the peak period seasons or the
production could be curtailed during the slack seasons & increases during the peak
period. 4) Manufacturing process; - In manufacturing business the requirement of
EC increases indirect proportion to length of MP longer the production period of
manufacturing larger is the amt. of WC required. 5) Seasonal variation: - In certain
industries raw material is not available through out the yr. They have to buy raw
material in bulk during the season to ensure an uninterested flow & process them
during entire yr. which required WC 6) WC Cycle: - in a manufacturing concern WC
starts with the purchasing raw material and end with the realization of cash from the
sale of finished product. This cycle involves purchasing of raw material & stores its
conversion into stock of finished product through work in progress incremental of
labour and services cost, conversion of finished stock into sales, debtor, reliable and
realization of cash. This cycle continuous again from cash to purchase of RM. All this
required large amount of WC.
7) Rate of stock turnover. 8) Credit policy 9) Business cycle 10) rate of growth
of business 11) Earning capacity & dividend policy 12) price level changes 13)
other factors.

Q: Factor required to consider while estimating the working capital:

1) total cost incurred or material, wages and overheads. 2) The length of time for which
raw material are remain in store before they are issued for production. 3) The length of
the production cycle or working in progress i.e. the time taken for conversion of raw
material into finished goods.4) the length of scale cycle during which finished product
are to be kept waiting 4 sale. 5) The avg. period of credit allow to customer .6) the
amount of cash regd. To pay day to day expenditure of the business. 7) The avg.
amount of cash regd. To make adv. Payment if any.8) the avg. credit period expected
to allowed by supplies. 9) Time log in payment of wages and other expenses.

Q: sources of working capital:

A) payment/fixed/long term working capital. B) temporary/variable/short term working
A) P.F.LT working capital: I) shares. II) Debenture. III) Public deposit. IV) Plaguing back
of period. V)loan from financial intuitions. B) T.V.ST working capital: I)commercial bank.
II)indigenous bank. III)trade creditors. IV) installments credit. V) advances. VI) account
receivable or factoring. VII) Accrued expenses. VIII) Commercial paper.

Trade credit refers to the credit extended by the suppliers of good in the normal course
of the business at present day commerce is build upon credit the trade credit .
Arrangement of a firm with its suppliers is the important source of short term finance.
The credit worth ness of a firm and the confidence of its suppliers are the main basis of
securing trade credit. It is mostly granted or an open account basis where by suppliers
sends good to the buyers 4 the payment to be receive in future as per terms of sale
invoice. It may also takes the form of bill payable where by the buyer sign a bill of
exchange payment on a specified future date.
ITS ADVANTAGE: it is an easy and convent method of finance. 2) It is flexible as the
credit increase with the growth of the firm. 3) It is informal and spontaneous source of

Q:MANAGEMENT OF CASH : cash is one of the current asset of a business it is

needed at all time to keep the business going. A business concern should always keep
sufficient cash for meeting its obligation any storage of cash will hamper the operation
of a concern and any excess of its will be unproductive. Cash is the most U/P of all the
asset. Cash in hand will not added any thing to the concern. C does not good or service.
It used as a medium to acquire other asset. A business has to keep required cash for
meeting various needs. The assets acquired by cash again help the business in
producing cash. MOC has assumed imp. because it is the most significant of all the
C/asset. It deals with 1) cash inflow & out flow. 2) CF within the firm 3) C balance held
by the firm at a point of time.


RM is the process of making decision relating to the investment in trade debtor we
have already stated that certain investment in R is necessary to increase the sales and
the profit of a firm. But at the same time investment in this asset involves cost
consideration also. Further, there is always a risk of debt too. Thus the objective of RM
is to take a sound decision. As regard investment in debtor. In the word of Bolton, S.E,
the objective of RM is “to promote sale and profit until that point is reach where the
return on inv in further finding of R is less than the cost of fund raised to finance the
additional credit”.
The investment in I is very high in most of the undertaking engaged in manufacturing,
wholesale and retail trade. The amount of inv as sometime more in I than in other
assets. About 90% of WC is invested in I. it is necessary for every management to give
proper attention to IM. A proper planning of purchasing, handling, storing and
accounting should form a part of IM. The purpose of IM is to keep the stock in such a
way that neither there is over stocking nor under stocking. The OS will mean a
reduction of liquidity and starving of other product, process. Under stocking on the
other hand result in stoppage of work.
1) to avoid both over stocking and under stocking of I. / 2) to maintain investment in
the inventories at the optimum level as required by the operational and sale activities.
3) To keep material cost under control so that they contribute in reducing cost of
production and total cost.
The term CM to the institutional arrangement for facilitating the borrowing and lending
of long term funds. CM can be easily understood as a M for capital and where capital
means share stock securities bonds and instruments. / Objective and importance of
CM: - The CM provides long term and medium loan 2) Ensure best possible co-
ordination and balance the flow of saving on the one hand & the flow of investment on
the leading to C. Information on the other. 3) Direct the flow of saving into most
profitable channels and their by ensure optimum utilization of financial resources. /
FUNCTION OF CM: - Mobilization of financial resource on a nation wide scale 2)
securing the foreign capital and know-how to fill up the deficit in the required resources
in economic growth at a faster rate. 3) Effective allocation of the marketed financial
resources by directing the same to project yielding highest yield or to the project
needed to promote balanced economic development.
Structure of Indian capital market: -
The CM in India may be classified in 2 categories organized and unorganized. The
structure of an CM is composed of the sources of demand for and supply of long term
capital in the organized sector of CM. Demand for long term capital comes from
corporate enterprise, public sector enterprise, govt. and semi govt. institutional
investors investment intermediaries financial institutions, commercial bank and govt.
While on the other hand the unorganized sector of CM consists of indigenous bankers
and private money lenders. The demand in the unorganized CM comes from the
agriculturist private individuals for consumption rather than production & even small
traders. The supply of money capital comes, usually from own resources of money
lenders and fall short of the required made on them.
Difference between CM and Money Market
CM: - 1) it provide finance / money capital for long term investment. 2) The finance
provided by the capital market may be used both for fixed and WC. 3) Mobilization of
resource and effective utilization of resources through lending are its main function. 4)
It acts a middle man between an investor and an entrepreneur. 5) Underwriting is one
of its primary activities. / MM: - 1) It provides finance / money for short term
investment. 2) The finance provided by MM is utilized usually for WC. 3) Lending and
borrowing are its principle functions it facilitates adjustment of liquidity position. 4) It
acts a link between the depositor and the borrower. 5) Underwriting is secondary
Difference between Leasing and Hire Purchase
Points of difference; - 1) Ownership, 2) tax deductibility, 3) depreciation and
other allowance 4) Salvage value
Leasing: - 1) Ownership is not transfer to the leases. 2) Entire lease rentals are tax
deductible expenses 3) can not be claim by lessee. 4) Lessee can not realize the
salvage value of the asset on the expiry of the lease of life of the asset. / HP: - 1)
Ownership is transferred to the hirer on payment of last installment. 2) Only the int.
Component and not the entire installment is deductible. 3) Can be claim by the hirer. 4)
Hirer can realize the salvage value of the asset after payment of last installment and
expiry of the life of the asset.
The STL are rising by a firm for meeting it’s for WC requirement. These are generally
for a short period not exceeding the counting period of one yr. the main sources of ST
are as follows: 1) Indigenous bankers:- Private money lenders and other country
bankers used to be the only sources of finance prior to the establishment of
commercial bank. They used to charge very high rate of int. and explode the customers
to the largest extent possible, now a day with the help of commercial bank they have
lost there monopoly. 2) Trader credit: - TC refers to the credit extended by the
supplier of goods in the normal source of business. As present day commerce is built
upon credit the TC agreement of a firm and the confidence of its suppliers is the main
basis of securing TC. The main advantage of TC is as follows: i) it is easy and
convenient methods of finance. ii) It is flexible as a credit increase with the growth of
firm. iii) It is informed and spontaneous sources of finance. 3) Installment credit: this
is another metod by which the assets are purchase and the possession of goods is
taken immediately but the payment is made in the installments over pre determined
period of time. The int. is charged on the unpaid price or it may be adjusted in the
price. But in any case it provides funds, is used as a SOWC. 4) Advances: -Some
business houses get A from their customers and agents against orders and this source
is a short term source of finance for them. It is a cheap source of finance and in order
to minimise their investment in WC, some funds having long production cycle, specially
the firm of manufacturing, industrial product production to take advances from their
customers. 5) Factor or Account Receivable: - Another method of raising short term
finance is through AR credit offer by commercial banks and factor. A C.B. may provide
finance by discounting the bill or invoice of its customers. Thus a firm gets immediately
payment for the sales made on credit. / Limitation of Factor or Account
Receivable: - 1) The high cost of factoring as compared to other sources of ST
financing. 2) The perception of financial weakness about the firm available factoring
services. 3) Adverse impact of tough stance taken by factor, agents a defaulting buyer
upon the borrower. / 6) Accrued Expenses; - AE are the E which have been incurred
but not yet due and hence not yet paid also. This simply represents a liability that a
firm has to pay for the services already received by it. The most imp. accrual are
wages, salaries, int, taxes. The amt. of accrual varies with the change in the level of
activity of a firm. When the activity level expands accrual also increases and hence
they provided a spontaneous source of finance which helps to meet the short term
requirement. 7) Differed income: -DI are I received in advance before supplying
goods or services. They represent funds received by a firm for which it has to supply
goods or services in future. These funds increase the liquidity of a firm and constitute
an important source of short term finance. 8) Commercial paper: - CP represents
unsecured promissory note issued by a firm to raise short term funds. The RBI had led
down a number o condition of determine eligibility of a Co. for the issue of CP. 9)
Commercial banks: - CB are the most imp. Sources of ST capital. The measure
portions of WC loan are provided by CB. 10) Public deposit: -accept of fixed deposit
from the public by all type of manufacture and non banking financial companies in the
private sector has been a unique feature of IFS.
In order to run and manage a co. funds are needed. Right from the promotional stage
up to end, finance plays an imp role in companies’ life. If fund are inadequate the
business suffer and if the funds are not properly managed, the entire org. suffer. It is
therefore necessary that correct estimate of the current and future needed capital be
made to have an optimum CS which shall help the org to run its work smoothly and
without stress. According Gerestendeg “CS of co. refers to the composition or make up
of its capitalization and it includes all long term capital resources. Viz., Loan, reserves,
shares & and bonds.
Financing the firm’s assets is very crucial problem in every business and a general role
there should be a proper mix of debt and equity capital in financing the firm’s assets.
The use of long term fixed int. bearing debt and preference share capital along with
equity shares capital called FL or TE.
The CS decision can influence the value of the firm through the cost of capital and
trading on equity or leverage. The OCS may be defined as “That CS or combination of
debt and equity debt leads to the maximum value of the firm” OCS “maximum the
value of the co. and hence, the wealth of its owner and minimizes the co. cost of

Q. What are he following consideration which should be kept in mind while

Maximising the value of the firm to achieve the goal of optimum capital
Ans: - 1) If the return on the investment is higher than the fixed cost of fund, the
company should prefer to raise funds having a fixed cost, such as debentures, loan and
pref. shares capital. 2) When debt is used a source of finance, the firm saves a
considerable amt. in payment of tax as int. is allow as a deductible expenses in
computation of tax. 3) The firm should avoid undue financial risk attached with the use
of increase debt financing. If the S holder prescribes high risk in using debt capital, it
will reduce the market of the share. 4) The CS should be flexible.

Capital Gearing: -
The term CG refrs to the relationship between equity capital and long term debt. CG
means the ratio between the various types of securities in the capital structure of a

Q. Significant of Financial Leverage

Ans; 1) Planning of capital Structure: -The CS is concerned with the raising of long
term funds, both from shareholders and long term creditor. The finance manager has to
decide a bout the ratio between fixed cost funds and eq. Share capital. 2) Profit
Planning: -The earning per share is by the degree of financial leverage. If the
profitability of the concern is increasing them fixed cost fund while help in increasing in
availability of profit for equity stock holder. Therefore FL is important for profit

Q. Limitation of financial leverage

Ans: 1) Double Edged Weapon: trading in equity is a DEW. It can be successful
employed to increase the earning of the shareholder only when the rate of earning of
the co. is more then the fixed rate of interest of dividend in debenture or preference
share. 2) Beneficial only to co. having stability of earning: trading on equity is beneficial
only to the co. having stable and regular earning. 3) Increases risk and rate of interest:
Trading on equity is an a/c of fact that every rupee of extra debts increases the risk and
hence the rate of interest on subsequently loan also goes on increasing. 4) Restriction
from financial institution: the FI also impose restriction on companies which report to
excessive trading on equity coz of risk factor & to maintain a balance in the capital
structure of the co.

Q. Operating Leverage
Ans: OL result from the presence of fixed cost that help in magnifying net-operating
income fluctuation flexing from small variation in revenue. The OL occur when a firm
has fixed cost which must be recovered irrespective of sales volume. The fixed cost
remain same, the % change in operating revenue will be more then the % change in
soled. The occurrence is known as OL. OL = Contribution (C) / Operating profit {C =
sales, OP = S-VC-FC, i.e. OP=C-FC}.

Q. Composite leverage
Ans: Both financial operating leverage magnify the revenue of the firm. Operating
leverage affect the income which is the result of production. On the other hand, the
financial leverage is the result of financial decision. The company leverage focuses
attention on the concern. The risk factor should be properly assumed by the
management before using CL.


WCL measure the sensitivity of return on investment of changes in the level of current
% of change in ROI
WCL = -----------------------------
Yr. of change in CA
Theories of capital structure
Ans: 1) Net income Approach: -According to this approach a firm can minimise the
weighted avg. cost of capital and increases the value of firm as well as market. Price of
eq. shares by using debt financing to the maximum possible extent. The theories
propounded that a co. can increase its value & reduce the overall cost of capital by
increasing the portion of debt in capital structure V = S+D, V = total market value o
the firm, S = M.V. of eq. shares, D = M.V. Debt 2) Net operating Income Approach: -
According to this approach changes in the capital structure of a co. does not effect the
market value of the firm and the overall cost of capital remains constant irrespective of
the method of financing. 3) The Traditional Approach; - the TA, also known as
Intermediate approach, is a compromise between the two extremes of net income
approach and the net operating income approach. According to this theory the value of
the firm can be increased initially or the cost of capital can be decreased by using more
debt as the debt is a cheaper course of fund than equity. 4) Modigliani & Miller
Approach: - M&M hypothesis is identical with the net operating income approach. If
taxes are ignored. However when corporate taxes are assumed to exist, their
hypothesis is similar to the net income approach.
Retained Earning or Plugging Back of Profit
The PBOP is a technique of financial management user which all profit of a company
are not distributed among the shareholders divided but a part of the profits is retained
or reinvested in the companies. This process of retained profits yr. after yr. and their
utilization in the business is also known as PBOP. / It is actually on economical step
which a co. takes in the sense that instead of distributing the entire earning by way of
dividend, it keeps certain % of it to be reintroduced in the business for its development.
Such a phenomenon is also known as self finances/ internal financing/ Inter financing.
1) Funds cannot invariably be used for productive purpose of retained earning is likely
to be diluted.
2) a company may not broader to develop retain with financial institution and thus
loose its image in the credit market
The Necessity of PBOP
1) For the replacement of the old assets which have become obsolete. 2) For the
expansion and growth of the business. 3) For contributing towards the fixed as well as
working capital needs of the co. 3) For contributing towards the fixed as well to the WC
of the company. 4) For improving the efficiency of the plant & Equipment.
Term Loan
In addition to the raising of funds by means of share capital, debentures, public
deposits and internal financing, firms may also raise term loans for meeting their
medium term and long term financial needs. Medium terms are for period ranging from
one to five yr. and long term loans are granted for a period of more than five yr. A term
loan is financed on the basis of a formal agreement between the borrowers and the
lending institutions.
Lease Financing: -
In addition to debt and equity financing, leasing has emerged as another important
source of intermediate and long term financing of corporate enterprise during the
recent few decades. In India, leasing is a recent development and equipment leasing
was introduces by first leasing company of India in 1973 only. Since then, a number of
medium to large scale company have entered the field of leasing. Leasing is an
arrangement that provide a firm with the use and control over assets without buying
and owing the same. It is a form of renting assets.
Bridge Finance: -
There is a usually a time gap between the date of sanction of a firm loan and its
disbursement by the financial institution to the concerned borrowings firm. The reason
for such delay includes procedure formalities for retaining of mortgage etc. the delay
may occur in case of public issue of shares with regard to receipt of public subscription.
Therefore, to avoid delay in implementation of the project, the firms approach
commercial banks for short term loans for the period for which delay may otherwise
occur. Such a loan is calling BF.
Term Financing by Commercial Banks: -
CB normally concentrated on providing short term financial assistance to industrial
sector. The WC needs of industrial enterprises were met. The industrial sector required
huge funds for long term financing. The CB came into the picture for filling the gap
between demand and supply of long term requirement. The refinance scheme of IDBI
encourage more term lending by CB. The bank managements now feel that they can
extend long term credit without distoring the principle of liquidity.


D may be regarded as the capital cost of assets allotted over the life of the asset. In
simple language, it means the gradual decreases in the value of an asset due to wear
and tear, use, and passage of time. In real sense D is simply a book entry having the
effect of reducing the book value of the asset and the profit of the current yr. for the
same amt. it does not affect current asset or the current liability and does not result in
the flow of funds. Although D is operating cost there is no actual outflow cash so the
amt. of D charge during the yr. is added to the profit while the fund for operations. But
it is difficult to say whether D is source of fun or not, but it can be said with certainty
that D, directly at least does not amt. to a SOF. However under certain circumstance D
helps a business concern to affect saying in payment of tax and dividend and amt. to
with holding a part of the fund generated through normal operation. To conclude it may
be said that to the extent D helps in effecting saving in the payment of tax and
dividend, it may be regarded as SOF.
L is an arrangement that provide a firm with use and control over assets without owing
the same. L is a contract between the owner of the assets and the user of the asset call
the lessee, were by the lesser gives the right to use the assets to the lessee over an
agreed period of time for a consideration call the lease rental. According to M.H. Miller
“leasing separates ownership and use as two economic activities, and facilitates assets
use without ownership”
Types of Leasing: 1) Operating or service lease 2) Financial lease: - A lease is
classified as financial lease if it ensures the lessor for amortization of the entire cost of
investment plus the expected return on capital outlay during the term of the lese. As
the source of the fund the financial lease is an alternative similar debt financing.
Listing of Securities
LOS means the permission to quote shares and debenture officially on the trading floor
of the Stock Exchange. Every securities issued by co. can not traded at SE. the SE fix
certain standards which the co. must fulfill before getting the securities listed.
Requirements for Listings: Memorandum and article of association b) History of the
company in Brief c) Agreement in managing director 4) details of issue of bonuses and
dividend declares. Objective if listing: a)to avoid consecration of economic power .B)
to ensure liquidity of securities C) to regulate dealing in securities D) to ensure
marketing facilities for the securities advantage of listing : 1) publicity of securities
2)protection of investors interest 3)ensures liquidity 4) better goodwill.


1) Financial position of the co. 2) demand and supply position 3) role of financial
institution 4) lending rates 5) trade cycle 6) speculation articles 7) govt. control.
Importance One of the most imp. factor which determine the dividend policy is
determine pay out ratio. It may be defined as the % share of net earning distribute to
the shareholder dividend. Dividend policy involves the decision to pay out earning or to
retain therefore investment in the firm the retained earning constitute of financing. the
DP of the firm effect both the share holders wealth and long term growth of firm./
generally the co. adopt the policy of a target dividend PO ratio over the long run./
according to lintner ,dividend share adjusted to changes in earning with a leg in
modern times the authority establish relation between cash flow and dividend pay out.
Cash flow are earning + deprecation and dividend are relate to cash flow rather then to
earning PO pattern show the following two charges .1)the P/Y % drop to larger label 2)
it appeared to be more stable when dividend are related to cash for rather then to
Dividend policy: according to Weston and brighom “D.P determine the division of
earnings between payments to share holder and retained earning”. According to
gitman “the firm dividend presents a plan of actions to be fallowed when ever the
dividend decision must be made.”
Nature of dividend policy: tied up with retained earnings: a retained earnings policy.
it has the effect of dividing not earning into two parts, retained earning and dividend.2)
impact on shares: DP of the firm has for reaching consequences on the share price,
financing decision, growth of business and the wealth of the share holders due to the
market imperfections and uncertainties, share holder give a higher weight age to the
current dividend rather then future dividend. Thus, payment of dividend influence the
market price of share hire the rate of dividend greater the price of share.3) optimal
dividend policy: hence dividend is an active variable. it has it has to be intelligent
manage by the financial manager who should try to formulate an optimal DP i.e. a
policy marked with few or no dividend payments fluctuation over a long period of time,
having a favorable impaction the wealth of share holder.
Objective of dividend: 1) wealth maximization the dividend a firm aims at the
Maximising of the owner’s wealth. It is formulated not only to increase the share prices
in the short run but also maximize the owner wealth in the long run. The share holder
may not only appreciate such a dividend policy and may prefer immediate dividend to
future dividend and capital gain and the share policy may drop in market. 2) providing
sufficient financing : one of the important source of ling run finance in retained the
management has to decide what shall be the proper ratio between retained earning so
that the object of short term interest of share holder and ling term go in of expansion
are realized.
Factor influencing the Dividend policy of a firm: 1) Legal restriction: provide a
frame work where the dividend policy is formulated. / LR co. Act 1956, income sec.93
and 205 to 207 of the companies Act follg provision regarding dividend: a) dividend can
be paid only out of the profit & not out of the capital. B) Profit must be retained to the
current year. C) The co. amendment Act, 1974 stop the declaration dividend unless a %
of profit not exceeding 10% is transferred to the reserve of the co. D) the dividend is
only payable in cash. / LR in Income Tax Act sec 104 -109 of the I. tax act, imposes
certain restriction on payment of dividend. 2) Liquidity position: coz the payment of
dividend in out flow of cash from the business, the dividend policy must taken into LP of
the firm. 3) Magnitude & trend of earning: the amount & trade of earning is an
important aspect of dividend policy. It is the starting point of dividend policy. As
dividend can be paid only out of present or past years profit earning of the co. fix the
upper limit on dividend. 4) Govt. economic policy: the dividend policy(DP) of a firm
has also to be adjusted to the economic policy of the govt. as was the cash when the
temporary restriction on payment of dividend ordinance was in forced. 5) Taxation
policy: TP of the govt. also effect to the DP of the firm a high or low rate of business
taxation effect the net earning & DP of the co. 6) Age of the company: the AOTC also
influence the dividend decision of a co. A newly established co. has to limit payment of
dividend & other part of earning for financing is future growth & development. / to
conclude every firm should established a general policy about the payment of dividend.
The financial manager should bring about a balance among various factors.
Management of earning: the term MOE means how the earning of a firm are utilized,
i.e. how much is paid to the shareholders in the firm of dividend and now much is
retained ploughed back in the business. / Acc to GERMTENBERG “Management of
income in its broads senses include the management each faced the co. business coz,
the minutest activity of the business usually involves income or expenditure.
Scope: 1) determination of profit, 2) determination of surplus, 3) creation of reserve, 4)
provision of depn & dep policy 5) declaration of dividend & DP, 6) retained earning or
PBOP (self financing).

Q. Factore determining the capital structure.

Ans: It is not possible to rank them coz all factor are of different importance, the factors
influencing the capital structure discussed as follows: 1) Financial leverage or trading
on equity: the use of long-term fixed interest bearing debt & preference share capital
along with equity share capital is called financial leverage or trading on equity. 2) The
Growth & stability of sales: The CS of a firm is highly influenced by the growth and
stability of its sales. If the sales of a firm are expected to remain fairly stable, it can
raise a higher level of debt.3) cost of capital: every rupee invests in a firm has a cost.
COC refers to the minimum return expected by its suppliers. The capital should provide
4 the minimum COC. 4) cash flow ability to service that a firm which shall be able to
generate larger and stable cash inflow can employ more debt in its capital structure as
compared to the one which has unstable and lesser ability to generate cash inflow 5)
nature and size of a firm: N and S of a firm also influence its capital structure. a public
utility concern has different capital structure as compare to manufacturing concern.
Public utility concern may employee more of debt coz of stability and regularity of there
earning 6) control whenever additional funds are required by a firm, the management
of the firm once to raise the fund without any loss of control over the firm. 7) flexibility :
CS of a firm should be flexible should be such as to be capable of being adjusted
according to the needs of the changing condition. 8) requirement of investor 9) capital
market condition 10) asset structure 11) purpose of financing 12) period of finance 13)
cost of floatation 14)personal consideration 15) corporate tax rate 16)legal