Ch-9(Financial Management)

Ch-9 Financial management

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Direct Questions

1.            Meaning of Business Finance

2.            Meaning of Financial Management

3.           Explain the role of financial management in an organization 
4. (a)  What is the main objective of financial management? Briefly explain.

    (b)   What are the objectives of Financial Management?

5.            Type of Financial Decisions or Financial Management decisions

6.            Define Investment decisions and give an example

7.            Types of Investment decisions

8.            Why are Long term Investment decisions /Capital budgeting decisions important for business?

9.            Factors affecting Long term Investment decisions /Capital budgeting decisions

10.          What do you mean by Fixed Capital?

11.          Discuss Factors affecting Fixed Capital requirements in business.

12.          What do you mean by Working Capital?

13.          What do you mean by Net Working Capital?

14.          What are Current Assets?

15.          What are Current Liabilities?

16.          Discuss Factors affecting Working Capital requirements in business

17.          Define Financing decisions

18.          What is financial risk?

19.          What do you mean by Flotation cost?

20.          Differentiate between Debt and Equity on basis of Cost and Risk

21.          Discuss Factors affecting Financing decisions

22.          Define Financial Planning

23.          What is the process of Financial Planning?

24.          What are Twin Objectives of Financial Planning?

25.          Discuss the importance of Financial Planning

26.          Differentiate between Financial Management and Financial Planning

27.          What do you mean by Capital Structure?

28.          What are two formulas to calculate Capital Structure?

29.          What do you mean by Optimum Capital Structure?

30.          Discuss factors affecting Capital Structure

31.          What do you mean by Financial Leverage?

32.          What is favorable Financial Leverage?

33.          What is unfavorable Financial Leverage?

34.          Discuss factors affecting Financing decisions

35.          Define Dividend decisions

36.          Discuss Factors affecting Dividend decisions

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Test your knowledge of two important topics of this chapter with an interactive worksheet: CLICK HERE 

Video explanation of financing decision: Click here 

Video explanation of financing decision: CLICK HERE

Indirect Questions:

1.           “A capital budgeting decision is capable of changing the financial fortune of a business.” Do you agree? Why or why not?

2.            Under which situation the EPS of a company falls with the increased use of debt? Explain with the help of an example.

3.            How do loan components or debentures in the capital structure act as a lever to raise the return on equity share capital?

4.            Explain how are the shareholders are likely to gain with the loan component in the capital employed with example.

5.            What is meant by “Financial Leverage”? How does it affect the capital structure of a company? Explain with the help of an example of favorable financial leverage.

6.            Capital structure decision is essentially optimization of risk-return relationship. Comment

7.            The directors of a manufacturing company are thinking of issuing Rs. 20 lacs additional debentures for expansion of their production capacity. This will lead to an increase. in debt-equity the ratio from 2:1 to 3:1. What are the risks involved in it? What factors other than risk do you think the directors should keep in view before taking the decision?

8.            You are the finance manager of a company. The board of directors has asked you to determine the working capital requirement for the company. State the factors that you would take into consideration while determining the requirement of working capital for the company.

9.            Discuss the primary objective of Financial Management.

10.          “Financial Planning is not equivalent to or substitute for Financial Management”.Do you agree? Explain.

11.          What do you mean by Financial Blueprint of Organisation? Discuss its importance.

12.          How does working capital affect both the liquidity as well as the profitability of a business?

13.          A businessman who wants to start a manufacturing concern approaches you to suggest to him whether the following manufacturing concern would require large or small working capital:

                     (a)   Bread           (b)   Coolers        (c)   Sugar            (d)   Motorcar

                     (e)   Furniture manufactured against specific orders        (f)   Locomotives.
14. Debt and Equity differ significantly in terms of cost and risk. How?

Answer to indirect question 10

“Financial Planning is not equivalent to or substitute for Financial Management” .Do you agree? Explain.

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Watch the video below for answer to  Q14  Indirect question

Debt and Equity differ significantly in terms of cost and risk. How? Click here to check the answer

Kindly check the video on Trading on equity 

Also, Click here to get notes and Indirect questions based on this topic (Trading on equity)

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Answers to NCERT Questions

Short Ans type (Page 265)

Q7 Discuss how working capital affecting both liquidity as well as the profitability of a business

Ans

 Working capital is excess of current assets over current liabilities.

More  Investment in current assets helps in increasing the liquidity of business as compared to Fixed assets as these are converted into cash  or cash equivalents  very quickly

Insufficient  Investment in current assets make it more difficult for an organization to meet its payment obligations(decreases Liquidity)

But current assets provide little or no returns  (they contribute less to profit)as compare to fixed assets

Conclusion:

A balance needs to be struck between liquidity and profitability as more working capital increases  liquidity  but  decreases profitability

Long Answer Questions

Q2 Capital Structure decision is essentially optimization of risk-return relationship. Comment

Ans

Capital structure policy involves a trade-off between risk and return.

·         Using more debt raises the riskiness of the firms because payment of  interest and return of principal amount is obligatory for business. Any default in meeting these commitments may force business to go into liquidation

·         But a higher proportion of debt generally leads to a higher expected rate of return for equity shareholders as EPS increases because of Trading on Equity

·          We know that if the debt is increased beyond a point, the higher risk associated with greater debt tends to lower the share price.

Conclusion:

Therefore, the optimal capital structure is the one that strikes a balance between risk and return to achieve our ultimate goal of maximizing the price of the equity shares(Wealth maximization)
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Check the presentation of factors affecting working Capital