Financial Management Test - 6

The funds which remain invested in the business for a longer period of time and generally, not refunded  during the life of the bisiness.  For example equity shares, retained earnings, reserves etc.

The funds raised through loans or borrowings are known as borrowed funds.  Main sources for raising borrowed funds are issue of debentures, public deposits, loans from commercial banks, etc.

• Financial manager will compare the risk with cost involved and prefer moderate risk factor and cost effectiveness.
• Firm prefer securities which involve least floatation cost.
• Smooth and steady cash flow companies will prefer borrowed funds but when shortage of cash flow, they prefer owner's funds.

Under dividend decision the finance manager decides how much to be distributed in the form of dividend and how much to keep aside as retained earning. This decision is also called residual decision because it is concerned with distribution of residual or left over income.

Earning : Dividends are paid out of current and previous year's earnings. More earning then high rate of dividend

Taxation policy : If tax rate is high then less dividend will be declared whereas tax rate is low then more dividend will be declared

Cash flow position: Paying dividend means outflows of cash.  In surplus cash then high rate of dividend. If shortage of cash then companies declare low dividend.

Financial planning means deciding in advance how much to spend, on what to spend according to funds at your disposal. In financial planning finance manager analyses various short term and long term investment  plans and selects the most appropriate.

The process of estimating the fund requirement of a business and specifying the sources of funds is called financial planning. The objective of financial planning  are

• To ensure availability of funds whenever these are required
• To see that the firm does not raise resources unnecessarily

The cost that a company incurs when it makes a new issue of either stocks or bonds. Flotation costs include the costs of printing the certificates, paying the underwriters, government fees, and other associated costs etc.

Companies employ more of cheaper debt to enhance the EPS. It is called trading on equity. It also refers to the increase in profit earned by the equity shareholders due to the presence of fixed financial charges like interest.

Financial leverage refers to proportion of debt in overall capital. As debt is a cheaper source of finance but very risky.  More debt will increase earning only if the ROI is higher than the cost of debt.