Financial Management Test - 32

Capital budgeting decisions are based on expected rate of return and risks involved from each proposal. When a proposal involves huge cash flow in return it expects to generate cash flows. Capital budgeting techniques are applied to each proposal before selecting a particular project. Amount of investment, interest rate etc should keep in mind.

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.

Combined leverage is the total effect of both operating and financial leverage on a company's EPS. It considers how changes in sales impact operating income and how changes in operating income, in turn, impact net income and EPS.

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.
  

Retained earning is a part of profit which is not distributed among shareholders as dividends but is retained in the business for future use. It is also known as self financing. It is available free of cost for the business.

The funds which remain invested in the business for a longer period of time and generally, not refunded  during the life of the business. For example equity shares, retained earnings, reserves 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 planning arrives at Ensuring that the firm faces neither a shortage nor a glut of unusable funds.

Current assets are those assets which can be converted into cash or can be used to pay off liabilities within a time span of 12 months, i.e. one year.

Financial management is concerned with management decisions relating to optimal procurement of funds, investment of funds in long term and short term assets of the firm. It is wider in scope as it includes financial planning also.