Financial Management Test - 34

Net working capital refers to Current assets minus (-) current liabilities.

Working capital is the difference between current assets and current liabilities.

Raising capital by issuing new securities doesn't come cheap. Companies in this position encounter various expenses, including underwriting, legal, registration, and audit fees. These fees are known as flotation costs and reduce the amount of capital a company can raise.

Higher debt- equity ratio refers to a situation where the proportion of debt in total capital is higher. This implies higher degree of financial risk. This is because in case of debt, it is obligatory for a business to make interest payments and the return of principal to the debtors. Thus, higher debt increases the financial risk for the business.

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.

The Investment decision refers to the decision of investing funds in different assets. It can be long term or short term. A Long term Investment decision is also called 'Capital Budgeting Decision'. It involves investing the finance in capital assets like making investment in a new machine to replace an existing one, etc.

The dividend decision involves how much of the profit earned by company is to be distributed to the shareholders and how much of it should be retained in the business for meeting investment requirement. High earning, high cash flow, stable earning and low growth opportunities etc. affects the rate of dividend.

Capital Structure is a combination of financial instruments like equity shares, preference shares, long-term loans, debentures, bonds or retained earnings that a business uses to raise funds for its operations.

Financing decision is about the quantum of finance to be raised from various long-term sources.

These are the assets which can be converted into cash and cash equivalents within one year in the normal routine of business. e.g. inventories, debtors, bills receivable etc.

Current assets are those assets which, in the normal routine of the business, get converted into cash or cash equivalents within one year e.g. inventories, debtors etc. Hence, these should be financed by both long term and short term liability.