Financial Management Test - 1

Short term investment decisions are also called working capital decisions.  These are concerned with the decisions about the inventories, debtors, bills receivable and level of cash etc. It affects the day to day working of the business.

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.

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.

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 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 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.

Financial decisions include:

• Investment decision
• Financing decision
• Dividend decision

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.

Companies with higher growth opportunities tend to retain more money out of their earnings so as to finance the required investments. Therefore, higher growth prospects result in lower dividend payment.

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.