Financial Management Test - 3

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.

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

Financial leverage is the degree to which a company uses fixed-income securities such as debt. Therefore, financial leverage is favorable when the uses to which debt can be put generate returns (ROI) greater than the interest expense associated with the debt (Cost of Debt).

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.

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.

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.

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.

Financial Risk refers to the chance that a firm will fail to meet its payment obligations. A higher debt to equity ratio indicates that more creditor financing (bank loans) is used than investor financing (shareholders). Higher use of debt increases the fixed financial charges (Interest on Debt) of a firm. As a result, increased used of debt increases the financial risk of a firm

Long term investment decisions are also called capital budgeting decisions which include purchase of land and building, plant and machinery,change of technology, research and development and expenditure of advertising campaign etc. Inventory management comes under working capital management decisions.

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.