Financial Management

Question 1

Role of Financial Management

Answer 1

• The amount of long-term and short-term funds to be used
• The size and composition of the business
• Break up of long-term finances into debt, equity, etc
• All items in the profit and loss account
• The quantum of current assets and its break up into cash, inventory and receivables

Question 2

The primary aim of financial management?

Answer 2

Wealth Maximisation.
Means to maximise shareholders wealth by increasing the market value of equity shares

Question 3

Investment Decision

Answer 3

• relates to how a firm’s funds are invested in the business
• 2 types
  long term (capital budgeting decision)(5)
  short term (working capital decision) (4)

Question 4

Factors affecting capital budgeting decisions

Answer 4

• Cash flows of the project
• The rate of return
• The investment criteria involved

Question 5

What are financial decisions?

Answer 5

This decision is about the quantum of finance to be raised from long-term sources

(Short-term sources are studied under working capital decisions)

Question 6

What is floatation cost?

Answer 6

The cost of fund raising exercise

(the amount you have to pay to raise funds)

Question 7

What does overall financial risk depend on?

Answer 7

proportion of debt in the total capital

Question 8

Factors affecting Financing Decisions