Describe working capital

Working capital, also known as net working capital, is a financial metric which represents
operating liquidity available to a business. Along with fixed assets such as plant and
equipment, working capital is considered a part of operating capital. It is calculated as current
assets minus current liabilities. If current assets are less than current liabilities, an entity has a
working capital deficiency, also called a working capital deficit. Positive working capital
means that the company is able to pay off its short-term liabilities. Negative working capital
means that a company currently is unable to meet its short-term liabilities with its current
assets (cash, accounts receivable and inventory).
WorkingCapital = CurrentAssets – CurrentLiabilities
 
  Describe preference shares
Preferred stock, also called preferred shares or preference shares, is typically a 'higher ranking'
stock than common stock, and its terms are negotiated between the corporation and the
investor. Preferred stock usually carries no voting rights,[1][2] but may carry priority over
common stock in the payment of dividends and upon liquidation. Preferred stock may carry a
dividend that is paid out prior to any dividends being paid to common stock holders. Preferred
stock may have a convertibility feature into common stock. Preferred stockholders will be
paid out in assets before common stockholders and after debt holders in bankruptcy.
                      
   What do you mean by financial management?
Financial management entails planning for the future of a person or a business enterprise to
ensure a positive cash flow. It includes the administration and maintenance of financial assets.
Besides, financial management covers the process of identifying and managing risks. The
primary concern of financial management is the assessment rather than the techniques of
financial quantification. A financial manager looks at the available data to judge the
performance of enterprises. Managerial finance is an interdisciplinary approach that borrows
from both managerial accounting and corporate finance.Some experts refer to financial
management as the science of money management.
  Describe operating lease.
An operating lease is a lease whose term is short compared to the useful life of the asset or
piece of equipment (an airliner, a ship etc.) being leased. An operating lease is commonly used
to acquire equipment on a relatively short-term basis. Thus, for example, an aircraft which has
an economic life of 25 years may be leased to an airline for 5 years on an operating lease.
A lease contract that allows the use of an asset, but does not convey rights similar to
ownership of the asset. Any lease that is not a capital lease is an operating lease.
 
    Describe merges and acquisition.
Merger. When two or more companies consolidate by exchanging common stock, and the
resulting single company replaces the old companies, the consolidation is described as a
merger.
The shareholders of the old companies receive prorated shares in the new company. A merger
is typically a tax-free transaction, meaning that shareholders owe no capital gains or lost taxes
on the stock that is being exchanged.
A merger is different from an acquisition, in which one company purchases, or takes over, the
assets of another. The acquiring company continues to function and the acquired company
ceases to exist. Shareholders of the acquired company receive shares in the new company in
exchange for their old shares.
Acuisition. Acquiring control of a corporation, called a target, by stock purchase or exchange,
either hostile or friendly. also called takeover.
 
  What is retained earning?
The percentage of net earnings not paid out as dividends, but retained by the company to be
reinvested in its core business or to pay debt. It is recorded under shareholders' equity on the
balance sheet. Also known as the "retention ratio" or "retained surplus".
The formula calculates retained earnings by adding net income to (or subtracting any net
losses from) beginning retained earnings and subtracting any dividends paid to shareholders:
Retained Earning(RE) = Beginning RE + Net Income – Dividend
 
  What do you mean by EVA?
Economic Value Added (EVA) is a financial performance method to calculate the true
economic profit of a corporation. EVA can be calculated as net operating after taxes profit
minus a charge for the opportunity cost of the capital invested.
EVA is an estimate of the amount by which earnings exceed or fall short of the required
minimum rate of return for shareholders or lenders at comparable risk.
The formula for calculating EVA is as follows:
= Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital)
EVA can be used for the following purposes: - setting organizational goals,  performance
measurement,  determining bonuses,  communication with shareholders and investors, 
motivation of managers,  capital budgeting,  corporate valuation,  analyzing equity securities.
 
 
   What do you mean by Capital budgeting?
Capital budgeting (or investment appraisal) is the planning process used to determine whether
a firm's long term investments such as new machinery, replacement machinery, new plants,
new products, and research development projects are worth pursuing. It is budget for major
capital, or investment, expenditures.
Many formal methods are used in capital budgeting, including the techniques such as: -Net
present value, Profitability index, Internal rate of return, Internal Rate of Return, Equivalent
annuity.
What do you mean by financial management? Explain in detail evolution, scope
   
and objectives of financial management.
 
Financial management entails planning for the future of a person or a business enterprise to
ensure a positive cash flow. It includes the administration and maintenance of financial assets.
Besides, financial management covers the process of identifying and managing risks. The
primary concern of financial management is the assessment rather than the techniques of
financial quantification. A financial manager looks at the available data to judge the
performance of enterprises. Managerial finance is an interdisciplinary approach that borrows
from both managerial accounting and corporate finance.Some experts refer to financial
management as the science of money management.

Scope of Financial Management

Investment Decision: - The investment decision relates to the selection of assets in which
funds will be invested by a firm.The assts which can be aquired fall into broad groups: (1)
long-term assts which yield a return over a period of time  in future, (2) short-term or cuurent
assts. The aspect of financial decision making with reference to current assets or short-term
assets is popularly termed as working capital management.

Capital Budgeting: - Capital budgeting (or investment appraisal) is the planning process used
to determine whether a firm's long term investments such as new machinery, replacement
machinery, new plants, new products, and research development projects are worth pursuing.
It is budget for major capital, or investment, expenditures. Capital budgeting is probably the
most crucial fianancial decision of a firm.

Working Capital Management: - Working capital management is concerned with the

management of current assets. One aspect of working capital management is the trade-off
between profitability and risk(liquidity). If the current assets are too large, profitability is
adversely affected. Thus, the management of working capital has two basic indredients: (1) an
overview of working capital management as a whole, and (2) efficient management of the
individual current assets such as cash, receivables and inventory.

Financing Decision: - The investment decision is broadly concerned with the assets-mix or
the composition of the assets of a firm. The concern of the financial decision is with the
financiing-mix or capital structure or leverage. The term capital structure refrers to the
proportion of debt (fixed-interest sources of financing) and equity capital (variable-dividend
securities/source of funds). The financing decision of a firm relates to the choice of the
proportion of these sources to finance the investment requirements. Thus, the financing
decision covers two  interrelated aspects: (10 the capital structure theory, and (2) the capital
structure decision.

Dividend Policy Decision: - The dividend decision should be analysed in relation to the
financing decision of a firm. The decision as to which course should be followed depends
largely on a siginficant element in the dividend decision, the dividend-pay ratio, thatis , what
proportion of net profits should be paid out to the shareholdes. The final decision will depend
upon the preference  of the shareholders and investment opportuinties available within the
firm. The second major aspect of the dividend decision is the factors determining dividend
policy of a firm in practice.

Objective of financial management:

Efficient Financial management requires the existence of some objectives, which are as
follows

1) Profit Maximization : Objective of financial management is same as the objective of a

company that is to earn profit. But profit maximization cannot the sole objective of a
company. It is a limited objective. If profits are given undue Importance then problems may
arise as discussed below. The term profit is vague and it involves much more contradictions. 
Profit maximization has to be attempted with a realization of risks involved. A positive
relationship exists between risk and profits. So both risk and profit objectives should be
balanced.Profit Maximization does not take into account the time pattern of returns. Profit
maximization fails to take into account the social considerations.

2) Wealth management: - It is commonly agreed that the objective of a firm is to maximize

value or wealth. Value of a firm is represented by the market price of the company's common
stock. The market price of a firm's stock represents the focal judgement of all market
participants as to what the value of the particular firm is. It takes in to account present and
prospective future earnings per share, the timing and risk of these earning, the dividend policy
of the firm and many other factors that bear upon the market price of the stock. Market price
acts as the performance index or report card of the firm's progress.Prices in the share markets
are largely affected by many factors like general economic outlook, outlook of particular
company, technical factors and even mass psychology. Normally this value is a function of
two factors as given below,
The anticipated rate of earnings per share of the company. The capitalization rate.
The likely rate of earnings per shares (EPS) depends upon the assessment as to how profitably
a company is growing to operate in the future.  The capitalization rate reflects the liking of the
investors for the company.

Explain in detail reasons and factors affecting mergers and acquisition.

   

There are a number of reasons why a corporation will merge with, acquire, or be
acquired by another corporation. Sometimes, corporations can produce goods or
services more efficiently if they combine their efforts and facilities. These efficiency
gains may come simply by virtue of the size of the combined company; it may be
cheaper to produce goods on a larger scale.
Collaborating or sharing expertise may achieve gains in efficiency, or a company
might have underutilized assets the other company can better use. Also, a change in
management may make the company more profitable.
Other reasons for acquisitions have to do more with hubris and power. The
management of an acquiring company may be motivated more by the desire to manage
ever-larger companies than by any possible gains in efficiency.
One of the most common arguments for mergers and acquisitions is the belief that
"synergies" exist, allowing the two companies to work more efficiently together than
either would separately. Such synergies may result from the firms' combined ability to
exploit economies of scale, eliminate duplicated functions, share managerial expertise,
and raise larger amounts of capital.
'Horizontal' mergers (between companies operating at the same level of production in
the same industry) may also be motivated by a desire for greater market power.
In some cases, firms may derive tax advantages from a merger or acquisition.
Corporations may pursue mergers and acquisitions as part of a deliberate strategy of
diversification, allowing the company to exploit new markets and spread its risks.
A company may seek an acquisition because it believes its target to be undervalued,
and thus a "bargain" - a good investment capable of generating a high return for the
parent company's shareholders. Often, such acquisitions are also motivated by the
"empire-building desire" of the parent company's managers. 

 
 Amit Sir

 
 
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  Tue, Aug 3, 2010 at 3:26 AM

Kanjilal Amit

<kanjilal.amit@gmail.com>
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Hi S09 Students
Another tiny gift follows ........ CONTRIBUTED BY STUDENTS 
 
Give the scope of financial management?
Ans-      A firm secures whatever capital it needs and employs it in financial activities,
which generates return on invested capital ( production & marketing activities). Firms
create manufacturing capacities for production of goods; some provides services to
customers . They sell their goods & services to earn profit .They raise funds to acquire
manufacturing & other facilities. The three most important activities of a business
are:
         Production
         Marketing
         Finance.

What is the nature of capital budgeting decisions?

Ans-      The nature of capital budgeting decision may be defined as a firm’s decision to invest
its current funds most efficiently in the long term assets   in anticipation of an expected flow
of benefits over a series of years. The long term assets are those that affect the firm’s
operation beyond the one year period . The  firm’s  investment decisions would generally
include expansion ,acquisition, modernization, and replacement of the long term assets. It is
important to note that investment in the long term assets invariably requires large funds to
be tied up in the current assets such as investors and receivables .So the nature of capital
budgeting decisions means to take decisions that to where invest and how much for long or
for short time so that maximum profits could be obtained.

   What is capital rationing?

Ans-      Capital rationing refers to a situation where the firm is constrained for external ,or
self imposed , reasons to obtained necessary funds to invest in all investment projects with
positive NPV . Under Capital rationing ,the management has not simply to determine the
profitable investment opportunities, but it also has to decide to obtain that combination of
the profitable projects which yields highest NPV within the available funds.

There are two types of capital rationing-

         External
         and  Internal capital rationing.

     What is time value of money?

  Ans-       The value of money has its logic in the fact that investors have ample investment  
opportunities   available to them , and therefore, one rupee received today is not same in
value as one rupee received after a period of time since one rupee received today can be
invested at a rate of interest. The rate of interest depends on the risk of investment. Higher
the risk ,higher the rate of interest expected. If there is no risk ,the rate of interest (called risk
free rate) will be low.

         There are two ways for accounting for the time value of money;
         Compounding
         And discounting

       What are public deposits?

  Ans-         The public deposits refer to the deposits that are attained by the numerous large and small firms from
the public. The public deposits are generally solicited by the firms in order to finance the working capital
requirements of the firm. 
The companies offer interest to the investors over public deposits. The rate of interest, however, varies with the
time period of the public deposits. The companies generally offer 8 to 9 percent interest rate on the deposits made
for one year. The companies offer 9 to 10 percent interest rate over public deposits for two years while 10 to 11
percent interest rate is offered for the three year deposits. 
 

    What is operating lease?

Ans -    Meaning of lease- Lease is a contract between a lessor, the owner of the asset, and
a      lessee , the user of the asset .Under the contract , the owner gives the right to use the
asset to the user over an agreed period of time for a consideration called the lease rental.

Operating lease-

It is a short term, cancellable lease agreements are called operating leases.

Convenience and instant services are the hallmarks of operating leases . The lessor is
generally responsible for maintenance and insurance. A single operating lease contract may
not fully amortise the original cost of the asset; it covers a period considerably shorter than
the useful life of the asset

Example- A tourist renting car, lease contracts for computers ,office equipments ,car,
trucks and hotel rooms.
  

     What is financial leverage?

Ans-        The degree to which an investor or business is utilizing borrowed money. Companies that are highly

leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be
unable to find new lenders in the future. Financial leverage is not always bad, however; it can increase the
shareholders' return on their investment and often there are tax advantages associated with borrowing. also
called leverage.
 What is meant by cost of capital?
Ans- The opportunity  cost of an investment; that is, the rate of return that a company would otherwise
be able to earn at the same risk level as the investment that has been selected. For example, when
an investor purchases stock in a company, he/she expects to see a return on that investment. Since
the individual expects to get back more than his/her initial investment, the cost of capital is equal to this
return that the investor receives, or the money that the company misses out on by selling its stock.
 
Amit Sir