KEY

WORDS/IMPORTANT
POINTS/HIDDEN GEMS

FINANCIAL
MANAGEMENT
1. Primary aim of financial management – to maximise
shareholders’ wealth.

2. The size of assets, profitability and competitiveness are all

affected by __________________

3. Essential ingredients of sound working capital management:

-Efficient cash management
-Inventory management
-Receivables management

4. Optimal procurement as well as usage of finance –

Financial management.
5. Debt is the cheapest of all sources.

6. Preparation of financial blueprint of an organisation’s

future operations.

7. Part of current assets not financed through short term

sources-
CA-CL = NWC

8. Which component of Capital Structure determines the

Overall Financial Risk?

9. A decision to acquire a new and modern plant to upgrade

an old one is known as _________ decision.
10. Long-term investment decision is also called a capital
budgeting.

11. These decisions affect the day to day working of a

business – Working capital.

12. Favourable financial leverage

Return on investment ˃ Cost of debt

13. Unfavourable financial leverage

Return on investment ˂ Cost of debt

14. The overall financial risk depends on the proportion

of debt in the total capital.
15. Financial leverage is computed as:
Debt or Debt
Equity Debt + Equity

Q: ABC Ltd. Has Debt Equity ratio of 3:1 whereas XYZ Ltd.
Has Debt Equity ratio of 1:1. Name the advantage ABC
Ltd. Will have over XYZ Ltd., when the rate of interest is
lower the rate of return on investment of the Company.
• A) Trading on Equity
• B) Low Risk
• C) Low Cost of Equity
• D)Greater Flexibility
16. Factors affecting choice of capital structure:
Following Simple Daily Fitness Routine Can Cure Common
Cough Cold Reduce Risk To Illness.
F – Flexibility
S – Stock market conditions
D – Debt service coverage ratio (DSCR)
F – Floatation cost
R – Regulatory framework
C – Cash flow position
C – Cost of debt
C – Cost of equity
C – Capital structure of other companies
C – Control
R – Risk consideration
R – Return on investment (ROI)
T – Tax rate
I – Interest coverage ratio
17. Twin objectives of financial planning:
- To ensure availability of funds whenever required.
- To see that the firm does not raise resources
unnecessarily.

18. OPTIMAL CAPITAL STRUCTURE:

When the proportion of debt and equity is such that it
results in an increase in the value of the equity share.

19. Increase in profit earned by the equity shareholders

due to presence of fixed financial charges like
interest – TRADING ON EQUITY
20. Certain business organisations share each other’s
facilities – Level of collaboration.

21. Return on investment (ROI)

= EBIT ÷ Total investment × 100

22. The cost of debt is lower than the cost of equity for
a firm.
- Lender’s risk is lower than the equity shareholders’ risk
since the lender earns an assured return and repayment
of capital and therefore, they should require a low rate
of return.
- Interest paid on debt is a tax deductible expense.
23. Higher the ICR, lower shall be the risk of company
failing to meet its interest payment obligations.

24. Proper matching of funds requirements and their

availability is sought to be achieved by financial planning.

25. Importance of capital budgeting decisions.

RILL
-Risk involved
-Irreversible decisions
-Long-term growth
-Large amount of funds involved
26. Major determinant of dividend decision – Amount of
earnings

27. Factors affecting financing decision:

See Calorie Consumption Chart For Food Recipes.

S – State of capital market

C – Control considerations
C – Cash flow position
C – Cost
F – Floatation costs
F – Fixed operating costs
R – Risk
28. Financial Planning:

(i) Short term

- Short-term financial plan
- BUDGET

(ii) Long-term
-Long term growth and investment
-CAPITAL EXPENDITURE PROGRAMMES

29. The proportion of debt in the overall capital is also

called financial leverage.
30. Link between investment and financing
decisions – Financial planning.

31. Decision taken in financial management which affects

the liquidity as well as the profitability of
business – Working capital decision.

32. Least liquid current assets.

33. What does lower business risk indicate?

34. As financial leverage increases, what happens to the

cost and risk?
35. Relative proportion of various types of
funds – Capital structure.

36. Foresee the fund requirements both the quantum as

well as the timing.

37. Name the process which helps in determining the

objectives, policies, procedures, programmes and budgets to deal
with the financial activities of an enterprise – Financial Planning.

Vikrant joins his father’s business of Organic masalas, near Kotgarh in Himachal
after completing his MBA. In order to capture a major share of the market, he
decided to sell the product in small attractive packages by using the latest
packaging technology. His father suggested that they hire financial consultants to
estimate the amount of funds that would be required for the purpose & timings
when it would be required. The concept being discussed by Vikrant’s father, links
which financial decision with the investment decision.
• Factors affecting the working capital
requirements -