WHAT IS FINANCIAL MANAGEMENT? WHAT IS RETAINED EARNINGS? DIFFERENCE BETWEEN TRANSACTION AND SPECULATIVE MOTIVE?

Financial management refers to acquisition of funds and effective utilization of funds. Portion of profit which is not distributed in the form of dividends In transaction motive money is used for day-to-day transaction whereas in
WHAT ARE THE DIFFERENT SOURCES OF FUNDS? Readily available funds speculative motive money is hold to take advantage of unexpected
Term loans opportunities.
Used for emergency purpose
Equity shares WHAT IS CASH BUDGET?
Preference shares WHAT ARE THE OBJECTIVES OF FM? Estimation of cash inflow and outflow of a business over a specifies period
Debentures To ensure adequate and regular supply of funds of time. it can be weekly monthly or annually.
Retained Earnings Proper estimation of financial requirements DIFFERENCE BETWEEN DEBENTURES AND BONDS
WHAT IS EQUITY CAPITAL? Securing future by ensuring high return on investment Bonds are financial instruments showing indebtedness of issuing body
Also known as owner’s capital and they are the true owners of the company Profit maximization towards its holders. They are generally secured by collaterals and have low
They have voting rights Wealth maximization interest rates. Issued by government agencies financial institutions.
Have preemptive rights and have no tax benefit WHAT IS WEALTH MAXIMISATION? Whereas debentures are debt instruments used to raise long term
WHAT ARE PREEMPTIVE RIGHTS? One of the main objectives of FM is to maximize the SH’s wealth to achieve finance. They generally have high interest rates and can be both secured
It allows the existing shareholder of a company to avoid involuntary dilution of optimal capital structure (mix of debt and equity which maximizes company’s and unsecured. Issues by companies.
ownership by purchasing new shares before the public. market value and minimizes the cost of capital) and utilization of funds. DIFFERENCE BETWEEN DIVIDEND AND INTEREST
WHAT IS PREFERENCE SHARE CAPITAL? WHAT ARE ITS TYPES? Long term focus and this is less prone to manipulation. Interest is the charge against the money lent to the borrower.
Dividends are fixed as well as their payments are mandatory and the PS holders does It is based on generation of cash flow not on accounting profits A dividend is the percentage of profit distributed. Interest is paid to the
not have voting rights WHAT IS PROFIT MAXIMISATION? lenders/creditors/debenture holders. A dividend is paid to the preferred
Raised through PS It’s a traditional approach and is one of the important objectives of FM shareholders and equity shareholders.
Hybrid form of financing in which it has the certain characteristics of both equity Concerned with the determination of price and output level that returns DIFFERENCE BETWEEN OL AND CL
shares and debentures maximum profit. Operating leverage shows the effect of change in sales revenue on EBIT
Types of preference shares It implies that every decision which we take in the company gives profit. and financial leverage shows the effect of change in EBIT on
Convertible PS – converted into ES HOW TO CALCULATE % CHANGE IN EPS EPS. ... Combined leverage shows the effect of change in sales revenue on
Non-Convertible PS – %change in EPS = (NEW EPS – OLD EPS) /OLD EPS EPS of a company. Combined leverage is calculated as the multiplication
Participating PS - pay both preferred dividends and additional dividends to the SH of Operating leverage and Financial Leverage.
Non-Participating PS HOW TO CALCULATE % CHANGE IN EBIT DIFFERENCE BETWEEN OL AND FL
Cumulative PS %change in EBIT = (New EBIT – Old EBIT) /Old EBIT OL is the firms ability to use fixed cost to generate more returns whereas
Non-Cumulative PS OPERATING PROFIT also called as EBIT FL is the firm’s ability to use capital structure to earn better returns and to
WHAT ARE DEBENTURES? WHAT ARE ITS FEATURES AND TYPES? WHAT IS THE FORMULA FOR ROI? reduce tax
Borrowed capital from the public and the payment of interest is compulsory. ROI (Return on investment) = (Operating profit or EBIT/Total investment) X100 DIFFERENCE BETWEEN EPS AND DIVIDENDS
There is tax benefit associated with the payment of interest Total investment = Equity capital + Debt capital Both reflections of the company’s profitability. . Earnings per share is a
Does not result in dilution of control WHAT IS ASSET TURNOVER RATIO? gauge of how profitable a company is per share of its stock. Dividends per
Types of debentures is the ratio between the value of a company’s sales or revenues and the value of share, on the other hand, measures the portion of a company's earnings
Redeemable its assets. It is an indicator of the efficiency with which a company is deploying its that is paid out to shareholders.
Non-Redeemable assets to produce the revenue. HOW CAN YOU SAY COMPANY IS HAVING FAVOURABLE LEVERAGE?
Secured ATR = Sale/Total assets When ROI is greater than Cost of capital
Unsecured Total assets = total liabilities DIFFERENCE BETWEEN FINANCE AND ACCOUNTING
Convertible Total liabilities = Equity capital + Debt capital Accounting focuses on the day-to-day flow of money in and out of a
Non-convertible HOW TO FIND company or institution. It is responsible for preparing the financial
Leverages and types-it is the employment of fixed funds or borrowed funds to % Of VARIABLE COST = (variable /sales) X100 statement and is backward looking, whereas finance is a broader term for
generate greater profit. Operating leverage-measures percentage change in EBIT for a EBIT = Invested capital X ROI the management of assets and liabilities and the planning of future
given percentage change in sales.(contribution/EBIT) Financial leverage-measures WHAT IS SPECULATIVE MOTIVE? growth. It is responsible for preparing analyzing the financial statement
percentage change in EPS for a given percentage change in EBIT.(EBIT/EBT) Combined Hold cash to take advantage of unexpected opportunities. and is forward looking.
leverage-measures percentage change in EPS for a given percentage change in sales WHAT IS BUDGET DIFFERENCE BETWEEN TRANSACTION AND PRECAUTIONARY MOTIVE
(OL*FL). Estimating the future cash flow. In case of transaction motive, money is held for ordinary transactions,
WHAT ARE THE FUNCTIONS OF FM? WHAT ARE TYPES OF MOTIVES while under precautionary motive, cash is kept to meet
Estimating the amount of capital required for different needs. Transaction Motive unforeseen transactions. ... In general, the cash balances held
Managing the inflow and outflow of cash Precautionary motive for transaction and precautionary motives are directly dependent on the
Effectively utilizing the funds needed Speculative motive level of income.
Procurement of funds WHY IS CASH BUDGET PREPARED? WHAT ARE ITS MOTIVES? ROI = (EBIT/TOTAL INVESTMENT)*100
DEBENTIURES CAN BE DILUTED WHY? Cash budget is prepared to show all the planned monthly cash inflow and any EBT = EBIT – INTEREST
It cannot be diluted because debenture holders does not have any voting rights. planned cash outflow. This helps the business in taking better decisions. EBIT = CAPITAL INVESTED * ROI
WHAT IS TERM LOAN? Transaction motive TOTAL INVESTMENT = EQUITY CAPTIAL + DEBT CAPITAL
Money borrowed from the financial institutions Speculative motive
Precautionary motive ( to keep extra cash in case of unforeseen situations.)