financial management – term end

8/13/2019 Financial Management Term End

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Financial Management Term

End


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Capital structure and its major

determinants


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Factors determining Capital Structure


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Financial and Operational Leverage


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Financial management - Decisions

Investment Decisions These involve the allocation of resources among various type of assets.

what portion of the firm's fund should be invested in various currentassets such as cash, marketable securities and receivable and whatportion in fixed assets, such as inventories and plant and equipment. Theassets mix affects the amount of income the firm can earn.

For example, a manufacturer is in business to earn income with fixedassets such as machinery and not with current assets. However, placingtoo high a percentage of its assets in new building or new machinery mayleave the firm short of cash to meet an unexpected need or exploitsudden opportunity

The firmsfinancial manager must invest in fixed assets. but not too much.Besides determining the assets mix financial manager must also decidewhat type of fixed and current assets to acquire. All this covers areapertaining to capital budgeting and working capital management.


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Financing Decision

It is the next step in financial management for executing theinvestment decisions once taken a look at the balance sheetof a company indicates that it obtains finance fromshareholders ordinary, preference, debenture holders, or long- term loans from the institutions, bank and other sources.There are variations in the provisions contained in preferenceshares, debentures, loans papers etc.

Thus financing decisions i.e. The financing mix of capitalstructure. Efforts are made to obtain an optimal financing mixfor a particular company. This necessitates study of capitalstructure as also the short and intermediate term financingplans of the company. In more advanced companies financing

decision today , has become fully -integrated with top -management policy formulation via capital budgeting,

long - range planning , evaluation of alternate uses of fundsand establishment of measurable standards of performance infinancial terms


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Dividend Decisions : The third major decision of financialmanagement is the decision relating to the dividend policy.The dividend decision should be analysed in relation to thefinancing decision of a firm .

Two alternatives are available in dealing with the profits ofa firm; they can be retained in the business. Which coursesshould be followed - dividend or retention ? One significantfactor is that the dividend pay out ratio i.e. what proportionof net profits should be paid out to the shareholders.

The decision will depend upon the preference of theshareholders and investment opportunities available withinthe firm. The second major aspect of the dividend decisionis the factors determining dividend policy of a firm inpractice


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All the above decision of finance are inter -related with one another. Any decisionundertaken by the firm in one area has its impacton other areas as well. For example acceptance

of an investment proposal by a firm affects itscapital structure and dividend decision as well. Sothese decision are inter -related and should betaken jointly so that financial decision is optimal.

All the financial decision have ultimately toachieve the firm's goal of maximisationof shareholders wealth.


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financial management – term end

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