Dibrugarh University Financial Management Solved Question Papers
2012 (November)
Commerce (Speciality)
1.
Write ‘True’ or ‘False’: 1x4
= 4 Marks
(a) Financial
decision includes financial planning and capital structure decisions. False
(b) Profit
maximization is a capitalistic approach. True
(c) Debentures
do not carry any voting right. True
(d) A firm
should always keep a large balance of cash so as to meet the contingencies True
2.
Fill in the blanks: 1x4
= 4 Marks
(a) The time required to process and
execute an order is called Fixed
time.
(b) Payment of dividend involves legal
as well as financial considerations.
(c) ‘Ploughing back of profit’ is also
known as retained earnings.
(d) Leasing benefits both the lessee
as well as the lessor.
3.
Write short notes on:
(a)
Trading on Equity: Ans: Financial leverage is also known as Trading on
Equity. Trading on Equity
refers to the practice of using borrowed funds, carrying a fixed charge, to
obtain a higher return to the Equity Shareholders. With a larger proportion of
the debt in the financial structure, the earnings, available to the owners
would increase more than the proportionately with an increase in the operating
profits of the firm. This is because the
debt carries a fixed rate of return and if the firm is able to earn, on the
borrowed funds, a rate higher than the fixed charges on loans, the benefit will
go the shareholders. This is referred to as “Trading on Equity”
The concept of
trading on equity is the financial process of using debt to produce gain for
the residual owners or the equity shareholders. The term owes its name also to
the fact that the equity supplied by the owners, when the amount of borrowing
is relatively large in relation to capital stock, a company is said to be
trading on equity, but where borrowing is comparatively small in relation to
capital stock, the company is said to be trading on thick equity. Capital
gearing ration can be used to judge as to whether the company is trading on
thin or thick equity.
Degree of Financial Leverage: Degree of
financial leverage may be defined as the percentage change in taxable profit as
a result of percentage change in earning before interest and tax (EBIT). This
can be calculated by the following formula: DFL= Percentage change in
taxable Income / Precentage change in EBIT
(b) Lease Financing
(c) Stable
Dividend Policy: Stable Dividend Policy: Stability of dividends means
regularity in payment of dividends. It refers to the consistency in stream of
dividends. In short, we can say that a stable dividend policy is a long term
policy which is not affected by the variations in the earnings during different
periods. The stability of dividends can take any one of the three forms:
a) Constant
D/P ratio.
b) Constant
dividends per share.
c) Constant
dividend per share plus extra dividends.
Merits of
Stable Dividend Policy: Following are some of the advantages of a
stable dividend policy:
a) This
policy contributes to stablise market value of company’s equity shares at a
high level.
b) This
policy helps the company is mobilizing additional funds in the form of
additional equity shares.
c) Regular
earnings in the form of dividend satisfy investors.
d) This
policy encourages shareholders to hold company’s share for longer time and
simultaneously other investors are also attracted for the purchase of shares.
e) This
policy is helpful for expansion and growth prospects of a company.
f) This
policy encourages the institutional investors because they like to invest in
those companies which make uninterrupted payment of dividends.
Demerits
of Stable Dividend Policy: Following are some of the disadvantages of a
stable dividend policy:
a) Sometime
despite of large earnings, management decides not to declare dividends.
b) In this
policy, instead of paying dividend in cash, bonus share are issued to the
shareholders.
c) This
policy is used to capitalise reinvested earnings of the firm.
(d) Inventory Management
4.
(a) “Finance is lifeblood of an organization and financial management is the
network which facilitates its flow and availability to all organs of an
organization.” Explain.
Ans:
Business finance is required for the establishment and existence of every
business organization. Finance is required not only to start the business but
also to operate it, it expand for modernize its operations and to secure stable
growth. The importance of business finance arises basically to bridge the time
gap. Manufacturers require business finance to bridge the time gap between the
purchase of raw material and other supplies for production and recovery of
sales. Traders require finance to bridge the time gap between the purchase of
goods and recovery of sales. The need for business finance arises for the
following purposes:
1. To acquire Fixed Assets: Every business
organization whether manufacturing or trading needs finance to acquire some
fixed assets. Manufacturers need finance to acquire land & building, plant
& machinery, furniture etc. Traders need finance to acquire shops for sale
of goods, godown for storage of goods and vehicles for distribution of goods.
2. To purchase raw materials/goods:
Manufacturers need finance to acquire raw-materials and consumable stores for
production. Traders need finance to acquire goods for distribution.
3. To acquire service of human being:
Manufacturers need finance to pay their workers, supervisors, managers and
other staff employed by them. Traders need finance to pay their staff employed
by them.
4. To meet other operating expenses: Every
organization needs finance to meet day to day other operating expenses like
payment for electricity bills, water bills, telephone bills, travelling &
conveyance of staff, postage & telegram expenses & so on.
5. To adopt Modern Technology: With fast
changing technology, business organizations need finance to modernize their
plans & machineries, production methods and distribution methods. An
enterprise may decide to replace outdated and obsolete assets with new assets
to operate more economically.
6. To meet contingencies: Every
organization needs finance to meet the ups and downs of business and unforeseen
problems.
7. To expand existing operations: Every
organization needs finance to expand its existing operations. For example, a
company manufacturing Pen Drives at a rate of 10,000 per day needs finance to
increase its plant capacity to manufacture 20,000 Pen Drives per day.
8. To diversity: Every organization which
decides to diversify needs finance to add new products to the existing line.
For example, the company manufacturing Pen Drive needs finance to add new
products say Ganga Water.
9. To avail of business opportunities:
Finance is required to avail of business opportunities. For example, where
raw-materials are available at heavy cash discounts, the enterprises need finance
to avail of this opportunity.
Finance is said to be life
blood of business. It is required not only at the time of setting up of
business but at every stage during the existence of business. It must be
available at the time when it is needed. It must also be adequate for the
purpose for which it is needed. Thus, finance is required to bring a business
into existence, to keep it alive and to see it growing. Men, materials,
machinery and managers can be brought together and engaged in business when adequate
finance is available. Many business firms are known to have failed mainly due
to shortage of finance. The importance of finance has increased in modern times
for two reasons viz., (i) the business activities are now undertaken on a much
larger scale than in the past, and (ii) the manufacturing process has become
more complex than it used to be. With the growth in size and volume of business
and with the increasing complexity of production and trade there is growing
need for finance.
Significance of financial
management in the present day business world
The significance of financial management can
be discussed from the following angles:
1)
Importance to Business organizations: Financial management is important to
all types of business organization i.e. Small size, medium size or a large size
organization. As the size grows, financial decisions become more and more
complex as the amount involves also is large.
2)
Importance to all Stake holders
a) Share holders: Share holders are interested
in getting optimum dividend and maximizing their wealth which is basic
objective of financial management.
b) Investors / creditors: these stake holders
are interested in safety of their funds, timely repayment of the principal
amount as well as interest on the same. All these aspect are to be ensured by
the person managing funds/ finance.
c) Employees: They are interested in getting
timely payment of their salary/ wages, bonus, incentives and their retirement
benefits which are possible only if funds are managed properly and organization
is working in profit.
d) Customers: They are interested in quality
products at reasonable rates which are possible only through efficient
management of organization including management of funds.
e) Public: Public at large is interested in
general public welfare activities under corporate social responsibility and
this aspect is possible only when organization earns adequate profit.
f) Government: Govt is interested in timely
payment of taxes and other revenues from business world where again efficient
finance manager has a definite role to play.
g) Management: Management is interested in
overall image building, increase in the market share, optimizing share holders
wealth and profit and all these aspect greatly depends upon efficient
management of financial resources.
3)
Importance to other departments of an organization
A large size company, besides finance dept.,
has many departments like
a) Production
Dept
b) Marketing
Dept
c) Personnel
Dept
d) Material/
Inventory Dept
All these departments look for availability of
adequate funds so that they could manage their individual responsibilities in
an efficient manner. Lot of funds are required in production/manufacturing dept
for ongoing / completing the production process as well as maintaining adequate
stock to make available goods for the marketing dept for sale. Hence, finance
department through efficient management of funds has to ensure that adequate
funds are made available to all department and these departments at no stage
starve for want of funds. Hence, efficient financial management is of utmost
importance to all other department of the organization.
Or
(b) What is financial management? What
are the objectives of financial management? Discuss its scope.
Ans: Ans: Financial management is management
principles and practices applied to finance. General management functions
include planning, execution and control. Financial decision making includes
decisions as to size of investment, sources of capital, extent of use of
different sources of capital and extent of retention of profit or dividend
payout ratio. Financial management, is therefore, planning, execution and
control of investment of money resources, raising of such resources and
retention of profit/payment of dividend.
Howard and Upton define financial management as
"that administrative area or set of administrative functions in an
organisation which have to do with the management of the flow of cash so that
the organisation will have the means to carry out its objectives as
satisfactorily as possible and at the same time meets its obligations as they
become due.”
According to Guthamann and Dougall,” Business finance
can be broadly defined as the activity concerned with the planning, raising,
controlling and administering the funds used in the business.”
Bonneville and Dewey interpret that financing consists
in the raising, providing and managing all the money, capital or funds of any
kind to be used in connection with the business.
Osbon defines financial management as the
"process of acquiring and utilizing funds by a business”.
Considering all these views, financial management may
be defined as that part of management which is concerned mainly with raising
funds in the most economic and suitable manner, using these funds as profitably
as possible.
Objectives of Financial
Management
The firm’s investment and
financing decision are unavoidable and continuous. In order to make them
rational, the firm must have a goal. Two financial objectives predominate
amongst many objectives. These are:
1. Profit maximization
2. Shareholders’ Wealth
Maximization (SWM)
Profit maximization refers to
the rupee income while wealth maximization refers to the maximization of the
market value of the firm’s shares. Although profit maximization has been
traditionally considered as the main objective of the firm, it has faced
criticism. Wealth maximization is regarded as operationally and managerially
the better objective.
1. Profit maximization:
Profit maximization implies that either a firm produces maximum output for a
given input or uses minimum input for a given level of output. Profit
maximization causes the efficient allocation of resources in competitive market
condition and profit is considered as the most important measure of firm
performance. The underlying logic of profit maximization is efficiency.
In a market economy, prices
are driven by competitive forces and firms are expected to produce goods and
services desired by society as efficiently as possible. Demand for goods and
services leads price. Goods and services which are in great demand can command
higher prices. This leads to higher profits for the firm. This in turn attracts
other firms to produce such goods and services. Competition grows and
intensifies leading to a match in demand and supply. Thus, an equilibrium price
is reached. On the other hand, goods and services not in demand fetches low
price which forces producers to stop producing such goods and services and go
for goods and services in demand. This shows that the price system directs the
managerial effort towards more profitable goods and services. Competitive
forces direct price movement and guides the allocation of resources for various
productive activities.
2. Shareholders’ Wealth
Maximization: Shareholders’ wealth maximization means maximizing the net
present value of a course of action to shareholders. Net Present Value (NPV) of
a course of action is the difference between the present value of its benefits
and the present value of its costs. A financial action that has a positive NPV
creates wealth for shareholders and therefore, is desirable. A financial action
resulting in negative NPV destroys shareholders’ wealth and is, therefore
undesirable. Between mutually exclusive projects, the one with the highest NPV
should be adopted. NPVs of a firm’s projects are additive in nature. That is
NPV(A) + NPV(B) = NPV(A+B)
The objective of Shareholders
Wealth Maximization (SWM) considers timing and risk of expected benefits.
Benefits are measured in terms of cash flows. One should understand that in
investment and financing decisions, it is the flow of cash that is important,
not the accounting profits. SWM as an objective of financial management is
appropriate and operationally feasible criterion to choose among the
alternative financial actions.
Finance Functions (Scope of Financial Management)/ Types
of Decisions to be taken under financial management
The finance function encompasses the
activities of raising funds, investing them in assets and distributing returns
earned from assets to shareholders. While doing these activities, a firm
attempts to balance cash inflow and outflow. It is evident that the finance
function involves the four decisions viz., financing decision, investment
decision, dividend decision and liquidity decision. Thus the finance function
includes:
a) Investment
decision
b) Financing
decision
c) Dividend
decision
d) Liquidity
decision
1. Investment Decision: The investment
decision, also known as capital budgeting, is concerned with the selection of
an investment proposal/ proposals and the investment of funds in the selected
proposal. A capital budgeting decision involves the decision of allocation of
funds to long-term assets that would yield cash flows in the future. Two
important aspects of investment decisions are:
(a) The evaluation of the prospective
profitability of new investments, and
(b) The measurement of a cut-off rate against
that the prospective return of new investments could be compared.
Future benefits of investments are difficult
to measure and cannot be predicted with certainty. Risk in investment arises
because of the uncertain returns. Investment proposals should, therefore, be
evaluated in terms of both expected return and risk. Besides the decision to
commit funds in new investment proposals, capital budgeting also involves
replacement decision, that is decision of recommitting funds when an asset
become less productive or non-profitable. The
computation of the risk-adjusted return and the required rate of return,
selection of the project on these bases, form the subject-matter of the
investment decision.
Long-term investment decisions may be both
internal and external. In the former, the finance manager has to determine
which capital expenditure projects have to be undertaken, the amount of funds
to be committed and the ways in which the funds are to be allocated among
different investment outlets. In the latter case, the finance manager is
concerned with the investment of funds outside the business for merger with, or
acquisition of, another firm.
2.Financing Decision: Financing decision is
the second important function to be performed by the financial manager.
Broadly, he or she must decide when, from where and how to acquire funds to
meet the firm’s investment needs. The central issue before him or her is to
determine the appropriate proportion of equity and debt. The mix of debt and
equity is known as the firm’s capital structure. The financial manager must
strive to obtain the best financing mix or the optimum capital structure for
his or her firm. The firm’s capital structure is considered optimum when the
market value of shares is maximized.
The use of debt affects the return and risk of
shareholders; it may increase the return on equity funds, but it always
increases risk as well. The change in the shareholders’ return caused by the
change in the profit is called the financial leverage. A proper balance will
have to be struck between return and risk. When the shareholders’ return is
maximized with given risk, the market value per share will be maximized and the
firm’s capital structure would be considered optimum. Once the financial
manager is able to determine the best combination of debt and equity, he or she
must raise the appropriate amount through the best available sources. In
practice, a firm considers many other factors such as control, flexibility,
loan covenants, legal aspects etc. in deciding its capital structure.
3. Dividend Decision: Dividend decision is the
third major financial decision. The financial manager must decide whether the
firm should distribute all profits, or retain them, or distribute a portion and
return the balance. The proportion of profits distributed as dividends is
called the dividend-payout ratio and the retained portion of profits is known as
the retention ratio. Like the debt policy, the dividend policy should be
determined in terms of its impact on the shareholders’ value. The optimum
dividend policy is one that maximizes the market value of the firm’s shares.
Thus, if shareholders are not indifferent to the firm’s dividend policy, the
financial manager must determine the optimum dividend-payout ratio. Dividends
are generally paid in cash. But a firm may issue bonus shares. Bonus shares are
shares issued to the existing shareholders without any charge. The financial
manager should consider the questions of dividend stability, bonus shares and
cash dividends in practice.
4. Liquidity Decision: Investment in current
assets affects the firm’s profitability and liquidity. Current assets should be
managed efficiently for safeguarding the firm against the risk of illiquidity.
Lack of liquidity in extreme situations can lead to the firm’s insolvency. A
conflict exists between profitability and liquidity while managing current
assets. If the firm does not invest sufficient funds in current assets, it may
become illiquid and therefore, risky. But if the firm invests heavily in the
current assets, then it would loose interest as idle current assets would not
earn anything. Thus, a proper trade-off must be achieved between profitability
and liquidity. The profitability-liquidity trade-off requires that the
financial manager should develop sound techniques of managing current assets
and make sure that funds would be made available when needed.
5.
(a) What do you mean by Investment Decisions? What are its characteristics?
Discuss any one technique of investment decisions.
Ans: Meaning of Capital Budgeting or
Investment Decision
The term capital budgeting or investment
decision means planning for capital assets. Capital budgeting decision means
the decision as to whether or not to invest in long-term projects such as
setting up of a factory or installing a machinery or creating additional
capacities to manufacture a part which at present may be purchased from outside
and so on. It includes the financial analysis of the various proposals
regarding capital expenditure to evaluate their impact on the financial
condition of the company for the purpose to choose the best out of the various
alternatives.
According to Milton “Capital budgeting
involves planning of expenditure for assets and return from them which will be
realized in future time period”.
According to I.M Pandey “Capital budgeting
refers to the total process of generating, evaluating, selecting, and follow up
of capital expenditure alternative”
Capital budgeting decision is thus, evaluation
of expenditure decisions that involve current outlays but are likely to produce
benefits over a period of time longer than one year. The benefit that arises
from capital budgeting decision may be either in the form of increased revenues
or reduced costs. Such decision requires evaluation of the proposed project to
forecast likely or expected return from the project and determine whether
return from the project is adequate.
Nature
/ Features of Capital budgeting decisions
a) Long term
effect: Such decisions have long term effect on future profitability and
influence pace of firms growth. A good decision may bring amazing returns and
wrong decision may endanger very survival of firm. Hence capital budgeting
decisions determine future destiny of firm.
b) High
degree of risk: Decision is based on estimated return. Changes in taste,
fashion, research and technological advancement leads to greater risk in such
decisions.
c)
Huge funds: Large funds are required and
sparing huge funds is problem and hence decision to be taken after proper care
.
d)
Irreversible decision: Reverting back from a
decision is very difficult as sale of high value asset would be a problem.
e)
Most difficult decision: Decision is based on
future estimates/uncertainty. Future events are affected by economic, political
and technological changes taking place.
f)
Impact on firms future competitive strengths:
These decisions determine future profit or cost and hence affect the
competitive strengths of firm.
g)
Impact on cost structure – Due to this vital
decision, firm commits itself to fixed costs such as supervision, insurance,
rent, interest etc. If investment does not generate anticipated profit, future
profitability would be affected.
Payback
period Method: It is one of the simplest methods to calculate period within
which entire cost of project would be completely recovered. It is the period
within which total cash inflows from project would be equal to total cash
outflow of project. Here, cash inflow means profit after tax but before
depreciation.
Merits of
Payback period Method
a) This method of evaluating proposals for
capital budgeting is simple and easy to understand, it has an advantage of
making clear that it has no profit on any project until the payback period is over
i.e. until capital invested is recovered. This method is particularly suitable
in the case of industries where risk of technological services is very high.
b) In case of routine projects also, use of
payback period method favours projects that generates cash inflows in earlier
years, thereby eliminating projects bringing cash inflows in later years that
generally are conceived to be risky as this tends to increase with futurity.
c) By stressing earlier cash inflows,
liquidity dimension is also considered in selection criteria. This is important
in situations of liquidity crunch and high cost of capital.
d) Payback period can be compared to
break-even point, the point at which costs are fully recovered but profits are
yet to commence.
e) The risk associated with a project arises
due to uncertainty associated with cash inflows. A shorter payback period means
that uncertainty with respect to project is resolved faster.
Limitations
of payback period
a) It stresses capital recovery rather than
profitability. It does not take into account returns from the project after its
payback period.
b) This method becomes an inadequate measure
of evaluating 2 projects where the cash inflows are uneven.
c) This method does not give any consideration
to time value of money, cash flows occurring at all points of time are simply
added.
d) Post-payback period profitability is
ignored totally.
Or
(b) What is financial Leverage? What
are its important features? Calculate the degree of financial leverage from the
following capital structure of a company:
Equity
Share Capital: 1000000
10%
preference Share Capital:
1000000
8%
Debentures: 1250000
The Earning Before Interest and Tax
(EBIT) are Rs. 500000. The rate of income tax is 50%
SOLUTIONS:
LINK OF ALL PRACTICAL PROBLEMS VIDEOS
6. (a) What are
the main sources of finance available to industries for meeting long-term
financial requirements? Discuss these sources.
Or
(b) What is
Capital Market? What are the main components of a capital market? Distinguish
between Capital Market and Money Market.
7. (a)
Discuss the M-M Theory of dividend distribution. What are the major criticisms
of this theory of irrelevance?
Ans: Modigliani and Miller approach (M & M
Hypothesis)
The residuals theory of
dividends tends to imply that the dividends are irrelevant and the value of the
firm is independent of its dividend policy. The irrelevance of dividend policy
for a valuation of the firm has been most comprehensively presented by Modigliani
and Miller. They have argued that the market price of a share is affected by
the earnings of the firm and not influenced by the pattern of income
distribution. What matters, on the other hand, is the investment decisions
which determine the earnings of the firm and thus affect the value of the firm.
They argue that subject to a number of assumptions, the way a firm splits its
earnings between dividends and retained earnings has no effect on the value of
the firm.
Like several financial theories, M&M
hypothesis is based on the argument of efficient capital markets. In addition,
there are two options:
(a) It retains earnings and finances its new
investment plans with such retained earnings;
(b) It distributes dividends, and finances its
new investment plans by issuing new shares.
The intuitive background of the M&M
approach is extremely simple, and in fact, almost self explanatory. It is based
on the following assumptions:
a) The capital markets are perfect and the
investors behave rationally.
b) All information is freely available to all the
investors.
c) There is no transaction cost.
d) Securities are divisible and can be split into
any fraction. No investor can affect the market price.
e) There are no taxes and no flotation cost.
f) The firm has a defined investment policy and
the future profits are known with certainty. The implication is that the
investment decisions are unaffected by the dividend decision and the operating
cash flows are same no matter which dividend policy is adopted.
Their conclusion is that, the shareholders get
the same benefit from dividend as from capital gain through retained earnings.
So, the division of earnings into dividend and retained earnings does not
influence shareholders' perceptions. So whether dividend is declared or not,
and whether high or low payout ratio is follows, it makes no difference on the
value of the share. In order to satisfy their model, MM has started with the
following valuation model.
P0= 1* (D1+P1)/
(1+ke)
Where,
P0 = Present
market price of the share
Ke = Cost of
equity share capital
D1 = Expected
dividend at the end of year 1
P1 = Expected
market price of the share at the end of year 1
With the help of
this valuation model we will create a arbitrage process, i.e., replacement of
amount paid as dividend by the issue of fresh capital. The arbitrage process
involves two simultaneous actions. With reference to dividend policy the two
actions are:
a) Payment of dividend by the firm
b) Rising of fresh capital.
With the help of
arbitrage process, MM have shown that the dividend payment will not have any
effect on the value of the firm. Even if the firm pays dividends, resulting in
a increase in market value of the share, the effect on the value of the firm
will be neutralised by the decrease in terminal value of the share.
Criticisms on MM Dividend theory: MM theory is criticized on
the invalidity of most of its assumptions. Some of the criticisms are presented
below:
a) First,
perfect capital market is not a reality.
b) Second,
transaction and floatation costs do exist.
c) Third,
Dividend has a signaling effect. Dividend decision signals financial standing
of the business, earnings position of the business, and so on. All these are
taken as uncertainty reducers and that these influence share value. So, the
stand of MM is not tenable.
d) Fourth,
MM assumed that additional shares are issued at the prevailing market price. It
is not so. Fresh issues - whether rights or otherwise, are made at prices below
the ruling market price.
e) Fifth,
taxation of dividend income is not the same as that of capital gain. Dividend
income upto Rs. 10000 is fully exempt, whereas capital gain attracts a flat 20%
tax in the case of individual assesses. So, investor preferences between
dividend and capital gain differ.
f) Sixth,
investment decisions are not always rational. Some, sub-marginal projects may
be taken up by firms if internally generated funds are available in plenty.
This would deflate ROI sooner than later reducing share price.
g) Seventh,
investment decisions are tied up with financing decisions. Availability of
funds and external constrains might affect investment decisions and rationing
of capital, then becomes a relevant issue as it affects the availability of
funds.
Or
(b) What
do you mean by Ploughing Back of profit? What are the purposes of Ploughing
back? Discuss different factors that influence the Ploughing back of profits.
Ans: Retained Earnings
or Ploughing Back of Profit
Retained earnings are an internal sources of
finance for any company. Actually is not a method of raising finance, but it is
called as accumulation of profits by a company for its expansion and
diversification activities. Retained earnings are called under different names
such as self finance, inter finance, and plugging back of profits. As prescribed by the central government, a
part (not exceeding 10%) of the net profits after tax of a financial year have
to be compulsorily transferred to reserve by a company before declaring dividends
for the year.
Under the retained earnings sources of
finance, a reasonable part of the total profits is transferred to various
reserves such as general reserve, replacement fund, reserve for repairs and renewals,
reserve funds and secrete reserves, etc.
Retained earnings or profits are ploughed
back for the following purposes.
a) Purchasing
new assets required for betterment, development and expansion of the company.
b) Replacing
the old assets which have become obsolete.
c) Meeting
the working capital needs of the company.
d) Repayment
of the old debts of the company.
Determinants or Factors of Ploughing Back of Profits or Retained
Earnings
(a) Total
Earnings of the Enterprise: The question of saving can arise only when there
are sufficient profits. So larger the earnings larger the savings, it is a
common principle of financial management.
(b) Taxation
Policy of the Government: The report submitted by Taxation Enquiry Commission
has brought into light that taxation policy of the Government tells upon it the
taxes are levied at high rates. Hence, it is also an important determinant of
corporate savings.
(c) Dividend
Policy: It is policy adapted by the top management (board of directors) in
regards to distribution of profits. A conservative dividend policy is essential
for having good accumulation of corporate savings. But, dividend policy is
highly influenced by the income expectation of shareholders and by general
environment prevailing in the country.
(d) Government
Attitudes and Control: Govt. is not only a silent spectator but a regulatory
body of economic system of the country. Its policies, control order and regulatory
instructions-all compel the organizations to work in that very direction for
example compulsory Deposit Scheme which had been in force.
(e) Other
Factors : Other factors affecting the retained earnings are:
(a) Tradition
of industry.
(b) General
economic and social environment prevailing in the country.
(c) Managerial
attitudes and philosophy, etc.
8. (a) What is
Receivable Management? Discuss the factors which influence the size of
receivables.
Or
(b) A proforma Cost Sheet of a company
provided the following particulars:
Elements
of Cost:
Raw
Material 40%
Direct
Labour 10%
Overheads 30%
Following further particulars are also
available:
(i)
Raw
materials are to remain in stores on an average of 6 weeks
(ii)
Processing
time is 4 weeks
(iii) Finished goods are required to be in stock on
an average period of 8 weeks
(iv) Credit period
allowed to debtors on an average of 10 weeks
(v)
Credit
period allowed by creditors is 4 weeks
(vi) Lag-in payment of wages is 2 weeks
(vii)
Selling price
per unit is Rs. 50
You are required to be preparing an
Estimate of Working Capital Requirements adding 10% margin for contingencies
for a level of activity of 130000 unites of production.
SOLUTIONS:
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