Financial Management 2 marks Theory Questions & Answers.pptx

1. What is financial management ?
Financial Management refers to the management of
flow of funds in the firm. It deals with the financial
decision making of the firm.

2. Define financial management ?
According to Solomon: Financial
management is concerned with the
efficient use of an important economic
resource, namely capital funds.

3. What is financial planning?
It refers to the planning function related
to financial requirements of a firm.

4. What is fixedcapital?
It is the part of total capital which is meant
for meeting the permanent or long term
needs of a firm.

5. List out the factors determining fixedcapital?
Nature of Business
Size/Scale
Production process
Mode of acquiring fixed assets
Gestation period

6. What do you mean by capitalization?
Capitalization implies long term funds
available for a firm. It include shares,
debentures, long term borrowings and
retained earnings.

7. Define Capitalization.
A.S.Dewing defines the term capitalization
or the valuation of the capital includes the
capital stock and debts.

8. What do you mean by capital structure?
Capital structure is the particular
combination of debt and equity used by a
company to finance its overall operations
and growth.

9. Define capital structure
John J. Hampton: Capital structure is the
combination of debt and equity securities
that comprises a firm’s financing of its
assets.

10. What is Optimum capital structure
The capital structure is said to be optimum
capital structure when the firm has
selected such a combination of equity and
debt so that the wealth of the firm is
maximum.

11. List out the factors affecting capital structure
 Trading on equity
 Stability on sales
 Cost of capital
 Capital market conditions
 Flexibility
 Period of finance
 Size of the firm
 Timing
 Government policies

12. What do you mean by Point of Indifference?
Indifference point refers to the EBIT level
at which EPS remains unchanged
irrespective of debt-equity mix.

13. Define Cost of capital
Milton H. Spencer: Cost of capital is the
minimum rate of return which a firm
requires as a condition for undertaking an
investment.

14. List out the factors determining cost of capital.
General economic condition
Market condition
Operating and financing decisions
Amount of financing

15. What are the types of cost of capital?
Historical cost and Future cost
Explicit cost and Implicit cost
Specific cost and Composite cost

16. What is historical cost?
It refers to the cost which has already
been incurred in order to finance a
particular project.

17. What is Future cost?
It is the expected cost of funds for
financing a particular project.

18. What do you mean by composite cost?
It refers to the combined cost of equity
capital, preference capital, debt etc.,

19. What is cost of debt?
Cost of debt may be defined as the returns
expected by the potential investors of
debt securities of a firm.

20. What is meant by dividend?
The term dividend refers to that part of
the profit (after tax) which is distributed
among the owners/shareholders of the
firm.

21. What are the types of dividends?
Regular Dividend
Interim Dividend
Stock Dividend
Bond Dividend
Property Dividend

22. What is Dividendpolicy?
It refers to the policy chalked out by firms
regarding the amount they would pay to
their shareholders as dividends.

23. What are the types of Dividendpolicy?
Generous Dividend Policy
Erratic Dividend Policy
Stable Dividend Policy

24. Define Working capital
ICAI: Working capital means the funds
available for day-to-day operations of an
enterprise.

25. What is Operating Cycle?
The Operating cycle is the length of time required for
conversion of non-cash assets into cash.
OR
The operating cycle is the length of time between the
company's outlay on raw materials, wages and other
expenses and inflow of cash from sale of goods.