financial management

1. CHAPTER 9

3. • Money required for carrying out business activities is
called business finance.
“ Finance is the life blood of business”.
• Finance is defined as the provision for money at the
time it is wanted.
Business

6. SCOPE OF
1.
2.

9. I
It is the main aim of every
Economic activity. It means maximising the income of the firm.

16. Cash flows of the project
The rate of return
Investment criteria involved
Factors affecting investment
decision

17. Investment in long
term assets generate
cash flows over a
period.Cash inflow and
outflow must be
carefully analysed
before arriving at any
investment decision
Cash flows of the project

18. The rate of return is the
basic criterion for selecting
any project.Calculations
must be based on the
expected returns from each
proposal and risk associated
with them.
The rate of return

19. There are different capital
budgeting techniques to
evaluate investment
proposals.These techniques
are present value,discounted
cash flow,payback period
method ,etc.
Investment criteria involved

22. > Cost
> Risk
> Floatation costs
> Cash flow position
> Fixed operating costs
> Control
> State of capital market
Factors affecting Financing decision

23. Evaluate the
cost of obtaining
finance from
different sources
and select the
cheapest source.
COST

24. Risk involved in each source should be evaluated
carefully before selecting the source of finance.
RISK

25. Floatation cost is the cost of
raising finance .The selected
source of finance should have
the cheapest floatation cost
3.Floatation costs

26. A stronger cash flow
position normally
recommend more of debt
financing
Cash flow position of the firm

27. If fixed operating costs like
building rent,insurance
premium,salaries etc are high
in business,It must reduce
fixed financing commitments.
Fixed operating costs

28. More owned funds
dilute the
management control
over business. Debt
financing has no
such danger.
CONTROL

29. DECISIONS

30. Retained earnings or ploughing back of profit is that
portion of profit which is kept as reserves.

31. FACTORS AFFECTING DIVIDEND
DECSION
• Amount of earnings
• Stability of earnings
• Stability of dividends
• Growth opportunities
• Cash flow position
• Shareholders’preferen
ce

32. FACTORS AFFECTING DIVIDEND
DECSION
• Taxation policy
• Stock market
reaction
• Access to capital
market
• Legal constraints
• Contractual

33. • Amout of earnings
Dividends are paid
out of current earnings
and past
earnings.Earnings is
thus an important
determinant of

34. • A company having stable earning will be
able to declare higher dividends.
Stability of earnings

35. • A stable dividend policy will instill
confidence in the minds of shareholders,
which in turn improves the reputation of
the company
Stability of dividends

36. • A company having good growth opportunities
will retain a major part of its earnings as
source of internal financing.
Growth opportunities

37. • Payment of dividend involves an outflow of
cash. Therefore, availability of enough cash
is necessary for declaration of dividend.
Cash flow position

38. • Management must keep in mind the
preferences of shareholders while making
payment of dividend.
Share holders’ preference

39. • If tax on dividend is higher, it is better to
pay less dividend. Dividend distribution tax
is levied on companies.
Taxation policy

40. • Rate of dividend and stock market reaction
are directly related.A higher rate of
dividend has a positive impact on stock
market and vice versa
Stock market reaction

41. • Companies with proven track record,
generally have easy access to the capital
market.Therefore,they may depend less on
retained earning.
Access to capital market

42. • There are certain provisions in the Companies
Act, which place restrictions on payouts of
dividends.
Legal constraints

43. • When companies borrow money on long term
basis, the lender may impose certain
restriction on dividend distribution.
Contractual constraints