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Practice each question, then open the answer or worked solution.
What is meant by capital structure?
Capital structure is the combination of debt and equity, which is used by a company to finance its requirements for funds. Debt can be obtained in the form of loans, while equity is generated through retained earnings or common stock.
Discuss the two objectives of Financial Planning.
Financial planning is the process of framing financial policies, procedures, programs and budgets that are necessary for the financial activities of the enterprise.
Objectives of financial planning are:
1. To ensure proper utilisation of funds available for the organisational activities.
2. To determine the capital structure, which is the composition of debt and equity that is necessary for a business.
Name the concept of financial management, which increases the return to equity shareholders due to the presence of fixed financial charges.
Trading on equity concept increases returns to equity shareholders due to the presence of fixed financial charges.
Amrit is running a ‘transport service’ and earning good returns by providing this service to industries. Giving reason, state whether the working capital requirement of the firm will be ‘less’ or ‘more’.
The type of business conducted by Amrit is transport service which will be operating on a large scale. Hence, there is a need for more amount of working capital.
Ramnath is into the business of assembling and selling televisions. Recently he has adopted a new policy of purchasing the components on three months’ credit and selling the complete product in cash. Will it affect the requirement for working capital? Give reasons in support of your answer
As Ramnath has adopted the policy of purchasing components on credit for 3 months and selling the product in cash, the working capital requirement is reduced.