Question 1:

Financial management involves planning, organizing, controlling, and monitoring financial resources

to achieve organizational goals. It encompasses three main decisions:

- Investment Decision: Where to invest funds.

- Financing Decision: How to raise funds.

- Dividend Decision: How to distribute profits.

Its scope includes capital budgeting, working capital management, financial planning, and risk

management.

Question 2:

Short-term investment decisions are concerned with current assets like cash, inventory, and

receivables, e.g., investing in stock for resale. Long-term investment decisions involve fixed assets

such as land or machinery, which yield benefits over a longer period, e.g., building a new plant.

Question 3:

Working capital is the difference between current assets and current liabilities.

- Net Working Capital = Current Assets - Current Liabilities

- Gross Working Capital = Total Current Assets

Efficient management ensures liquidity and operational efficiency.

Question 4:

Cash management involves collecting, managing, and investing cash. Objectives:

- Ensure liquidity

- Optimize cash utilization

- Avoid insolvency

- Control cash inflow and outflow

It ensures smooth business operations and financial stability.

Question 5:

Capital budgeting is the process of planning investments in fixed assets. It's relevant in long-term

planning as it involves decisions that affect a company's future growth, profitability, and risk. It uses
techniques like NPV, IRR, and Payback Period.

Question 6:

Sources of finance include:

- Debt (loans, bonds)

- Equity (shares, retained earnings)

- Internal funds

Entrepreneurs should consider cost, risk, control, and repayment terms. Early-stage startups may

prefer equity, while stable businesses may opt for loans.

Question 7:

Cash management ensures a business has enough cash for day-to-day operations. Functions

include:

- Managing inflows and outflows

- Maintaining liquidity

- Investing surplus cash

- Ensuring timely payments

It prevents cash shortages and improves creditworthiness.

Question 8:

Using DCF:

Annual inflow = 1,50,000, Discount rate = 10%, Years = 5

NPV = [Cash inflow / (1 + r)^t] - Initial Investment

= 1,50,000 PVIFA(10%,5) - 5,00,000

= 1,50,000 3.791 - 5,00,000 = 5,686.5

Decision: Since NPV > 0, accept the investment.

Question 9:

To determine cost of capital:

- Identify cost of each component (debt, equity)

- Use WACC formula

Changes in these affect investment attractiveness and financing options.

Question 10:

Cash management avoids insolvency by ensuring sufficient cash is available to meet short-term

obligations. It helps manage cash flow gaps, prioritize essential payments, and plan for

contingencies.

Question 11:

DCF evaluates investment by discounting future cash flows to present value. Formula: DCF =

[Cash Flow / (1 + r)^t]

It helps in valuing projects and making informed investment decisions.

Question 12:

WACC is the average rate a company is expected to pay to finance assets. It is used in investment

appraisal:

WACC = (E/V Re) + (D/V Rd (1 Tc))

Lower WACC means cheaper capital, influencing investment choices.

Question 13:

Profit Maximization focuses on short-term gains. Wealth Maximization aims for long-term value

creation, considering risk, time value, and sustainability. Wealth maximization is a modern,

comprehensive objective.

Question 14:

Use financial statements and ratios like profitability, liquidity, and solvency. Tools: Ratio analysis,

trend analysis, common-size statements. Helps identify inefficiencies and guide strategic changes.

Question 15:

Working Capital Cycle = Inventory Period + Receivables Period - Payables Period. Steps:

1. Purchase raw materials

2. Produce goods

3. Sell goods
4. Collect receivables

5. Pay suppliers

Efficient WCC improves liquidity.

Question 16:

Same as Q7. Cash management ensures liquidity by balancing inflows and outflows, enabling

smooth operations, reducing borrowing, and managing payments.

Question 17:

Discounted methods (NPV, IRR) consider time value of money; more accurate. Non-discounted

methods (Payback Period, ARR) are simpler but ignore time value. Discounted methods are

preferred for major decisions.

Question 18:

Debt involves borrowing with interest obligations; retains ownership. Equity involves issuing shares;

dilutes ownership but no fixed repayment. Balance is key in financial planning.

Question 19:

Cash management ensures liquidity, reduces idle cash. Objectives:

- Forecast cash needs

- Manage collection and payments

- Invest surplus efficiently

This maintains solvency and operational efficiency.

Question 20:

Capital budgeting involves evaluating and selecting long-term investments. Businesses need it to

allocate resources efficiently, maximize returns, and reduce risks.

Question 21:

Cost of Capital includes:

- Cost of Debt

- Cost of Equity

- Preferred Capital Cost

Question 22:

Approach:

- Estimate capital needs

- Evaluate financing options (debt/equity)

- Assess returns and risks

- Choose based on cost, flexibility, and control.

Question 23:

Advantages:

- Higher returns

- Business growth

- Competitive edge

Disadvantages:

- Riskier

- Liquidity issues

- Long payback period

Question 24:

Working Capital = Current Assets - Current Liabilities

Factors: Business size, sales volume, credit policy, production cycle. Proper WC ensures smooth

operations.

Question 25:

Cash forecasting predicts future cash flows. Process:

1. Analyze historical data

2. Estimate revenues and expenses

3. Identify timing of flows

4. Adjust for variability

5. Monitor and revise regularly.

Discounted Methods: NPV, IRR (time value considered). Non-discounted: Payback Period, ARR

(simpler, less accurate). Use depends on project type and complexity.

Question 27:

WACC = (E/V Re) + (D/V Rd (1 Tc))

E = 6,00,000, D = 4,00,000, V = 10,00,000

Re = 15%, Rd = 10%, Tc = 0

WACC = (6/10 15%) + (4/10 10%) = 9% + 4% = 13%