Gujarat BoardEnglish MediumSTD 12 CommerceOCMFINANCIAL MANAGEMENT5 Marks
Question
For which major problems does the financial management make decision? Explain them very briefly.
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Answer
Financial management has to take important decisions with respect to the following three problems:
$(A)$ Decisions related to investment
$(B)$ Decisions related to financing
$(C)$ Decisions related to dividend
$(A)$ Decisions related to investment:
Business requires capital investment in various assets that too for a long and fixed term. This includes investment in machinery, land, etc.
It is always a risk to identify the best asset in which investment should be made. Hence it is very crucial that decision of investment is evaluated in terms of expected return and risk.
$(B)$ Decisions related to financing:
Investment decisions are connected with the assets of the company while financing decisions are related to the capital structure.
Capital structure of the company consists of
$(a)$ equity shares
$(b)$ equity shares and preference shares
$(c)$ equity shares and debentures
$(d)$ equity shares, preference shares and debentures.
Financial manager has to take decision regarding the portion to be maintained between equity and debt in capital structure. A fine balance between equity capital and debt is necessary so as to maximize the returns of the company.
$(C)$ Decisions related to dividend:
Dividend is a part of profit of a company which is distributed among its shareholders. Dividend is a return to shareholders on their investment.
The financial manager has to tactfully decide what part of profit should be distributed as dividend and what part of profit should be retained in business.
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