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FINANCIAL MANAGEMENT — OCM STD 12 Commerce — Question

Gujarat BoardEnglish MediumSTD 12 CommerceOCMFINANCIAL MANAGEMENT3 Marks
Question
Write notes: $(1)$ Decision related to Investment $(2)$ Decisions related to Dividend.
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Answer

They are as under:
  • Decisions related to Investment :
  • For any business unit first of all fixed capital for long term is invested.
  • Financial management has to determine the selection of assists in which future investment is to be made.
  • Decisions regarding investment is assists is known as ‘capital budgeting’.
  • When financial management has more that in option to invest finance it has to select the assists to invest.
  • It select from the capital budgeting methods such as pay back method, rate of return method , discounted cash flow method.
  • Assessment of the investment should be done on the basis of expected return and probable risk.
  • Factors affecting decision related to investment :
  • Requirement of total capital.
  • Estimated rate of return and profitability from investment.
  • Estimated net cash liquidity from investment.
  • Risk factor in investment.
  • Requirement of working capital after investment.
  • Economic utility of investment and its life.
  • Importance if investment.
  • Significance of importance.
  • Certainty or uncertainty of earning in future.
  • Decisions related to dividend :
  • Company distributes its profit to shareholders as dividend.
  • As per companies act dividend can be distributed in cash only.
  • Dividend is a financial return to the shareholder on the investment they have made in the company.
  • Dividend payment depends on availability of company’s cash.
  • It is paid to shareholders at fixed rate on fully paid up share capital.
  • Financial management has to determine the portion of profit to be distributed as dividend and the portion to be kept in business.
  • For financial management retained earning is important internal source of finance for the company.
  • Dividend payment affect market price of the share of the company.
  • Market value of the share increases if high dividend is paid.
  • On the other hand reinvestment of profit decreases.
  • If large share profit is re-investment then less amount remains for payment of dividend.
  • So the rate of dividend decreases market price of share decreases.
  • Factors affecting decisions related to dividend :
  • After proper study of different alternatives and after evaluation of that alternative from different view point, best plan should be selected.
  • As this stage, time, expense, profitability, like of plan etc.
  • Matters should be considered.
  • Divisible profit of the company during the current financial year.
  • Estimation of earning in future.
  • Rate of dividend paid by the company in the previous years.
  • Need of re-investment $($plugging back$)$ in business.
  • Financial status of the company at present and financial need.
  • Reserve with the company.
  • Future planning of profitable investment.
  • Attitude of the management of the company.
  • Taxation policy
  • Legal restrictions.
  • Expectations of company’s shareholders..
  • Condition of capital market.
  • Growth rate of the company.
  • Liquidity – position of the company.

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