Business Studies 6 Marks Question

FACTORS AFFECTING THE WORKING CAPITAL REQUIREMENTS:

1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a lower amount of working capital compared to a manufacturing organisation. This is because there is, usually no processing, therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible. Other factors remaining the same, trading business requires less working capital. Similarly, service industries which usually do not have to maintain inventory require less working capital.
2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital compared to the organisations which operate on a lower scale.
3. Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as,well as production are likely to be higher and therefore, higher amount of working capital is required. As against this the requirement for working capital will be lower during period of depression as the sales as well as production will be low.
4. Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, higher amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.

1. Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as,well as production are likely to be higher and therefore, higher amount of working capital is required. As against this the requirement for working capital will be lower during period of depression as the sales as well as production will be low.
2. Operating Efficiency: Firms manage their operations with varied degrees of efficiency. For example, a firm managing its raw materials efficiently may be able to manage with a smaller balance. This is reflected in a higher inventory turnover ratio. Similarly, a better debtors turnover ratio may be achieved reducing the amount tied up in receivable. Better sales effort may reduce the average time for which finished goods inventory is held.
3. Availability of Raw Material: If the raw materials and other required materials are available freely and continuously, lower stock levels may suffice. If, however, raw materials do not have a record of un-interrupted availability, higher stock levels may be required. In addition, the time lag between the placement of order and actual receipt of the materials (also called lead time) is also relevant. Higher the lead time, higher the quantity of material to be stored and higher is the amount of working capital requirement.
4. Level of Competition: Higher level of competitiveness may necessitate higher stocks of finished goods to meet urgent orders from customers. This increases the working capital requirement. competition may also force the firm to extend liberal credit terms.

Apart from the investment in fixed assets every business organization needs to invest in current assets. This investment facilitates smooth day-to-day operations of the business. Current assets are usually more liquid but contribute less to the profits than fixed assets.Factors affecting the fixed capital are:

1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a lower amount of working capital compared to a manufacturing organisation. This is because there is, usually no processing, therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible. Other factors remaining the same, trading business requires less working capital. Similarly, service industries which usually do not have to maintain inventory require less working capital
2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum ofinventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.
3. Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as well as production are likely to be higher and therefore, higher amount of working capital is required. As against this the requirement for working capital will be lower during period of depression as the sales as well as production will be low.
4. Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, higher amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.

1. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum ofinventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.
2. Choice of Technique: Some organisations are capital intensive whereas others are labour intensive. A capital-intensive organisation requires higher investment in plant and machinery as it relies less on manual labour. The requirement of fixed capital for such organisations would be higher. Labour intensive organisations on the other hand require less investment in fixed assets. Hence, their fixed capital requirement is lower.
3. Technology Upgradation: In certain industries, assets become obsolete sooner. consequently, their replacements become due faster. Higher investment in fixed assets may, therefore, be required in such cases. For example, computers become obsolete faster and are replaced much sooner than say, furniture. Thus, such organizations which use assets which are prone to obsolescence require higher fixed capital to purchase such assets.
4. Financing Alternatives: A developed financial market may provide leasing facilities as an alternative to outright purchase. When an asset is taken on lease, the firm pays lease rentals and uses it. By doing so, it avoids huge sums required to purchase it. Availability of leasing facilities, thus, may reduce the funds required to be invested in fixed assets, thereby reducing the fixed capital requirements. Such a strategy is specially suitable in high risk lines of business.

1. Stability of Dividends: It has been found that the companies generally follow a policy of stabilizing dividend per share. The increase in dividends is generally made when there is confidence that their earning potential has gone up and not just the earnings of the current year. In other words, dividend per share is not altered if the change in earnings is small or seen to be temporary in nature.
2. Shareholder Preference: While declaring dividends, managements usually keep in mind the preferences of the shareholders in this regard. If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same. There are always some shareholders who depend upon a regular income from their investments.
3. Legal Constraints: Certain provisions of the Company’s Act place restrictions on payouts as dividend. Such provisions must be adhered to while declaring the dividends.
4. Access to Capital Market: Large and reputed companies generally have easy access to the capital market and therefore may depend less on retained earning to finance their growth. These companies tend to pay higher dividends than the smaller companies which have relatively low access to the market.

1. Earning per share before diversification: ₹ 0.50

Calculation of Earning per share after issue of Debentures: (assuming face value of ₹ 100 per share)

Particulars	₹
Share capital 10% debentures	60,00,000 40,00,000
Total	1,00,00,000
Profit before interest and tax Less Interest Profit before tax Less tax@ 40% Profit available to shareholders Earning per share = 2,40,000/ 60,000	8,00,000 4,00,000 4,00,000 1,60,000 2,40,000   = ₹ 4

This clearly shows that the shareholders have gained after the issue of debentures since the Earning per share has increased from ₹ 0.50 to ₹ 4.

Alternate Answer

Calculation of Earning per share after issue of Debentures: (assuming face value of ₹ 10 per share)

Particulars	₹
Share capital 10% debentures	60,00,000 40,00,000
Total	1,00,00,000
Profit before interest and tax Less Interest Profit before tax Less tax@ 40% Profit available to shareholders Earning per share = 2,40,000/ 60,000	8,00,000 4,00,000 4,00,000 1,60,000 2,40,000   = ₹ 0.40

This clearly shows that the shareholders have lost after the issue of debentures since the Earning per share has decreased from ₹ 0.50 to ₹ 0.40.

2. Factors that favour issue of debentures by the company:

Good Cash Flow Position: Size of projected cash flows must be considered before issuing debt. Cash flows must not only cover fixed cash payment obligations but there must be sufficient buffer also. It must be kept in mind that a company has cash payment obligations for,

1. Normal business operations.
2. For investment in fixed assets.
3. For meeting the debt service commitments i.e., payment of interest and repayment of principal.

Return on Investment (RoI): If the RoI of the company is higher, it canchoose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater.

Control: Debt normally does not cause a dilution of control. A publicissue of equity may reduce the managements holding in the company and make it vulnerable to takeover.

The following factors affect the dividend decision:

1. Quotes from the case ''It has been consistently earning good profits for many years''.

Stability of earnings Other things remaining the same, a company having stable earning is in a position to declare higher dividends. As against this, a company having unstable earnings is likely to pay smaller dividend.

2. Quotes from the case “There is availability of enough cash in the company”

Cash Flow position: Dividends involve an outflow of cash. A company may be profitable but short on cash. Availability of enough cash in the company is necessary for declaration of dividend by it.

3. Quotes from the case “Good prospects for growth in the future”

Growth Prospects: Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. The dividend in growth companies is, therefore, smaller, than that in the non– growth companies.

4. Quotes from the case “It has many shareholders who prefer to receive regular income from their investments”.

Shareholders' preference: While declaring dividends, managements usually keep in mind the preferences of the shareholders in this regard. If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same. There are always some shareholders who depend upon a regular income from their investments

5. Quotes from the case “It has taken a loan of Rs. 40 Lakhs from IDBI and ..... agreement”.

Contractual constraints: While granting loans to a company, sometimes the lender may impose certain restrictions on the payment of dividends in future. The companies are required to ensure that the dividends does not violate the terms of the loan agreement in this regard.

Factors affecting the requirements of working capital:

1. Nature of Business: The type of business has a bearing upon the fixed capital requirements. For example, a trading concern needs lower investment in fixed assets compared with a manufacturing organisation; since it does not require to purchase plant and machinery etc.
2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which.
3. Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, higher amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.
4. Production Cycle: Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Some businesses have longer production cycle while some have a shorter one. Duration and the length of production cycle, affects the amount of funds required for raw materials and expenses. Consequently, working capital requirement is higher in firms with longer processing cycle and lower in firms with shorter processing cycle.

Factors affecting the choice of capital structure:

1. Cash Flow Position: Size of projected cash flows must be considered before issuing debt. Cash flows must not only cover fixed cash payment obligations but there must be sufficient buffer also. It must be kept in mind that a company has cash payment obligations for,

1. Normal business operations,
2. For investment in fixed assets,
3. For meeting the debt service commitments i.e., payment of interest and repayment of principal.

2. Cost of Equity: Stock owners expect a rate of return from the equity which is commensurate with the risk they are assuming. When a company increases debt, the financial risk faced by the equity holders, increases. Consequently, their desired rate of return may increase. It is for this reason that a company can not use debt beyond a point. If debt is used beyond that point, cost of equity may go up sharply and share price may decrease inspite of increased EPS. Consequently, for maximisation of shareholders’ wealth, debt can be used only upto a level.
3. Floatation Costs: Process of raising resources also involves some cost. Public issue of shares and debentures requires considerable expenditure. Getting a loan from a financial institution may not cost so much. These considerations may also affect the choice between debt and equity and hence the capital structure.
4. Stock Market Conditions: If the stock markets are bullish, equity shares are more easily sold even at a higher price. Use of equity is often preferred by companies in such a situation. However, during a bearish phase, a company, may find raising of equity capital more difficult and it may opt for debt. Thus, stock market conditions often affect the choice between the two.

Working capital requirements of Pranav would be less as it is a SERVICE industry.Working capital requirements of Pranav would also include payment of salaries, fuel charges maintenance of vehicles, etc.Factors which will affect his fixed capital requirements are:

1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a lower amount of working capital compared to a manufacturing organisation. This is because there is, usually no processing, therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible. Other factors remaining the same, trading business requires less working capital. Similarly, service industries which usually do not have to maintain inventory require less working capital
2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum ofinventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.

Overall cost of capital and the financial risk of the enterprise depends upon the following factors:

1. Cost: The cost of raising funds through different sources are different. A prudent financial manager would normally opt for a source which is the cheapest.
2. Cash Flow Position of the Business: A stronger cash flow position may make debt financing more viable than funding through equity.
3. Level of Fixed Operating Costs: If a business has high level of fixed operating costs (e.g., building rent, Insurance premium, Salaries etc.), It must opt for lower fixed financing costs. Hence, lower debt financing is better. Similarly, if fixed operating cost is less, more of debt financing may be preferred.
4. Control Considerations: Issues of more equity may lead to dilution of management’s control over the business. Debt financing has no such implication. Companies afraid of a takeover bid may consequently prefer debt to equity.
5. State of Capital Markets: Health of the capital market may also affect the choice of source of fund. During the period when stock market is rising, more people are ready to invest in equity. However, depressed capital market may make issue of equity shares difficult for any company.

Sound financial planning is essential for the success of any business enterprise because of the following reasons:

1. It tries to forecast what may happen in future under different business situations. By doing so, it helps the firms to face the eventual situation in a better way. In other words, it makes the firm better prepared to face the future. It helps in avoiding business shocks and surprises and helps the company in preparing for the future.
2. If helps in co-ordinating various business functions e.g., sales and production functions, by providing clear policies and procedures.
3. Detailed plans of action prepared under financial planning reduce waste, duplication of efforts, and gaps in planning.
4. It tries to link the present with the future.
5. It provides a link between investment and financing decisions on a continuous basis.
6. By spelling out detailed objectives for various business segments, it makes the evaluation of actual performance easier.

Factors to be considered while determining the fixed capital requirement for the company:

1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a lower amount of working capital compared to a manufacturing organisation. This is because there is, usually no processing, therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible.
2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.
3. Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as well as production are likely to be higher and therefore, higher amount of working capital is required. As working capital will be lower during period of depression as the sales as well as production will be low.
4. Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, higher amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.

Financing decision is the decision about the quantum of finance to be raised from various long term sources and how” much is to be raised from each source. Factors affecting financing decision are:

1. Cost of different sources of finance as some sources may be cheaper than others.
2. Risk associated with different sources of finance is different.
3. Higher the floatation costs, less attractive the source.
4. A stronger cash flow position may make debt financing more viable than funding through equity.
5. With higher fixed operating costs, lower fixed financing costs should be opted for.
6. Issue of more equity may lead to dilution of management’s control over the business.
7. State of the capital market is considered while taking financing decision as in a depressed capital market, issue of equity shares may be difficult.

The capital structure means the proportion of debt and equity used for financing the operations of a business.Alternate Answer
It refers to the mix between owner’s funds and borrowed funds.Factors which affect the capital structure of a company are:

1. Cash Flow Position must be considered to meet fixed payment obligations associated with debt.
2. Issue of more equity may lead to dilution of management’s control over the business.
3. If the firm uses its debt potential to the full, it loses flexibility to issue further debt
4. If the stock markets are bullish, use of equity is preferred as they are more easily sold even at a higher price.
5. While deciding the capital structure, the regulatory framework provided by law should be considered.
6. If a firm’s business risk is lower, its capacity to use debt is higher and vice versa.
7. Floatation cost of different sources is considered as cost of raising equity is higher.
8. The higher the Interest Coverage Ratio OCR). lower is the risk of company failing to meet its interest obligations.
9. A higher Debt Service Coverage Ratio (DSCR) indicates the company’s potential to increase debt component in its capital structure.
10. If the Return on Investment (ROI) of the company is higher than the interest on debt, its ability to use debt is greater.
11. A firm’ s ability to borrow (cost of debt) at a lower arte, increase its capacity to employ higher debt.
12. Cost of Equity increase when debt is used beyond a certain point.
13. A higher tax rate makes debt relatively cheaper and more attractive.
14. Capital Structure of other companies is also a useful guideline while planning capital structure.

1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a lower amount of working capital compared to a manufacturing organisation. This is because there is, usually no processing, therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible. Other factors remaining the same, trading business requires less working capital. Similarly, service industries which usually do not have to maintain inventory require less working capital.
2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital compared to the organisations which operate on a lower scale.
3. Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as,well as production are likely to be higher and therefore, higher amount of working capital is required. As against this the requirement for working capital will be lower during period of depression as the sales as well as production will be low.
4. Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, higher amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.

Factors affecting the Choice of Capital Structure:Deciding about the capital structure of a firm involves determining the relative proportion of various types of funds. This depends on various factors.

1. Cash Flow Position: Size of projected cash flows must be considered before issuing debt. Cash flows must not only cover fixed cash payment obligations but there must be sufficient buffer also. It must be kept in mind that a company has cash payment obligations.

1. Normal business operations,
2. For investment in fixed assets,
3. For meeting the debt service commitments i.e., payment of interest and repayment of principal.

2. Return on Investment (RoI): If the RoI of the company is higher, it can choose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater.
3. Cost of debt: A firm’s ability to borrow at a lower rate increases its capacity to employ higher debt. Thus, more debt can be used if debt can be raised at a lower rate.
4. Tax Rate: Since interest is a deductible expense, cost of debt is affected by the tax rate. The firms in our examples are borrowing @ 10%. Since the tax rate is 30%, the after tax cost of debt is only 7%. A higher tax rate, thus, makes debt relatively cheaper and increases its attraction vis-à-vis equity.

Factors affecting the fixed capital are:

1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a lower amount of working capital compared to a manufacturing organisation. This is because there is, usually no processing, therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible. Other factors remaining the same, trading business requires less working capital. Similarly, service industries which usually do not have to maintain inventory require less working capital
2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum ofinventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.
3. Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as well as production are likely to be higher and therefore, higher amount of working capital is required. As against this the requirement for working capital will be lower during period of depression as the sales as well as production will be low.
4. Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, higher amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.

Fixed capital refers to investment in long-term assets. Management of fixed capital involves around allocation of firm’s capital to different projects or assets with long-term implications for the business. These decisions are called investment decisions or capital budgeting decisions and affect the growth, profitability and risk of the business in the long run.Factors affecting the fixed capital are:

1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a lower amount of working capital compared to a manufacturing organisation. This is because there is, usually no processing, therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible. Other factors remaining the same, trading business requires less working capital. Similarly, service industries which usually do not have to maintain inventory require less working capital.
2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum ofinventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.
3. Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as well as production are likely to be higher and therefore, higher amount of working capital is required. As against this the requirement for working capital will be lower during period of depression as the sales as well as production will be low.
4. Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, higher amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.

Financial Management is concerned with optimal procurement as well as usage of finance. For optimal procurement, different available sources of finance are identified and compared in terms of their costs and associated risks. Financial decision-making is concerned with three broad decisions which are as under.

1. Investment Decision: The investment decision, relates to how the firm’s funds are invested in different assets. Investment decision can be longterm or short-term. A long-term investment decision is also called a Capital Budgeting decision. It involves committing the finance on a long-term basis. Short term investment decisions (also called working capital decisions) are concerned with the decisions about the levels of cash, inventories and debtors. These decisions affect the day to day working of a business.
2. Financing Decision: This decision is about the quantum of finance to be raised from various long-term sources (short-term sources are studied in working capital management). It involves identification of various available sources. The main sources of funds for a firm are shareholders funds and borrowed funds. Shareholders funds refer to equity capital and retained earnings. Borrowed funds refer to finance raised as debentures or other forms of debt.
3. Dividend Decision: The third important decision that every financial manager has to take relates to the distribution of dividend. Dividend is that portion of profit which is distributed to shareholders. The decision involved here is how much of the profit earned by company (after paying tax) is to be distributed to the shareholders and how much of it should be retained in the business for meeting the investment requirements. While dividend constitutes current income reinvestment as retained earning increases the firms future earning capacity.

Privatization: The transfer of ownership, property or business from the government to the private sector is termed privatization. The government ceases to be the owner of the entity or business. The process in which a publicly-traded company is taken over by a few people is also called privatization
The Indian corporate sector has come face-to-face with several challenges due to government policy changes. These challenges can be explained as follows:

1. Increasing competition: As a result of changes in the rules of industrial licensing and entry of foreign firms, competition for Indian firms has increased especially in service industries like telecommunications, airlines, banking, insurance, etc. which were earlier in the public sector.
2. More demanding customers: Customers today have become more demanding because they are well-informed. Increased competition in the market gives the customers wider choice in purchasing better quality of goods and services.
3. Need for developing human resource: Indian enterprises have suffered for long with inadequately trained personnel. The new market conditions require people with higher competence and greater commitment. Hence the need for developing human resources.
4. Market orientation: Earlier firms used to produce first and go to the market for sale later. In other words, they had production oriented marketing operations
5. Necessity for change: In a regulated environment of pre - 1991 era, the firms could have relatively stable policies and practices. After 1991, the market forces have become turbulent as a result of which the enterprises have to continuously modify their operations.

Factors affecting capital structure:

1. Financial leverage: A financial manager must examine in detail how the use of proposed financing mix will affect the risk and return of the owners.
2. Cash flow ability: Ability of the business to generate enough cash flow to meet its fixed commitment like interest payment on debts. raised.
3. Control: If shareholders want to retain the control they will prefer to employ debt and preference capital. The control will be diluted if additional funds are raised through issue of equity, as equity shareholders have a right to vote.
4. Flexibility: Composition of capital structure should be flexible enough to change as per the company’s requirement and operation.
5. Market conditions: Depending upon the economic conditions, investors may be cautious in their dealing and not be ready to take unnecessary risk by purchasing the shares.
6. Legal framework: A company has to operate in the frame work provided by law.
7. Floatation costs: Capital structure also depends upon the cost to be incurred on raising of funds.

Factors affecting the Choice of Capital Structure:Deciding about the capital structure of a firm involves determining the relative proportion of various types of funds. This depends on various factors.

1. Cash Flow Position: Size of projected cash flows must be considered before issuing debt. Cash flows must not only cover fixed cash payment obligations but there must be sufficient buffer also. It must be kept in mind that a company has cash payment obligations for,

1. Normal business operations,
2. For investment in fixed assets,
3. For meeting the debt service commitments i.e., payment of interest and repayment of principal.

1. Return on Investment (RoI): If the RoI of the company is higher, it can choose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater.
2. Cost of debt: A firm’s ability to borrow at a lower rate increases its capacity to employ higher debt. Thus, more debt can be used if debt can be raised at a lower rate.
3. Tax Rate: Since interest is a deductible expense, cost of debt is affected by the tax rate. The firms in our examples are borrowing @ 10%. Since the tax rate is 30%, the after tax cost of debt is only 7%. A higher tax rate, thus, makes debt relatively cheaper and increases its attraction vis-à-vis equity.

FACTORS AFFECTING THE WORKING CAPITAL REQUIREMENTS

1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a lower amount of working capital compared to a manufacturing organisation. This is because there is, usually no processing, therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible. Other factors remaining the same, trading business requires less working capital. Similarly, service industries which usually do not have to maintain inventory require less working capital.
2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital compared to the organisations which operate on a lower scale.
3. Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as,well as production are likely to be higher and therefore, higher amount of working capital is required. As against this the requirement for working capital will be lower during period of depression as the sales as well as production will be low.
4. Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, higher amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.

1. Earning per share before diversification: ₹ 0.50

Calculation of Earning per share after issue of Debentures: (assuming face value of ₹ 100 per share)

Particulars	₹
Share capital 10% debentures	1,20,00,000 80,00,000
Total	2,00,00,000
Profit before interest and tax Less Interest Profit before tax Less tax@ 40% Profit available to shareholders Earning per share = 4,80,000/ 1,20,000	16,00,000 8,00,000 8,00,000 3,20,000 4,80,000   =₹ 4

This clearly shows that the shareholders have gained after the issue of debentures since the Earning per share has increased from ₹ 0.50 to ₹ 4.
Alternate Answer
Calculation of Earning per share after issue of Debentures: (assuming face value of ₹ 10 per share)

Particulars	₹
Share capital 10% debentures	1,20,00,000 80,00,000
Total	2,00,00,000
Profit before interest and tax Less Interest Profit before tax Less tax@ 40% Profit available to shareholders Earning per share = 4,80,000/12,00,000	16,00,000 8,00,000 8,00,000 3,20,000 4,80,000   =₹ 0.40

This clearly shows that the shareholders have lost after the issue of debentures since the Earning per share has decreased from ₹ 0.50 to ₹ 0.40.

2. Factors that favour issue of debentures by the company:
   Good Cash Flow Position: Size of projected cash flows must be considered before issuing debt. Cash flows must not only cover fixed cash payment obligations but there must be sufficient buffer also. It must be kept in mind that a company has cash payment obligations for,

1. Normal business operations,
2. For investment in fixed assets,
3. For meeting the debt service commitments i.e., payment of interest and repayment of principal.

Control: Debt normally does not cause a dilution of control. A publicissue of equity may reduce the managements holding in the company and make it vulnerable to takeover.

1. Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as,well as production are likely to be higher and therefore, higher amount of working capital is required. As against this the requirement for working capital will be lower during period of depression as the sales as well as production will be low.
2. Operating Efficiency: Firms manage their operations with varied degrees of efficiency. For example, a firm managing its raw materials efficiently may be able to manage with a smaller balance. This is reflected in a higher inventory turnover ratio. Similarly, a better debtors turnover ratio may be achieved reducing the amount tied up in receivable. Better sales effort may reduce the average time for which finished goods inventory is held.
3. Availability of Raw Material: If the raw materials and other required materials are available freely and continuously, lower stock levels may suffice. If, however, raw materials do not have a record of un-interrupted availability, higher stock levels may be required. In addition, the time lag between the placement of order and actual receipt of the materials (also called lead time) is also relevant. Higher the lead time, higher the quantity of material to be stored and higher is the amount of working capital requirement.
4. Level of Competition: Higher level of competitiveness may necessitate higher stocks of finished goods to meet urgent orders from customers. This increases the working capital requirement. competition may also force the firm to extend liberal credit terms.

Factors affecting financing decision:

1. Cash Flow Position of the Business: A stronger cash flow position may make debt financing more viable than funding through equity.
2. Level of Fixed Operating Costs: If a business has high level of fixed operating costs (e.g., building rent, Insurance premium, Salaries etc.), It must opt for lower fixed financing costs. Hence, lower debt Financing is better. Similarly, if fixed operating cost is less, more of debt financing may be preferred.
3. Control Considerations: Issues of more equity may lead to dilution of management’s control over the business. Debt financing has no such implication. Companies afraid of a takeover bid may consequently prefer debt to equity.
4. State of Capital Markets: Health of the capital market may also affect the choice of source of fund. During the period when stock market is rising, more people are ready to invest in equity. However, depressed capital market may make issue of equity shares difficult for any company.

FACTORS AFFECTING THE WORKING CAPITAL REQUIREMENTS:

1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a lower amount of working capital compared to a manufacturing organisation. This is because there is, usually no processing, therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible. Other factors remaining the same, trading business requires less working capital. Similarly, service industries which usually do not have to maintain inventory require less working capital.
2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital compared to the organisations which operate on a lower scale.
3. Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as,well as production are likely to be higher and therefore, higher amount of working capital is required. As against this the requirement for working capital will be lower during period of depression as the sales as well as production will be low.
4. Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, higher amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.

1. Stability of Dividends: It has been found that the companies generally follow a policy of stabilizing dividend per share. The increase in dividends is generally made when there is confidence that their earning potential has gone up and not just the earnings of the current year. In other words, dividend per share is not altered if the change in earnings is small or seen to be temporary in nature.
2. Shareholder Preference: While declaring dividends, managements usually keep in mind the preferences of the shareholders in this regard. If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same. There are always some shareholders who depend upon a regular income from their investments.
3. Access to Capital Market: Large and reputed companies generally have easy access to the capital market and therefore may depend less on retained earning to finance their growth. These companies tend to pay higher dividends than the smaller companies which have relatively low access to the market.
4. Legal Constraints: Certain provisions of the Company’s Act place restrictions on payouts as dividend. Such provisions must be adhered to while declaring the dividends.

1. Nature of Business: The type of business has a bearing upon the fixed capital requirements. For example, a trading concern needs lower investment in fixed assets compared with a manufacturing organisation; since it does not require to purchase plant and machinery etc.
2. Growth Prospects: Higher growth of an organisation generally requires higher investment in fixed assets. Even when such growth is expected, a business may choose to create higher capacity in order to meet the anticipated higher demand quicker. This entails higher investment in fixed assets and consequently higher fixed capital.
3. Diversification: A firm may choose to diversify its operations for various reasons, With diversification, fixed capital requirements increase e.g., a textile company is diversifying and starting a cement manufacturing plant. Obviously, its investment in fixed capital will increase.
4. Level of Collaboration: At times, certain business organisations share each other’s facilities. For example, a bank may use another’s ATM or some of them may jointly establish a particular facility. This is feasible if the scale of operations of each one of them is not sufficient to make full use of the facility. Such collaboration reduces the level of investment in fixed assets for each one of the participating organizations.

Factors affecting the Choice of Capital Structure:Deciding about the capital structure of a firm involves determining the relative proportion of various types of funds. This depends on various factors.

1. Cash Flow Position: Size of projected cash flows must be considered before issuing debt. Cash flows must not only cover fixed cash payment obligations but there must be sufficient buffer also. It must be kept in mind that a company has cash payment obligations for,

1. Normal business operations,
2. For investment in fixed assets,
3. For meeting the debt service commitments i.e., payment of interest and repayment of principal.

2. Return on Investment (RoI): If the RoI of the company is higher, it can choose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater.
3. Cost of debt: A firm’s ability to borrow at a lower rate increases its capacity to employ higher debt. Thus, more debt can be used if debt can be raised at a lower rate.
4. Tax Rate: Since interest is a deductible expense, cost of debt is affected by the tax rate. The firms in our examples are borrowing @ 10%. Since the tax rate is 30%, the after tax cost of debt is only 7%. A higher tax rate, thus, makes debt relatively cheaper and increases its attraction vis-à-vis equity.

1. Earning per share before diversification: Rs.0.50

Calculation of Earning per share after issue of Debentures: (assuming face value of Rs. 100 per share)

Particulars	₹
Share capital 10% debentures	60,00,000 40,00,000
Total	1,00,00,000
Profit before interest and tax Less Interest Profit before tax Less tax 40% Profit available to shareholders Earning per share = 2,40,000/60,000	8,00,000 4,00,000 4,00,000 1,60,000 2,40,000   =₹ 0.40

This clearly shows that the shareholders have gained after the issue of debentures since the Earning per share has increased from 0.50 to 4.
Alternate Answer
Calculation of Earning per share after issue of Debentures: (assuming face value of Rs 10 per share)

Particulars	₹
Share capital 10% debentures	60,00,000 40,00,000
Total	1,00,00,000
Profit before interest and tax Less Interest Profit before tax Less tax 40% Profit available to shareholders Earning per share = 2,40,000/60,000	8,0,000 4,00,000 1,60,000 2,40,00 00,000 4,0 0

2. Factors that favour issue of debentures by the company:
   Good Cash Flow Position: Size of projected cash flows must be considered before issuing debt. Cash flows must not only cover fixed cash payment obligations but there must be sufficient buffer also. It must be kept in mind that a company has cash payment obligations for

1. Normal business operations,
2. For investment in fixed assets,
3. For meeting the debt service commitments i.e., payment of interest and repayment of principal.

Return on Investment (RoI): If the RoI of the company is higher, it canchoose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater
Control: Debt normally does not cause a dilution of control. A publicissue of equity may reduce the managements holding in the company and make it vulnerable to takeover.

1. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum ofinventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.
2. Choice of Technique: Some organisations are capital intensive whereas others are labour intensive. A capital-intensive organisation requires higher investment in plant and machinery as it relies less on manual labour. The requirement of fixed capital for such organisations would be higher. Labour intensive organisations on the other hand require less investment in fixed assets. Hence, their fixed capital requirement is lower.
3. Technology Upgradation: In certain industries, assets become obsolete sooner. consequently, their replacements become due faster. Higher investment in fixed assets may, therefore, be required in such cases. For example, computers become obsolete faster and are replaced much sooner than say, furniture. Thus, such organizations which use assets which are prone to obsolescence require higher fixed capital to purchase such assets.
4. Financing Alternatives: A developed financial market may provide leasing facilities as an alternative to outright purchase. When an asset is taken on lease, the firm pays lease rentals and uses it. By doing so, it avoids huge sums required to purchase it. Availability of leasing facilities, thus, may reduce the funds required to be invested in fixed assets, thereby reducing the fixed capital requirements. Such a strategy is specially suitable in high risk lines of business.

1. Stability of Dividends: It has been found that the companies generally follow a policy of stabilizing dividend per share. The increase in dividends is generally made when there is confidence that their earning potential has gone up and not just the earnings of the current year. In other words, dividend per share is not altered if the change in earnings is small or seen to be temporary in nature.
2. Growth Opportunities: Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. The dividend in growth companies is, therefore, smaller, than that in the non– growth companies.
3. Cash Flow Position: Dividends involve an outflow of cash. A company may be profitable but short on cash. Availability of enough cash in the company is necessary for declaration of dividend by it.
4. Taxation Policy: The choice between payment of dividends and retaining the earnings is, to some extent, affected by difference in the tax treatment of dividends and capital gains. If tax on dividend is higher it would be better to pay less by way of dividends. As compared to this, higher dividends may be declared if tax rates are relatively lower. Though the dividends are free of tax in the hands of shareholders a dividend distribution tax is levied on companies. Thus, under the present tax policy, shareholders are likely to prefer higher dividends.

Devidend decision relates to taking decision how much of the profit earned by company (after paying tax) is to be distributed to the shareholders and how much of it should be retained in the business for meeting the investment requirements.
Factors affecting dividend decision are:

1. Earnings: Dividends are paid out of the profit of the company. Therefore, dividend decision depends upon the size of earnings. If there are more earnings, then the company can declare high rate of dividend and vice-versa.
2. Stability of earnings: A company having stable earnings is in a position to declare higher dividends. A company with unstable income will prefer to give a dividend at a lower rate.
3. Stability of dividend: Companies generally follow a stable dividend policy. This policy has a good impact on the share prices of the company.
4. Cash flow position: Comfortable cash flow position is the pre condition to declare dividend by a company. In cash of shortage of cash, company declare no or very low dividends.

Financial planning is an important part of overall planning of any business enterprise. It is the process of determining the objectives, policies, procedures, programmers and budgets to deal with the corporate financial activities of an enterprise. the importance of financial planning can be explained as follows:

1. Financial' planning involves accurate forecasts of the present and future requirements of funds. Intelligent estimates of financial requirements enables the enterprise to overcome the problem of excess or shortage of funds. Adequate funds are available for `smooth working of business.
2. It helps in coordinating various business functions e.g. sale and production function by providing clear policies and procedure.
3. It facilitates effective financial control throughout the organization.
4. It tries to link the present with the future.
5. It provides a link between investment and financing decisions on a continuous basis.

Working capital requirements of Neelabh would be less as it is a SERVICE industry.Alternate Answer
Working capital requirements of Neelabh would also include payment of salaries, fuel charges maintenance of vehicles, etc.Factors which will affect his fixed capital requirements are:

1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a lower amount of working capital compared to a manufacturing organisation. This is because there is, usually no processing, therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible. Other factors remaining the same, trading business requires less working capital. Similarly, service industries which usually do not have to maintain inventory require less working capital
2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum ofinventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.

1. Cash Flow Position: Size of projected cash flows must be considered before issuing debt. Cash flows must not only cover fixed cash payment obligations but there must be sufficient buffer also.
2. Interest Coverage Ratio (ICR): The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation.
3. Debt Service Coverage Ratio (DSCR): Debt Service Coverage Ratio takes care of the deficiencies referred to in the Interest Coverage Ratio (ICR). It is calculated as follows: A higher DSCR indicates better ability to meet cash commitments and consequently, the company’s potential to increase debt component in its capital structure.
4. Return on Investment (RoI): If the RoI of the company is higher, it can choose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater.
5. Floatation Costs: Process of raising resources also involves some cost. Public issue of shares and debentures requires considerable expenditure. Getting a loan from a financial institution may not cost so much. These considerations may also affect the choice between debt and equity and hence the capital structure.

Factors affecting requirements of working capital:

1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a lower amount of working capital compared to a manufacturing organisation. This is because there is, usually no processing, therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible.
2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.
3. Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as well as production are likely to be higher and therefore, higher amount of working capital is required. As working capital will be lower during period of depression as the sales as well as production will be low.
4. Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, higher amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.

Dividend decision is the decision about how much of the profit earned by the company is to be distributed to the shareholders and how much of it is to be retained in business.Factors affecting dividend decision are:

1. Earnings are a major determinant of dividend decision as dividends are paid out of current and past earnings.
2. Stability of earnings is another factor affecting dividend decision as a company having stable earnings is in a position to declare higher dividends.
3. Companies generally prefer to maintain stability of dividends while taking dividend decision.
4. If a company has good growth opportunities, it pays out less dividend.
5. A good cash flow position is necessary for declaration of dividend.
6. Shareholder’s preference is kept in mind by the management before declaring dividends.
7. Taxation policy affects the dividend decision as a higher dividend distribution tax will lead to lesser dividend payout.
8. The possible stock market reaction on the share price to dividend policy is one of the important factors affecting dividend decision.
9. While taking dividend decision, companies take into consideration their access to capital market.
10. Certain provisions of the Companies Act i.e. legal constraints place restrictions on payout of dividend.
11. While taking dividend decision, companies keep in mind the restrictions imposed by the lenders i.e. contractual constraints.

Factors affecting requirements of working capital:

1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a lower amount of working capital compared to a manufacturing organisation. This is because there is, usually no processing, therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible. Other factors remaining the same, trading business requires less working capital. Similarly, service industries which usually do not have to maintain inventory require less working capital.
2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital compared to the organisations which operate on a lower scale.
3. Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as,well as production are likely to be higher and therefore, higher amount of working capital is required. As against this the requirement for working capital will be lower during period of depression as the sales as well as production will be low.
4. Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, higher amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.

FACTORS AFFECTING THE WORKING CAPITAL REQUIREMENTS:

1. Nature of Business: The basic nature of a business influences the amount of working capital required. Atrading organisation usually needs a lower amount of working capital compared to a manufacturing organisation. This is because there is, usually no processing, therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible. Other factors remaining the same, trading business requires less working capital. Similarly, service industries which usually do not have to maintain inventory require less working capital.
2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. Such organisations, therefore, require large amount of working capital compared to the organisations which operate on a lower scale.
3. Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as,well as production are likely to be higher and therefore, higher amount of working capital is required. As against this the requirement for working capital will be lower during period of depression as the sales as well as production will be low.
4. Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, higher amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.

The capital structure means the proportion of debt and equity used for financing the operations of a business.Alternate Answer
Capital Structure means an appropriate mix of long-term sources of funds such as equity and preference share capital and reserves and surpluses and debentures and long-term debt.Factors affecting capital structure:
Factors affecting the Choice of Capital Structure:
Deciding about the capital structure of a firm involves determining the relative proportion of various types of funds. This depends on various factors.

1. Cash Flow Position: Size of projected cash flows must be considered before issuing debt. Cash flows must not only cover fixed cash payment obligations but there must be sufficient buffer also. It must be kept in mind that a company has cash payment obligations for,

1. Normal business operations,
2. For investment in fixed assets,
3. For meeting the debt service commitments i.e., payment of interest and repayment of principal.

2. Return on Investment (RoI): If the RoI of the company is higher, it can choose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater.
3. Cost of debt: A firm’s ability to borrow at a lower rate increases its capacity to employ higher debt. Thus, more debt can be used if debt can be raised at a lower rate.
4. Tax Rate: Since interest is a deductible expense, cost of debt is affected by the tax rate. The firms in our examples are borrowing @ 10%. Since the tax rate is 30%, the after tax cost of debt is only 7%. A higher tax rate, thus, makes debt relatively cheaper and increases its attraction vis-à-vis equity.

Financial Management is concerned with management of flow of funds and involves decisions relating to procurement of funds, investment of funds in long term and short term assets and distribution of earnings to owners.
Alternate Answer
Financial management is concerned with planning, organising, directing and controlling the financial activities of an organisation.
Objectives of financial management

1. Financial Management is concerned with optimal procurement as well as usage of finance. For optimal procurement, different available sources of finance are identified and compared in terms of their costs and associated risks.
2. Financial Management aims at reducing the cost of funds procured, keeping the risk under control and achieving effective deployment of such funds.
3. It also aims at ensuring availability of enough funds whenever required as well as avoiding idle finance.

Factors affecting dividend policy:

1. Stability of Dividends: It has been found that the companies generally follow a policy of stabilizing dividend per share. The increase in dividends is generally made when there is confidence that their earning potential has gone up and not just the earnings of the current year. In other words, dividend per share is not altered if the change in earnings is small or seen to be temporary in nature.
2. Growth Opportunities: Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. The dividend in growth companies is, therefore, smaller, than that in the non– growth companies.
3. Cash Flow Position: Dividends involve an outflow of cash. A company may be profitable but short on cash. Availability of enough cash in the company is necessary for declaration of dividend by it.
4. Taxation Policy: The choice between payment of dividends and retaining the earnings is, to some extent, affected by difference in the tax treatment of dividends and capital gains. If tax on dividend is higher it would be better to pay less by way of dividends. As compared to this, higher dividends may be declared if tax rates are relatively lower. Though the dividends are free of tax in the hands of shareholders a dividend distribution tax is levied on companies. Thus, under the present tax policy, shareholders are likely to prefer higher dividends
5. Shareholder Preference: While declaring dividends, managements usually keep in mind the preferences of the shareholders in this regard. If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same. There are always some shareholders who depend upon a regular income from their investments.

Factors affecting the fixed capital requirements of an organisation:

1. Scale of operations: A company which is operating in a large-scale of operations will require larger fixed assets in the form of plants, land and building.

2. Choice of technique: A company may use labour-intensive or capital-intensive techniques. A company using capital-intensive techniques will require larger fixed assets, whereas a company using labour-intensive technique will require less fixed assets.

3. Technology upgradation: Due to changes in technology or it becoming obsolete over time, companies require a large amount of investment in fixed capital. For example, certain machinery becomes obsolete very soon compared to other assets such as furniture. Therefore, a larger fixed capital is required for upgradation.

4. Financing alternatives: If leasing facilities are available without any lengthy procedures in the financial market, then the fixed capital requirements will be less.

1. Investment Decision: They refer to the decisions regarding where to invest the funds so as to earn the highest possible returns on investment. These decisions can further be bifurcated into two categories, namely long-term investment decisions and short-term investment decisions.

1. Long-term investment decisions: These are those decisions that affect a business’s long-term earning capacity and profitability. For example, investment in a new machine and purchase of a new building are such decisions. They are also known as ‘Capital budgeting decisions’.
2. Short-term investment decisions: These are those decisions that affect a business’s day-to-day working operations. For example, decisions regarding cash or bill receivables are two such decisions. These decisions are also known as ‘Working capital decisions’.

2. Financing Decision: They refer to the decisions regarding the identification of various sources of funds (as debt and equity) and deciding the best combination among them. These decisions are taken on the basis of risk and profitability of various alternatives.

3. Dividend Decision: They refer to the decisions regarding the distribution of profit or surplus of the company. The profits can either be distributed to the shareholders in the form of dividends or retained by the company itself.

1. Amount of earnings: As a firm pays dividends out of its own earnings (either current or past), it can be said that companies with higher earnings are in a position to pay a higher amount of dividend to its shareholders and vice versa.
2. Stable earnings: A company with stable and smooth earnings is in a position to distribute higher dividend as compared to those that have an unstable earning.

"Sound Financial Planning is essential for the success of any enterprise." The following points explain the importance of financial planning:

1. Helps in facing eventual situations: Financial planning helps in forecasting the future situations. In this way, it prepares an organisation to cope with adverse situations in a better manner.
2. Helps in avoiding surprises and shocks: Through financial planning, an organisation can detect situations of shortage or surplus of funds that may arise in future. Therefore, it prepares the managers in advance for such situations.
3. Improves coordination: Through financial planning, various business activities such as sales and production are coordinated in a better manner. Such coordination ensures smooth functioning of the business.
4. Reduces wastages and duplicity: Financial planning clearly defines the policies and procedures for working, which in turn helps to reduce duplication of work as well as avoid wastage of time and efforts.
5. Helps in optimum utilisation of funds: It ensures that situations of inadequate as well as excess funds are avoided, thereby ensuring the funds are properly and optimally utilised.
6. Link between the present and the future: Financial planning acts as a link between the present and the future. This is done by providing such information as future availability and requirement of funds.

1. Amount of earnings: As a firm pays dividends out of its own earnings (either current or past), it can be said that companies with higher earnings are in a position to pay a higher amount of dividend to its shareholders and vice versa.
2. Stable earnings: A company with stable and smooth earnings is in a position to distribute higher dividend as compared to those that have an unstable earning.
3. Stable dividends: In general, companies try to avoid frequent fluctuations in dividend per share and opt for increasing (or decreasing) their value only when there is a consistent rise (or fall) in the earnings of the company.
4. Growth prospects: Companies aiming for a higher growth level or expansion of operations retain a higher portion of the earnings with themselves for re- investment, thereby distributing lesser dividends.
5. Cash flow position: As dividend payments involve cash outflow from the company, companies low on cash/low on liquidity distribute lower dividends than those with high cash and liquidity.
6. Preference of shareholders: While distributing the dividends, a company must also keep in mind the preferences of its shareholders. For instance, if the shareholders prefer at least a certain minimum amount of dividend, then the company is likely to declare the same.

1. Bread: It needs less working capital as product is generally sold for cash.
2. Sugar: It will require large working capital because of long operating cycle.
3. Coolers: It is a seasonal product. So, it requires more working capital during peak season.
4. Furniture Manufactured against Orders: It requires less working capital as no inventory has to be maintained.