1.Explain the importance of financial management.
Ans :-
Ans: The importance of financial management has increased due to the current changes in business environment and contempory economic flows at Global level after 1950.

1. Estimated of Financial Needs:

• Financial management estimates how much long term capital and short term capital will be required for the business.

2. Acquiring Finance:

• Financial management acquires finance at the minimum cost by selecting the sources economically.

3. Planning and Controlling:

• Planning is combined with effective controlling to make economic utilization of finance.

4. Distribution of Finance:

• It distributes finance among different departments in such a way that every department gets adequate finance.

5. Maintaining Liquidity:

• It maintains liquidity by preparing cash flow statement and cash budget so that a definite cash balance can be maintained on hand.

6. Distribution of Income:

• It determines what part of profit is to be distributed as dividends among the shareholders and what part of profit is to be reinvested in the business.

7. Management of Current Assets:

• Cash, debtors, inventory, marketable securities, bank balance, etc. are included in current assets.
• It formulates investment policy of these current assets.

8. Financial Decisions:

• Financial management takes important decisions regarding capital budget, dividend policy, reinvestment of profit etc. and maintains co-ordination among various financial decisions.
• E.g. Co-ordination between dividend policy and reinvestment of profit.

9. Raising Credit of Business:

• Financial management significantly contributes in the progress and development of business.
• Efficient financial management generates financial facilities. ->So that employees, salary and creditorssanent can be made in time.
• As a result, credit of the business increases.

2.Discuss the factores affecting the capital structure.
Ans :-
There are two kinds of Factors which affect Capital Structure:
(1) Internal Factors
(2) External Factors

Internal Factors:

1. Type of Business:

• More fixed capital is required in the large scale manufacturing units, while less fixed capital is required in trading units.
• In service unit, the fixed capital investment is determined on the basis of service.

2. Size of Business:

• Due to large scale activities, big business units require fixed capital in large proportion.
• Small size industrial units require comparatively less fixed capital. Trading units

3.Estimation of Business Income:

• Earning of business may be certain or uncertain.
• Company can depend on borrowed capital if future estimated earning is fixed and handsome.

4. Nature and Requirement of Assets:

• If requirement of fixed assets are on large scale in business then the ratio of equity share will be high in capital structure.
• Due to high investment in fixed assets, it is also considered whether fixed assets are to be purchased or to be acquired on hire-purchase or on lease.

5. Attitude of Directors:

• If the directors of the company desire to retain the managerial control on company they do not issue equity shares in greater proportion and depend more on preference shares and debentures.

6. Financial Requirements:

• Capital can be raised only by issue of equity shares if requirement of capital is on the small scale.
• Various types of securities are to be issued if large scale capital fund is necessary.
• Apart from this, how much finance will be required in future for long term objective, plans, possibility of future growth is also to be considered while formulating capital structure.

7.Duration of Capital Requirement:

• If capital is required permanently, company will prefer to issue equity shares.
• On the other hand, if capital is required for a short period, company will procure capital through debentures and preference shares.

External Factors:

1. Condition of boom-depression in capital market:

• For steady income in depression period the investors prefer to invest in debentures but not in equity shares.
• While in the period if boom investors will prefer to invest in equity shares with expectation of higher dividend.
• Thus, formulation of capital structure based on present trends of capital market.

2. Present Rate of Interest in Capital Market:

• If the present rate of interest is high in capital market, the trend is to issue equity shares to procure fund, because payment of high interest on borrowed capital becomes a burden on company.
• Debentures are also given a place in the capital structure, if present rate of interest is low.

3. Cost of Capital-Expense of Issuing Securities:

• When securities are issued to raise capital, company has to incur expenses for issue of prospectus, underwriting commission, brokerage etc.
• Cost of capital is more as the expenses are more.
• The expenses incurred in issuing different types of securities are different.
• Although the expenses on issuing debentures is lower than the issue of other securities.

4. Legal Restrictions:

• Legal restrictions are also to be considered at the time of selecting capital structure.
• As per Companies Act, the company raising capital fund through securities has to issue equity shares compulsorily.
• In addition to this, rules of SEBI and RBI and provision of Companies Act are to be considered.

5. Taxation Policy:

• Company follows the trend of issuing debenture to acquire more capital fund if taxation ratio is high, because the amount of interest paid on debentures is deductible from the income for taxation purpose.
• Naturally, equity shares become more popular if the income of dividend is tax free or the rate is lower on the dividend income.

6. Institutional Investors:

• Insurance companies, banks, financial institutions of state and central government etc. invest in shares and debentures of the companies as per their established rules and conditions.
• Trends and conditions of all these institutions are considered at the time of formulating capital structure or at the time of alternation of capital structure.

7. Foreign Institutional Investors:

• Foreign investor institution is such an institutional which is established and registered out of India and whose objective is to invest in prescribed securities in India in primary and secondary markets.
• Foreign investment institutional has to make registration with SEBI. Such institutions are permitted to purchase shares and debentures of Indian company.

3.Giving the definition explain the concept of working capital.
Ans :-
Meaning & Definition:

• Fixed capital and working capital are required in all types of business.
• Fixed capital is required to purchase fixed assets such as land, building, machines etc. while working capital is required to pay day-to-day expenses.
• Working capital is generally employed in current assets of business such as raw materials, debtors, bill receivables, etc. ->It remains constantly circulating in business, therefore, working capital is called the life-bload.

Definition:

• According to Lincoln, Doris and Stevens, “Working capital is the excess of current asset over current liabilities.”

Concept of Working Capital:
1. Gross Working Capital:

• Working capital means sum of total investment in current assets of business such as stock of raw material and finished goods, debtors, bills receivable, short term securities etc.
  Gross Working Capital = Total Current Assets

2. Net Working Capital:

• Net working capital means current assets minus current liabilities. Net Working Capital = Current Assets – Current Liabilities.
• When current liabilities are less than current asset, it is called positive working capital and when current assets are less than current liabilities, it is called negative working capital.

4.Distinguish between :

1. Gross working capital and net working capital.