Financial management - class-XII

Generally a company with higher growth paternal are likely to pay lower dividends. This is because the companies wants to invest that money in earning higher income and growing at a higher rate which is in the benefit for the long term rather than paying dividend which will only benefit the company for a short term.

There are two primary causes for increases in a company’s dividend per share payout.

Share splitting and bonus shares are methods used to adjust the capital structure or provide value to shareholders without paying out cash dividends. Both are common corporate strategies to manage liquidity and shareholder expectations.

Degree of total leverage is combination of the operating and financial leverages. Thus it is a measure of the output and EPS of the company.
DOL = percentage change in EBIT/percentage change in output.
DFL = percentage change in EPS/percentage change in EBIT
Hence, DTL = DOL X DFL = Change in EPS / change in output.

Cash loans are most liquid as they represent actual cash. Call loans are next as they can be recalled on demand. Treasury bills are highly liquid government securities. Commercial bills are least liquid among these short-term instruments.

Cash dividends are the most standard and common form of dividend payment, where the company distributes a portion of its earnings directly to shareholders in the form of cash.

A letter of credit is defied as an arrangement by means of which a bank acting at the request of a customer, undertakes to pay a third party a predetermined amount by a given date, according to agreed stipulations and against presentation of stipulated documents. A beneficiary is an exporter in whose favour the letter of credit is opened.

Persistent cash losses, failure to pay taxes, cost overruns, low capacity utilization, accumulation of finished goods, etc.are the symptoms of bankruptcy.

A non-small scale industrial unit is defined as weak if the accumulated losses at the end of any accounting year, resulting in the erosion of fifty percent or more of its peak net worth during the immediately preceding four accounting years.

more the debt will increase more will be intrest rate in future.

Factors affecting financing decision:-

India has signed a loan agreement with the World Bank (WB) for $21.7 million for strengthening the public financial management in Rajasthan project in New Delhi on May 29, 2018. The objective of the project is to contribute to improved budget execution, enhanced accountability and greater efficiency in revenue administration in Rajasthan. 

• Dividend is that portion of profit which is distributed to shareholders.
  
• Paid-up capital means the total amount of called up share capital which is actually paid to the company by the members. Dividend is declared on the paid-up form of capital.
  
• Thus the company will provide dividend of 40% on paid-up capital.
  

Financial leverage measures the extent to which a firm uses debt to finance its assets. It is synonymous with gearing and trading on equity, as all these terms describe the impact of fixed-cost financing on shareholder returns.

Standard financial literature on dividend policy frameworks typically outlines a 4-step approach involving analysis of earnings, determination of payout ratio, consideration of legal/tax constraints, and final board approval.

Dividend policy is influenced by a complex interplay of corporate law (legal limits), taxation (tax implications for shareholders), and managerial considerations (growth needs and cash flow).

Under tax law and accounting standards, the definition of dividend is broad and can include various forms of distributions beyond simple cash, including rights to shares or specific property distributions.

Section 2(22) of the Income Tax Act, 1961 defines 'dividend' for taxation purposes, encompassing various forms of corporate distributions beyond just cash payouts.

Property dividends are rare and typically occur under exceptional circumstances, such as when a company needs to dispose of assets or lacks sufficient cash to pay a standard dividend.

A scrip dividend is essentially a promise to pay cash at a future date; it functions like a promissory note, often bears interest, and can be used as collateral.

Dividends paid out of the regular profits generated in the ordinary course of business are referred to as profit dividends.

Dividend policy is a multifaceted decision that impacts the firm's capital structure, its liquidity position, the market price of its stock, and the overall satisfaction of its investors.

Liquidation dividends are distributions made to shareholders when a company is winding up its operations or liquidating its assets. These are paid out of capital rather than accumulated profits.

Dividend policy refers to the policy that deals with the percentage of profit which are yield as dividend to the shareholders of a company which is a financial decision as it includes the finance of the company which can be retained in the company or given as dividend. 

Dividends paid out of share premium accounts are subject to specific legal and regulatory requirements, which typically mandate that shareholders be informed and consulted regarding the use of these capital reserves.

In financial jargon, a stock dividend is sometimes colloquially referred to as a melon, particularly when it represents a distribution of accumulated surplus to shareholders.

A regular dividend is a payment made by a company to its shareholders at a consistent, predictable rate, usually on a quarterly or annual basis.

Irregular dividend payments are often a consequence of unstable financial performance, where the company cannot guarantee a fixed payout due to fluctuating earnings or operational challenges.

Dividend policy is primarily driven by internal factors related to the firm, such as liquidity, profitability, investment opportunities, and growth requirements, collectively known as firm-oriented considerations.

Stable dividend payments signal financial health and reliability to the market, which helps attract long-term investors and shifts the perception of the stock from a speculative asset to a stable investment.

Projects with a positive $NPV$ are expected to increase the value of the firm. Thus, the $NPV$ decision rule specifies that all independent projects with a positive $NPV$ should be accepted. When choosing among mutually exclusive projects, the project with the largest (positive) $NPV$ should be selected.

Regular dividend payments provide all the listed benefits: they build a reputation for reliability, facilitate easier access to capital markets, improve creditworthiness, and reduce stock price volatility.

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

The financial management aspect of planning involves accurately forecasting the company's revenues, expenses, and resulting net profit. The business owner uses the budget, sometimes called a forecast, as a tool to manage the company.

Working capital is the amount of liquid assets which an organization has at its disposal. Working capital investments are required to pay for unexpected and unplanned expenses to build a business and meet the business’s short-term duties and obligations. 

Investment Decision relates to the determination of total amount of assets to be held in the firm, the composition of these assets and the business risk of the firm as perceived by its investors. It is the most important financial decision. Since funds involve cost and are available in a limited quantity, its proper utilization is very necessary to achieve the goal of wealth maximization.

Net working capital= current asset- current liablities

Financial
Management is concerned with optimal
procurement as well as usage of
finance.

Financial management involves decisions about the proportion of long term and short term finance. An organisation wanting to be more liquid would raise relatively more amount on long term basis. There is a choice between liquidity and profitability. The underlying assumption here is that current liabilities cost less than long term liabilities.

All items in the Profit and Loss Account, e.g., Interest, Expense, Depreciation, etc. and an expansion of business which is a result of capital budgeting decision is likely to affect virtually all items in the profit and loss account of the business.

The above statement is used to describe the function of financial management. The quantum of current assets and its breakup into cash, inventory and receivables means financial management decisions regarding how much to invest in current assets and its breakup into cash, inventory i.e stock, debtors.

The primary goal of both investment and financing decisions is to maximize shareholder value. Investment decisions revolve around how to best allocate capital to maximize their value. Financing decisions revolve around how to pay for investments and expenses. Companies can use existing capital, borrow, or sell equity.

Current liabilities have high interest rates with shorter duration to pay off hence,

Market price of equity shares will increase because if benefit from a decision exceeds the cost involved, wealth maximization will increase hence if revenue covers the cost then ultimately earning per share will increase.

Finance decisions, particularly capital budgeting, are heavily concerned with the acquisition and management of fixed assets, as these represent long-term investments that dictate the company's productive capacity.

Financing Decisions. Decisions concerning the liabilities and stockholders' equity side of the firm's balance sheet, such as a decision to issue bonds.

The Financing Decision is yet another crucial decision made by the financial manager relating to the financing-mix of an organization. It is concerned with the borrowing and allocation of funds required for the investment decisions.

The financing decision involves two sources from where the funds can be raised: using a company’s own money, such as share capital, retained earnings or borrowing funds from the outside in the form debenture, loan, bond, etc.

The objective of financial decision is to maintain an optimum capital structure, i.e. a proper mix of debt and equity, to ensure the trade-off between the risk and return to the shareholders.

Following are the functions of budgeting:-

In simple words, the break-even point can be defined as a point where total costs (expenses) and total sales (revenue) are equal. Break-even point can be described as a point where there is no net profit or loss. The firm just “breaks even.” Any company which wants to make normal profit, desires to achieve the break-even point. Graphically, it is the point where the total cost and the total revenue curves meet.

False.

According to Modigliani and Miller (M-M), dividend policy of a firm is irrelevant as it does not affect the wealth of the shareholders. They argue that the value of the firm depends on the firm’s earnings which result from its investment policy. 
Modigliani and Miller model is based on the following assumptions : 
1. The firm operates in perfect capital market.

Under standard corporate law regulations, companies are required to dispatch dividend warrants within 30 days of the declaration date to ensure timely payment to shareholders.