“Working capital means circulating capital in business”-Explain.
Answer
Working capital is employed in current assists of business such as raw material, debtors bills payable, etc. This capital is constantly circulating in business so it is called circulating capital.
“Capital structure is a mixture of owner’s capital and debt”-Explain.
Answer
Capital structure contains owner’s capital as well as debt means debenture. It is a combination of both. So equilibrium between capital and debt is required.
How does shortage of raw material affect capital requirement?
Answer
If a business needs raw material that is available in limited quantity or whose supply is irregular or is available in certain season only, then such raw material need to be kept in stock for continuous production. Hence, the company needs more capital for production.
Working capital gets circulated for short term and it is easily convertible cash $($i.e. it has high liquidity$).$ Hence, there is less risk in working capital.
A financial institution established and registered out of India and whose objective is to invest in prescribed securities in India in primary and secondary markets is known as foreign institutional investor or Fll.
How does the company raise capital when the taxation is high in the country? How does it benefit?
Answer
When the taxation is high, the companies prefer to issue debentures for acquiring capital. By doing so, the income tax gives deduction of interest paid on the debentures to the company.
How does the source of capital differ based on the duration of capital structure?
Answer
If capital is required on a permanent basis, the 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.
$(A)$ Capital structure of only equity of shares,
$(B)$ Capital structure of preference shares with equity shares,
$(C)$ Capital structure of debentures with equity shares and
$(D)$ Capital structure of preference shares and debentures with equity shares.
State the importance of financial management in distribution of income.
Answer
Financial management decides 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.
Net Present Value $(NPV)$ is used to measure the profit of the company. Profit under $NPV$ is obtained by obtaining the difference between present value of wealth and investment required.
The concept of increasing the value of the business in order to increase the value of the shares held by the shareholders is called wealth maximization.
State the definition of financial management as given by Raymond.
Answer
According to Raymond J. Chambers, “Financial management means to take decisions about financial matters to implement them smoothly and to review, them.”
When current liabilities are more than current assists it is called negative working capital. When current assists are more that current liabilities, it is called Positive Working Capital.
Fixed capital is employed in fixed assists. Fixed assists are for long period. So there is risk of obsolete. Moreover there is risk of change in political, social and economic factors.
How is profit allocation related to working capital?
Answer
Dividend is allocation of profit when company distributes major portion of profit as divided then capital goes out of business. So more requirement of working capital arises.
How is stock turnover rate associated to working capital?
Answer
If turn over rate of finished goods is high then requirement of working capital is less. If stock turnover rate is law than requirement of working capital is employees in finished goods.