What traumatic event does Zitkala-Sa describe at the school?

The forcible cutting of her long hair

Why was the cutting of her hair so humiliating to Zitkala-Sa?

Among her people, shingled hair was worn by cowards and mourners

What is financial management?

It is the optimal procurement and usage of finance, aimed at maximising shareholder wealth.

State the primary objective of financial management.

To maximise shareholder wealth, that is, the market value of the firm's equity shares.

Name the three financial decisions.

The investment decision, the financing decision and the dividend decision.

What is capital budgeting?

The long-term investment decision of committing funds to fixed assets and projects.

What does the financing decision involve?

Deciding the proportion of funds to be raised from equity and from debt.

What is the dividend decision?

Deciding how much of the profit to distribute as dividend and how much to retain.

Define capital structure.

It is the mix of debt and equity that a firm uses to finance its assets.

What is financial leverage or trading on equity?

Using debt in the capital structure to increase the earnings per share of equity shareholders.

Name two factors affecting the choice of capital structure.

Cost of debt and return on investment (also tax rate, risk, cash-flow position and control).

Name two factors affecting the requirement of fixed capital.

Nature and scale of business (also choice of technique and growth prospects).

Financial Management

Class 12 Business Studies · Business Studies Part II · Chapter 1

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CBSE Class 12 · Business Studies

Financial Markets: 26 marks, not in NCERT

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Summary

Business finance refers to the money and credit employed in a business; financial management is concerned with the optimal procurement and usage of finance. Its primary aim is to maximise the wealth of the shareholders, that is, the market value of the firm's equity shares. Financial management involves three broad financial decisions. The investment decision (capital budgeting for long-term assets and working-capital decisions for short-term assets) decides where funds are committed; it is affected by cash flows, the rate of return and the investment criteria. The financing decision is about the proportion of funds raised from shareholders (equity) and from borrowing (debt), and is affected by cost, risk, the floatation cost, cash-flow position and control considerations. The dividend decision concerns how much profit is distributed as dividend and how much retained, influenced by earnings, stability, growth opportunities, cash-flow position and shareholders' preference. Financial planning is the preparation of a financial blueprint of an organisation's future operations; it ensures that enough funds are available and avoids surplus or shortage. Capital structure is the mix of debt and equity used to finance the business; the use of debt is called financial leverage or trading on equity, which raises the return to equity shareholders but also raises risk. The choice of an appropriate capital structure depends on cash-flow position, interest-coverage ratio, return on investment, cost of debt, tax rate, cost of equity, floatation cost, risk, flexibility, control, the regulatory framework and stock-market conditions. Decisions on fixed and working capital depend on the nature and scale of business, the business cycle and the operating cycle.

Meaning of business finance and financial managementObjectives of financial managementInvestment, financing and dividend decisionsFinancial planningCapital structure and financial leverageFixed and working capital

Key terms

Financial management

The optimal procurement and usage of finance to maximise shareholder wealth.

Wealth maximisation

The main objective of financial management — raising the market value of the firm's equity shares.

Investment decision

Deciding where and how much funds are committed in long-term and short-term assets.

Financing decision

Deciding the proportion of funds raised from equity (shareholders) and debt (borrowing).

Capital structure

The mix of debt and equity used to finance the business.

Financial leverage

Use of debt in the capital structure (trading on equity) to raise the return to equity holders.

Extra questions & answers

Try one from this chapter

Financial management is concerned with the:

Flashcards & interactive practice