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Correct option is (D) SEBI

Wide scope:

• The scope of financial management is extremely wide. Its scope includes estimating the need of finance, acquiring finance, maximum utilization, proper allocation and its planning and controlling.
• It covers all financial operations, right from the inception of business.

Estimating the need of finance, acquirement, maximum utilization, proper allocation and its planning and controlling

1. Management of long term fixed capital and
2. Management of working capital.

The objective of maximizing income of the company is called profit maximization.

Through profit maximization the company can earn large profit in short term.

The objective of maximizing income of the company is called profit maximization.

• In market, investors purchase the shares of company with a hope of earning maximum dividend. As a result, company should earn maximum profit out of its available resources. Moreover, its dividend policy should be based on maximization of profit.
• In addition, this approach suggests that company should take up only those business projects which can earn good profits i.e. which aims at profit maximization.
• This approach increases the share price of the company. This in turn increases company’s per-share earning.

• Type and Nature of Business
• Size of Unit
• Use of Ownership/Lease,
• Research Expense
• Modern Technology,
• Government Assistance,
• Government Taxation Policy and
• Establishment Expenses.

(i) Internal Factors:

• Type of Business,
• Size of Business
• Estimation of Business Income
• Nature and Requirement of Assets
• Attitude of Directors
• Financial Requirement and
• Duration of Capital Requirement.

(ii) External Factors:

• Condition of Boom or Depression in the market,
• Present Rate of Interest in Capital Market
• Cost of Capital Expenses of issuing Securities
• Legal Restrictions
• Taxation Policy
• Institutional Investors and
• Foreign Institutional Investors.

• Capital structure of only Equity Share
• Capital structure of Preference shares with Equity Shares
• Capital Structure of Debentures with Equity Shares
• Capital Structure of Preference shares and Debentures with Equity Shares.

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.

Technology upgradation.

Level of Collaboration.

Low, as it is a service industry, which usually do not have to maintain inventory.

Loan activities of the bank

1. Banks keep a small proportion of their deposits as cash with themselves to pay the depositors who might come to withdraw money from the bank on any given day.
2. Since, on any particular day, only some of its many depositors come to withdraw cash, the bank is able to manage with this cash. 
3. Banks use the major portion of the deposits to extend loans. In this way, banks mediate between those who have surplus funds (the depositors) those who are in need of these funds (the borrowers). Banks charge a higher interest rate on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.
4. Banks make use of the deposits to meet the loan requirements of the people. In this way, banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers).
5. Banks charge a higher interest rate on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income. 

Working capital is invested in current assets and it is circulating in the business. As a result its form keep on changing and so depreciation is not calculated on it.

Financial Planning helps in forecasting what may happen in future under different business situations which makes the firm better prepared to face the future.

                                        Or

Financial Planning helps in forecasting by anticipating future events and conditions and drawing plans accordingly.

Financial management means planning, organizing, directing and controlling the financial activities of an organisation.

The concept is Financial Management and is concerned with management of flow of funds and involves decisions related to procurement and investment of funds in long-term and short-term assets and distribution of earnings to the owners.

It refers to an increase in profit earned by the equity shareholders due to the presence of fixed financial charges like interest.

Trading on Equity: Trading on equity means to raise fixed cost capital (borrowed capital and preference share capital) on the basis of equity share capital so as to increase the income of equity shareholders. Although it is possible only when the rate of return of the company is greater than the rate of interest on borrowed capital or the rate of dividend on preference shares. Now the question arises how the income (earning) of the equity shareholders can increase when the company raises fixed cost capital (borrowed capital). Following EBIT-EPS Analysis answers this question:

Example:

EBIT - EPS Analysis

It is clear from the above table that both the companies have raised Rs. 10,00,000 as total capital. But X-Co. has raised it by issuing equity capital. On the other hand, Y-Co. has raised Rs. 4,00,000 by issuing equity capital and Rs. 6,00,000 by issuing debentures bearing 10% fixed interest rate. Suppose, both the companies have earned EBIT Rs. 2 lakh each and Tax Rate is 30%.

EBIT - EPS Analysis

In the above example, shareholders of X-Co. are getting Rs. 1.40 return on their investment as against Rs. 2.45 return to shareholders of Y-Co. Both companies raised equal total capital (Rs. 10 lakh each) and earned equal total profit (Rs. 2 lakh each), yet the earning of Y-Co.’s shareholders is more. The reason being that Y-Co. has taken advantage of the process of ‘‘trading on equity.” In other words, Y-Co. has raised fixed cost capital (borrowed capital) along with equity share capital. On fixed cost capital (borrowed capital), it paid fixed interest at the rate of 10 per cent (10% debentures) and the remainder is distributed as dividend to equity shareholders. Obviously, return on equity shares of Y-Co. is greater than that of X-Co.

Financial planning is a concern with the preparation of a financial blueprint of an organization for future operations. Financial planning ensures that enough funds are available at the right time. Financial planning is the process of determining the objectives, policies, procedures to deal with the financial activities of an organization.

Importance of financial planning are: 

1. Tool to face uncertainties: Financial planning is a tool to face uncertainties. It helps in forecasting different business situations and develop alternative financial plans to meet different situations.

2. Ensures liquidity: Financial planning would ensure the liquidity of funds throughout the year for meeting various financial commitments and thereby creating confidence in the minds of the suppliers who provide funds to the organizations.

3. Ensures adequate funds: Financial planning avoids the situations of both surplus and shortage of funds. Financial planning estimates quantity of the funds required and time when it is required to ensure the optimum fund to achieve the company objective.

4. Elimination of waste: Good financial planning through proper policy and procedures contribute to the elimination of waste of funds and facilitates maximum utilization of the available resources. It also avoids complexity and lack of coordination among various functions of an organization.

5. Better financial control: Effective financial planning predetermines the desired results and also helps to check the deviation and adopts corrective measures to achieve the desired goals of the organization.

Shareholder’s Current Wealth in a Company = Number of Shares Market Price Per Share.

• While setting up the capital structure, the finance manager has to take decision regarding the portion to be maintained between equity and debt in capital structure.
• A fine balance between equity capital and debt is necessary so as to maximize the returns of the company.
• If the structure maintains an optimum balance between the two, several risks can be avoided and maximum returns can be ensured.

1. Nature of business: The amount of working capital requirement basically depends on the nature of the business. Due to the cash nature of the transactions in the business. Some business requires huge working capital and some need little working capital for their operations.

2. Scale of Operations: The requirement of working capital also depends upon the scale of operation. Small Scale operations need less working capital when compared to large scale operations.

3. Growth & Expansion: As the organizations grow it requires a large amount of working capital in order to meet higher production and sales targets. With the growth & expansion, the business needs more & more working capital to meet the day to day requirements of the organization.

4. Business cycle: The amount of working capital required by a concern varies with the changes in the phases of business cycle. During Boom period the demand for the product increases and results in higher working capital requirements. On the other hand during recession and depression demand for the products decreases results in lower working capital requirements.

5. Seasonal factors: The working capital requirement also influenced by the seasonal fluctuation in demand for the products. During peak seasons, the working capital requirement in more due to higher level of activity. On the contrary, during lean seasons the requirement of the working capital will be less.

There is a positive relationship between the both.

Financing decisions

Factors affecting financing decisions are as follows:

(i) Cost of Funds: Different financial sources have different cost like interest on debt, dividend of shares. A company chooses a source which proves to be the cheapest.

(ii) Risk: From companies point of view debt is more risky than equity,. So, company should analyse its financial risk bearing capacity and choose a source accordingly.

(iii) Floatation Cost: Higher the floatation cost of a source, less attractive it appears to the management.

(iv) Cash Flow position: A stronger cash flow position makes debt financing more viable that funding through equity.

(v) Level of Fixed Operating Cost: If a business has high fixed operating costs (For example, rent, insurance premium etc.), it should opt for less fixed financing cost (interest) by using less debt financing. Similarly if fixed operating cost is less, more debt financing can be done.

(vi) Control Consideration: Issue of more equity may lead to dilution of managements control over the business companies which may afraid them of a takeover bid. So it may prefer debt to equity.

(vii) State of capital markets: A depressed capital market makes issue of equity, shares difficult and less attractive source finance in comparison to debt. Similarly a rising capital market makes equity more viable source of finance than debt.

(viii) Return on Investment: lf the ROI for a company is higher, it will use more debt to take advantage of trading on equity.

(ix) Tax Rate: Since interest is a tax deductable expense, a higher tax rate makes debt relatively cheaper and increases its attraction vise-visa equity.

(x) Flexibility: If a firm uses its debt potential to the full capacity, it losses flexibility to issue further debt. To maintain flexibility, it must maintain some borrowing power to take care of unforeseen circumstances.

(xi) Regulatory Framework: Different sources of finance have different regulatory framework provided by the law. The relative ease with which these norms can be met have a good effect on the choice of the source of finance.

From this point of view ‘Retained Earning’ is the most appropriate source

The ‘cash flow position’ is one of the important factors which affects the capital structure decision. As per this factor, while making a choice of the capital structure the future cash flow position should be kept in mind. Debt capital should be used only if the cash flow position is really good because a lot of cash is needed in order to make payment of interest and refund of capital. Hence, on this basis it can be said that share capital is better than debt capital.

From this point of view equity share capital should be avoided.

It is financing decision. The following factors affect the financing decision:

i. Cost: The cost of all the sources of finance is different. The rate of interest on debt, fixed rate of dividend to be paid on preference share capital and the expectations of the shareholders on the equity share capital are in the form of costs. If the situations happen to be favourable, the benefit of cheap finance can be availed of by choosing debt capital.

ii. Risk: Debt capital is most risky and from the point of view of risk it should not be used.

iii. Floatation Cost: From the point of view of floating costs, retained profit is the most appropriate source. Therefore, its use should be made.

iv. Cash Flow Position: If the cash flow position of the company is good, the payment of interest on the debt and the refund of capital can be easily made. Therefore, in order to take advantage of cheap finance, debt capital can be given priority.

v. Level of Fixed Operating Costs: In business, there are mainly two types of costs:

a. Fixed Operating Costs, e.g., rent of the building, payment of salary, insurance premium, etc.

b. Fixed Financial Costs, e.g., interest on debt, etc. If the level of fixed operating costs is in excess, it is better to keep the fixed financial costs at their minimum. Therefore, debt capital should not be used. On the contrary, if the level of fixed operating cost is low, the use of debt capital is profitable.

Role of Financial Management Financial management is concerned with the proper management of funds. 

It involves the following.

1. Managerial decisions relating to procurement of long term and short term funds 

2. Keeping the risk associated with respect to procured funds under control. 

3. Utilisation of funds in the most productive and effective manner. 

4. Fixed debt-equity ratio and capital.

Objective of Financial Management: 

The objective of financial management is the maximisation of shareholders’ wealth The investment decision, financial decision and dividend decision help an organization to achieve its objective In the given situation, S limited envisages growth prospects of steel Industry due to the growing demand. To expand the production capacity, the company needs to invest.

How ever, investment decisions will depend on the availability of funds, the financing decision and the dividend decision. However, the company will take those financial decisions which result in value addition. The benefits are more than the cost. This leads to an increase in the market value of the shares of the company.

1. Profit maximization: profit can be maximized with proper utilization of organization's resources. The company should earn sufficient profit to reach its expenses, expansion & modification. 

2. Wealth maximization: It means the maximization of the market value of shares. The market value of shares is related to three financial decision, viz., investment decision, financial decision, & Dividend decision. 

3. Proper estimation of total requirement: It is very important to know the financial requirement to start & run the business. Estimating of financial requirements is done after considering factors such as a scale of operation, technology, manpower requirements etc. 

4. Obtaining funds at minimum cost: The required fund can be mobilized through many sources such as shares, debentures, Bank loan etc. The finance manager must decide about difference & the balance between owned finance & borrowed finance. He must obtain the funds at a minimum cost.

5. Proper utilization of finance: Finance must invest in profitable projects and care should be taken to ensure that finance is not wasted due to investment in unprofitable projects, blocking of finance in inventories & long period of credit.

Operating efficiency means completing the various business operations efficiently. Operating efficiency of every organisation happens to be different. Some such examples are: (i) Converting raw material into finished goods at the earliest, (ii) Selling the finished goods quickly, and (iii) Quickly getting payments from the debtors. A company which has a better operating efficiency has to invest less in stock and the debtors. Therefore, it requires less working capital, while the case is different in respect of companies with less operating efficiency.

If funds are raised by issuing equity shares, then the number of company’s shareholders will increase and it directly affects the control of existing shareholders. In other words, now the number of owners (shareholders) controlling the company increases. This situation will not be acceptable to the existing shareholders. On the contrary, when funds are raised through debt capital, there is no effect on the control of the company because the debenture holders have no control over the affairs of the company. Thus, for those who support this principle debt capital is the best.

i. Scale of Operations: There is a direct link between the working capital and the scale of operations. In other words, more working capital is required in case of big organisations while less working capital is needed in case of small organisations.

ii. Business Cycle: The need for the working capital is affected by various stages of the business cycle. During the booming period, the demand of a product increases and sales also increase. Therefore, more working capital is needed. On the contrary, during the period of depression, the demand declines and it affects both the production and sale of goods. Therefore in such a situation, less working capital is required.

iii. Production Cycle: By production cycle is meant the time involved in converting raw material into finished product. Longer this period, more will be the time for which the capital remain blocked in raw material and semi-manufactured products. Thus, more working capital will be needed. On the contrary, where period of production cycle is little, less working capital will be needed.

iv. Credit Allowed: Those enterprises which sell goods on cash payment basis need little working capital but those who provide credit facilities to the customers need more working capital.

1. Gross working capital and
2. Net working capital.

1. Profit maximization: profit can be maximized with proper utilization of organization's resources. The company should earn sufficient profit to meet its expenses, expansion & modification.

2. Wealth maximization: It means the maximization of the market value of shares. The market value of shares is related to three financial decision, viz., investment decision, a financial decision, & Dividend decision.

3. Proper estimation of total requirement: It is very important o know the financial requirement to start & run the business. Estimating of financial requirements is done after considering factors such as a scale of operation, technology, manpower requirements etc.

4. Obtaining funds at minimum cost: The required fund can be mobilized through many sources such as shares, debentures, Bank loan etc. The finance manager must decide about difference & the balance between owned finance & borrowed finance. He must obtain the funds at minimum cost.

5. Proper utilization of finance: Finance must invest in profitable projects and care should be taken to ensure that finance is not wasted due to investment in unprofitable projects, blocking of finance in inventories & long period of credit.

6. Maintaining proper cash flow: An organization must have proper cash flow to pay its day-to-day expenses such as purchase of raw material, payment of wages & salaries, rent, electricity bills etc. A healthy Cash flow improves organizational success.

7. Risk minimization: Financial management tries to minimize the risk through creation of reserves to meet unforeseen contingencies. A portion of profits are always kept aside as reserve in order to utilize it for future growth and development.

8. Proper co-ordination: Financial Management works in combination with other areas like production, marketing, personnel etc. thus proper co-ordination with other departments is an important objective of financial management to achieve the organizational goals.

9. Financial control: Finance management should always plan the source of procuring funds & also the applications of funds. Deviation between the planned & actual inflow & outflow of funds should be studied; analyzed & corrective actions should be taken immediately.

10. Creation of goodwill: Financial management should try to create goodwill for the organization. Financial Management ensures good corporate governance. It will help to create confidence in the minds of the stakeholders regarding the financial activities of the organization.

1. Nature of business: The amount of fixed capital requirement basically depends on the nature of the business. Some business requires huge fixed capital and some need little fixed capital depending on their operations. The need for fixed capital will be more as the concern needs to invest in fixed assets like plant, machinery & Buildings etc.

2. Scale of operation: The scale of operation is the other important determinant of fixed capital requirement of a business. Larger the size and the scale of operations, the greater will be the amount of fixed capital requirement. 

3. Growth & Expansion prospects: Higher growth of organization generally requires a higher investment in fixed assets. As the organization as to create higher capacity’ in order to meet the higher demand Suffer 

4. Choice of technique of production: An organization may be capital intensive or labor-intensive. A capital intensive organization requires a higher investment in plant and machinery when compared to a labor-intensive organization. Thus the requirement of fixed capital for capital intensive organizations would be higher. 

5. Method of fixed asset acquisition: Organizations purchasing fixed asset on cash basis requires a large amount of fixed capital. Those organizations which acquire fixed assets on hire purchase and installment system requires lesser amount of fixed capital.

1. Nature of business: The amount of fixed capital requirement basically depends on the nature of the business. Some business requires huge fixed capital and some need little fixed capital depending on their operations. The need for fixed capital will be more as the concern needs to invest on fixed assets like plant, machinery & Buildings etc.

2. Scale of operation: The scale of operation is the other important determinant of fixed capital requirement of a business. Larger the size and the scale of operations, the greater will be the amount of fixed capital requirement.

3. Growth & Expansion prospects: Higher growth of organization generally requires higher investment in fixed assets. As the organization as to create higher capacity’ in order to meet the higher demand.

4. Choice of a technique of production: An organization may be capital intensive or labor-intensive. A capital intensive organization requires a higher investment in plant and machinery when compared to labor-intensive organizations. Thus the requirement of fixed capital for capital intensive organizations would be higher.

5. Method of fixed asset acquisition: Organizations purchasing fixed asset on a cash basis requires a large amount of fixed capital. Those organizations which acquire fixed assets on hire purchase and installment system requires lesser amount of fixed capital.

6. Diversification: Diversification of production or operations is another important factor affecting fixed capital requirements. A concern that chooses to diversify its production requires more fixed capital.

7. Amount of promotion expenses: If a concern has to spend more amounts by way of promotion expenses, cost of raising finance etc then it requires more amount of fixed capital.

8. Level of collaboration: Collaboration refers to the business organizations which share the facilities to each other. It reduces the level of investment in fixed assets for the participating organizations. So the requirement of the fixed capital is less in a collaboration of business.

Working capital refers to that part of total capital, which is required for holding current assets. It is calculated as excess of current liabilities. Determinants of working capital are: 

Factor that determine working capital of a company are: 

i. Nature of Business: The working capital requirements depend upon the nature of business. For instance, 

a. In Small trading concern or retail shop, requirement of working capital is small because operating cycle period is small since: 

• They mostly have cash sales 
• They carry small quantities of goods in stock. 

b. In large trading firms or Departmental Stores dealing in large variety of goods, requirement of working capital is large because operating cycle period is larger since: 

• They require large quantities of goods in stock 
• They carry large debtor balances.

c. In manufacturing firm, requirement of working capital is large because operating cycle period is larger since: 

• They carry large quantity of raw materials. 
• They carry large quantity of work in progress. 

ii. Scale of operations: 

a. For organizations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. 

b. Such organizations, therefore, require large amount of working capital as compared to the organizations which operate on a lower scale. 

iii. Business cycle: 

a. 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. 

b. As against this, the requirement of working capital will be lower during period of depression as the sales as well as production will be low. 

iv. Seasonal factors: 

a. In a peak season, because of higher level of activity higher amount of working capital if required. 

b. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season. 

v. Production cycle: 

a. Production cycle is the time span between the receipts of raw material and their conversion into finished goods. 

b. Some business has a longer production cycle while some have shorter one. Consequently, working capital requirement is higher in firms with longer processing cycle and lower in firm having shorter processing cycle. 

Working capital refers to that part of total capital, which is required for holding current assets. It is calculated as excess of current liabilities. Determinants of working capital are: 

Factor that determine working capital of a company are: 

i. Nature of Business: The working capital requirements depend upon the nature of business. For instance, 

a. In Small trading concern or retail shop, requirement of working capital is small because operating cycle period is small since: 

• They mostly have cash sales 
• They carry small quantities of goods in stock. 

b. In large trading firms or Departmental Stores dealing in large variety of goods, requirement of working capital is large because operating cycle period is larger since: 

• They require large quantities of goods in stock 
• They carry large debtor balances.

c. In manufacturing firm, requirement of working capital is large because operating cycle period is larger since: 

• They carry large quantity of raw materials. 
• They carry large quantity of work in progress. 

ii. Scale of operations: 

a. For organizations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. 

b. Such organizations, therefore, require large amount of working capital as compared to the organizations which operate on a lower scale. 

iii. Business cycle: 

a. 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. 

b. As against this, the requirement of working capital will be lower during period of depression as the sales as well as production will be low. 

iv. Seasonal factors: 

a. In a peak season, because of higher level of activity higher amount of working capital if required. 

b. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season. 

v. Production cycle: 

a. Production cycle is the time span between the receipts of raw material and their conversion into finished goods. 

b. Some business has a longer production cycle while some have shorter one. Consequently, working capital requirement is higher in firms with longer processing cycle and lower in firm having shorter processing cycle. 

“The sum of the current assets means the working capital.”

• If the business sells its goods on cash, it will require less on hand capital. But, if sold on credit, the business will be cash deficient.
• In the same way, if the business can acquire raw material on credit and sell the goods on credit or cash, it will affect the capital available with the business.
• Naturally, the availability of capital with the business will decide its credit requirements and policy.

Capital market conditions refer to upward or downward trends in capital market. Both these conditions have their influence on the selection of sources of finance. When the market is dull, investors are mostly afraid of investing in share capital due to high risk. On the contrary, when conditions in capital market are cheerful, they treat investment in share capital as the best choice to reap profits. Companies should, therefore, make selection of capital sources keeping in view the conditions prevailing in capital market.

Generally for making investment in fixed assets long-term capital sources are used (e.g., equity share capital, preference share capital, debentures, etc.). However, another source of finance has emerged these days. This is called leasing. If a company makes use of this source, it acquires fixed assets on lease rather than buying them. In such a situation, the need for fixed capital decreases.

“Working capital is the excess of current assets over current liabilities.”

• Boom and depression are the two faces of capital market.
• When the market is in boom, the company earns good profit. Investors become positive and invest in the shares of the company. This enhances the capital structure of the company.
• When the market is in depression, the investors tend to invest in debt market so that they can safeguard their returns.
• Thus, how the market behaves plays a very important role in the formation of capital structure of the company and hence it cannot be ignored.

Working capital refers to that part of total capital, which is required for holding current assets. It is calculated as excess of current liabilities. Determinants of working capital are: 

Factor that determine working capital of a company are: 

i. Nature of Business: The working capital requirements depend upon the nature of business. For instance, 

a. In Small trading concern or retail shop, requirement of working capital is small because operating cycle period is small since: 

• They mostly have cash sales 
• They carry small quantities of goods in stock. 

b. In large trading firms or Departmental Stores dealing in large variety of goods, requirement of working capital is large because operating cycle period is larger since: 

• They require large quantities of goods in stock 
• They carry large debtor balances.

c. In manufacturing firm, requirement of working capital is large because operating cycle period is larger since: 

• They carry large quantity of raw materials. 
• They carry large quantity of work in progress. 

ii. Scale of operations: 

a. For organizations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. 

b. Such organizations, therefore, require large amount of working capital as compared to the organizations which operate on a lower scale. 

iii. Business cycle: 

a. 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. 

b. As against this, the requirement of working capital will be lower during period of depression as the sales as well as production will be low. 

iv. Seasonal factors: 

a. In a peak season, because of higher level of activity higher amount of working capital if required. 

b. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season. 

v. Production cycle: 

a. Production cycle is the time span between the receipts of raw material and their conversion into finished goods. 

b. Some business has a longer production cycle while some have shorter one. Consequently, working capital requirement is higher in firms with longer processing cycle and lower in firm having shorter processing cycle. 

Capital Structure refers to the mix between owners fund i.e., equity and borrowed funds i.e., debt raised by an organisation.