B.com Notes

OPTIMUM CAPITAL STRUCTURE AND ITS FEATURES   (#) Capital Structure ------> " Capital Structure is qualitative term that gives the ratio in which the total capital is contributed by different sources" * Capital Structure may be high geared or low geared * Capital Structure influenced by external factors . * Capital Structure is a proportion of debts and equity in the total capital of a company.  -- Debts such as all borrowings from government , semi government  and other agencies , loan from bank , debenture , etc . -- Equity such as equity  share capital , Preferential share capital , contingency reserve  , surplus profit and other . * Capital Structure denotes mix of owners' funds and outsider's fund  (#) Optimum capital structure   Optimum capital structure is the best debt-to-equity ratio for a firm that minimizes  the firm's cost of capital. - Debt financing generally offers the lowest cost of capital. - Since

Dividend Policy   Dividend policy is a financial decision in which company uses to decide how much it will pay to shareholders in form of dividends and how much to be plonked back into the firm. * It depends upon investment opportunities . * It involves relationship between cost and rate of return. * Company dividend policy is an important consideration for investor . -----> Types of Dividend Policy   1} Regular dividend policy * In this policy investor get dividend at usual rate  * In regular dividend policy investor are generally retired persons or    economically. * Investor involves who want to get regular income. * These investor prefer a regular income without much risk.  2} Stable dividend policy * Here the payment of certain sum of money is regularly paid to the    shareholder   * There are three types a) Constant dividend per share : Company create reserve fund. b) Constant pay out ratio : It means the payment of fixed percentage of earning a

Differentiate between over-capitalization and under-capitalization   "Both over-capitalization and under-capitalization are undesirable . However , of the two , the state of over-capitalization is more fatal and dangerous"  (#) Capitalization   * Capitalization means amount of capital invested in a business . * Capitalization is used in the case of companies only . * Capitalization includes all the sources of fund used in an organization .   ------> " The term capitalization or the valuation of the capital includes the capital stock and debts " * "Capitalization " has been derived from the term ' capital ' . Capitalization is used in relation to companies and not in partnership from of sole business .  *Capitalization  = Share capital + Preferential share capital   (#) Over-capitalization    * " A corporation is over-capitalized when its earning are not large enough to yield ( Provide ) a fair return on the am

Weighted Average Cost Of Capital  * The Weighted Average Cost Of Capital is the rate that a company is expected to pay on average to all its security holders to finance its assets . * Weighted average cost is dictated by the external market , not by management . * The Weighted Average Cost Of Capital represents the minimum return that a company  must earn on an existing assets base to satisfy its creditors , owners , and other provider of capital , or they will invest elsewhere . # FORMULA      WACA = E/V × Re + D/V × Rd × ( 1-Tc ) Where  :- * WACA = Weighted Average Cost Of Capital * Re = Cost of equity  * Rd = Cost of debts * E = Market value of firm equity * D = Market value of firm debts * V = E + D ( Total market value of the firms finance ) * E/V = Percentage of financing that is equity * D/V = Percentage of financing that is debts * Tc = Corporate tax rate  * Securities analysts frequently use Weighted Average Cost Of Capital  when asses

Difference Between Capitalization and Capital Structure (#) Capitalization  * Capitalization means amount of capital invested in a business . * Capitalization is used in the case of companies only . * Capitalization includes all the sources of fund used in an organization .   ------> " The term capitalization or the valuation of the capital includes the capital stock and debts " * "Capitalization " has been derived from the term ' capital ' . Capitalization is used in relation to companies and not in partnership from of sole business .  *Capitalization  = Share capital + Preferential share capital    (#) Capital Structure ------> " Capital Structure is qualitative term that gives the ratio in which the total capital is contributed by different sources" * Capital Structure may be high geared or low geared * Capital Structure influenced by external factors . * Capital Structure is a proportion of debts a

Maximization Of Profit * It may be short run or long run process . * Determine the best price and output level that returns the greatest profit . * It can be negative for consumer if the company starts to use cheaper products or decides to raise unreasonable price . ( # ) There are two methods for profit maximization . 1> Marginal cost = Marginal revenue method  2> Total cost = Total revenue method  * Profit = total revenue - total cost (#) Profit Maximization With The Help Of TR & TC      ( see above figure ) Gross Profit = Total Revenue - Total Cost                                                = TR - TC (1) At Q level of output     G.P = TR - TC             = QO - QO            = 0 This is B.E.P ( Break Even Point ) (2) At Q1 level of output         G.P = TR - TC                = Q1.A -  Q1.F                = AF ( i.e., Profit ) (3) At Q2 level of output             G.P = TR - TC                   = B.Q2 - E.Q2  

Trading on Equity policy and its Limitation Meaning * It refers to practice of using borrowed money at fixed interest rates. *It means taking advantages of ownership ( Here ownership means equity {capital} ) . * It is the financial process of using debt to produce gain for the residual owner . * Firm should earn return greater than the interest cost of the debt . * In finance , equity tading is the buying and selling of company stock . Limitation Of Trading On Equity 1 > FIxed Obligations * company have to pay dividend and interest on debentures or fixed dividend        on preference shares . Example -- If profit is 1000 in investment of 10000 which have interest 10% every year so , no amount is left for distribution among shareholder therefore whole profit is utilised for interest payment . 2 > Earning fluctuations * Company gaining from trading on equity should greater than fixed charges . * Firm should ready for future fluctuations . * If profit

Financial planning and its advantage & limitation. *  Financial planning is the task of determining how a business will afford to achieve its strategic goals & objectives . * It create on the basis of vision and objective . *  It establish & maintain a system of financial control governing the allocation and use of fund . * First it establishing objective than create policies and than formulate procedures after that it bring flexibility in three of them to adjust according to situation . --> Advantages of financial planning 1) Cost control * Create annual budgets * Analyse big expenses , reduce them if necessary and monitor them . 2) Cash flow management * Identifying in advance your cash need each month , regardless of your revenues . * Slow pay bales or bad debt when you need money then it raise problem to operate business . 3) Raising financing * raise fund according to need of firm such as short term , medium term , or long term 4)Facilit

Distinguish between traditional and modern approach of finance function and it's type -> Traditional Approach Of Finance Function * Scope is confined to the raising of fund * Narrow sense of procurement of fund * It involves discussion on the financial institution and instrument. * It deals with fund required for merge , liquidation , consolidation , reorganization and so on. * The traditional approach has now been discarded as it suffers from serious criticisms. * The traditional approach was the outsider looking in approach. such as- investor , financial institution , investment banker etc. * Internal financial decision making was completely ignored in this approach .  * It pay attention on infrequent happening like merger , reorganization etc. * Without paying any attention on the day to day financial aspects. * focus on long term financial problems * It ignore the importance of working capital . ->Modern Approach Of Finance Function         * After

Concept of payback period and capital budgeting ->Payback period   * Payback represent the number of year required to recover the original cash out lay invested in a project . *Basis of payback period is the calculation of recovery time *The number of year required to recover the cost of the investment * " Payback period in capital budgeting refers to period of time required to recoup the fund expended in an investment, or to reach the break even point "  *Payback period usually expressed in years. *It measures how long something takes to " pay for itself " *Shorter payback period are more preferable than longer payback period. * It is easy to apply and understand for most individual , regardless of academic training. ->  Construction    *calculate net cash flow   I-  Net cash flow for 1st year = cash inflow of 1st year - cash outflow of 1st year II- Cumulative cash flow =  Net cash flow for 1st year + Net cash flow for 2nd year +