optimum credit term exists when average rate of return My QA

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Capital rationing refers to a situation where a company cannot undertake all positive NPV projects it has identified because of shortage of capital. Capital rationing is a situation where a constraint or budget ceiling is placed on the total size of capital expenditures during a particular period. Often firms draw up their capital budget under the assumption that the availability of financial resources is limited.

By doing this he makes a capital gain of ` 1000 (i.e. 6000–5000). He further borrows ` 5000 (i.e. 10% of ` 50000) at 5% rate of interest. This is termed as personal leverage because Mr. X is borrowing on personal account. Total funds with Mr. X now is ` 11,000 ( ` 6000 own and ` 5000 borrowed).

Capital Structure and Firm Value as per Net Income Approach

Hence, the cost of raising funds, through this source, is a function of the amount of discount and the period of maturity and no interest rate is provided by the Reserve Bank of India for this purpose. Accrued expenses are the expenses which have been incurred but not yet due and hence not yet paid also. dwolla india These simply represent a liability that a firm has to pay for the services already received by it. The most important items of accruals are wages and salaries, interest, and taxes. Considering the volume of sales, the amount of working capital requirements will be rather small in such type of business.

• Hence financial structure is the mix of all sources of funds whether long term such as debt and equity or short term such as bank overdraft, short term loans etc.
• So, cost of capital is directly related to the market opportunities available in the market.
• A zero percent interest card offers no-cost EMI’s on certain large purchase items on various online marketplaces where the interest amount is discounted from the price of the order.
• It means that the expected yield/return have the identical risk factor i.e., business risk is equal among all firms having equivalent operational condition.
• The expected cost of raw materials, labour and overheads per unit of production.

To understand the financial management scope, first, it is essential to understand the approaches that are divided into two sections. Financial management is a specialized branch of general management, in the present-day-times. Long back, in traditional times, https://1investing.in/ the finance function was coupled, either with production or with marketing; without being assigned a separate status. Profit maximization is also called as cashing per share maximization. It leads to maximize the business operation for profit maximization.

Stage III: Higher use of Debt Capital

The financial management must primarily look to the safety of investment i.e. the channels of investment might bring in less returns; but investment must be safe. Loss of investment, in any one line, might lead to capital depletion; and ultimately tell upon the financial health of the enterprise. Micro-economics points out to the finance manager techniques for profit maximisation, with the limited finances at the disposal of the enterprise. Accounting, again, provides data to the finance manager for better and improved financial decision making in future.

The concept of cost of capital can be used to evaluate the financial performance of top management. This can be done by comparing the actual profitability of the investment project undertaken by the firm with the overall cost of capital. The advantage of this method is that a definite amount will be available while in the case of investment of funds in securities then exact amount may not be available on account of fall in the value of securities. After the liability is redeemed, the sinking fund is no longer required and as it is the undistributed profit, it may be distributed to the shareholders or may be transferred to the General Reserve Account.

Citi’s India retail business: Kotak, Axis Bank lead race

The term receivables are described as debt owed to the firm by the customers resulting from the sale of goods or services in the ordinary course of business. Receivables management denotes to the decision a business makes regarding to the overall credit, collection policies and the evaluation of individual credit applicants. Receivables Management is also known as trade credit management.

• Commercial paper represents unsecured promissory notes issued by firms to raise short-term funds.
• So, if 8% debt is increased from ` 5,00,000 to ` 10,00,000 the value of firm increases from ` 41,00,000 to ` 42,00,000 and WACC decreases from 9.7% to 9.5%.
• Finally, the minimum rate of return is to be set against which the performance of the long-term project can be evaluated.
• However, it can be used as a source of finance only by large companies enjoying high credit rating and sound financial health.

An annuity is the payment or receipt of equal cashflows per period for a specified amount of time. For example, when a company set aside a fixed sum each year to meet a future obligation, it is using annuity. The measure of Performance-Performance of a firm is also affected by the financial decision taken by the Management or finance manager. Therefore, to maximize revenue, the modern approach keeps a balance between liquidity and profitability. Though he was not accountable for the effective utilization of funds, however, his responsibility was to get the required funds from external partners on a fair term.

(iii) There are either no taxes or there are no differences in the tax rates applicable to capital gains and Dividend.

In property dividends, Company pays dividends in the form of assets other than cash. Generally, assets that are superfluous for the Company are distributed as dividends to stock-holders. Securities of subsidiaries owned by the Company may also take the form of property dividends. This means that company assumes fixed obligation of interest payments annually on principal amount of bond at the maturity date. It should be remembered that the company is assuming this obligation in return of nothing except credit for declaring the dividend.

A firm has an EBIT of ` 4,00,000 and belongs to a risk class of 10% i.e. its overall cost of capital is 10%. What is the value of equity capital if it employees 5% debt to the extent of 30%, 40% or 50% of the total capital of ` 20,00,000? In exceptional cases where the operating cycle of a business is longer than one year, a current liability is described as being payable within the term of the operating cycle. The operating cycle is the time period required for a business to acquire inventory, sell it, and convert the sale into cash. In final words, the notion of inventory management has been one of the many analytical characteristics of management.