Objectives of Financial Planning

BBA-301 (Financial Management)
SECTION-A
Q.1. (i) Write down the objectives of financial planning
Ans
Objectives of Financial Planning
a.Determining capital requirements- This will depend upon factors like

cost of current and fixed assets, promotional expenses and long- range
planning. Capital requirements have to be looked with both aspects: short-
term and long- term requirements.
b. Determining capital structure- The capital structure is the composition
of capital, i.e., the relative kind and proportion of capital required in the
business. This includes decisions of debt- equity ratio- both short-term and
long- term.
c. Framing financial policies with regards to cash control, lending,
borrowings, etc.
d. Avoiding unnecessary funds A finance manager ensures that the scarce
financial resources are maximally utilized in the best possible manner at least
cost in order to get maximum returns on investment.
(ii) What do you understand by Equity Shares ?
Equity Shares: An equity share, is a part ownership where each member is

a fractional owner and initiates the maximum entrepreneurial liability
related with a trading concern.
Shares which do not carry any preferential rights in repayment of capital

(payment of principal amount) and dividend payments (payment of interest)
are equity shares.
The main features are:
i) Voting rights: Equity Shareholders possess voting rights and select

the company’s management.
ii) Non-redeemable: It is a permanent source where funds are never refunded

back until and unless liquidation of the company.
iii) Share of profit: Shareholders receive share of profit in the form of
dividend.
iv) Limited liability & Claim over assets: to the extent of owned shares.
vi) Importance of working capital

1. Continuity in Business Operations: Working capital keeps the
business operations moving. It is needed to purchase raw materials,
pay wages and recurring expenses like electricity, rent, etc.
2. Dividend Payment: Working capital is needed to pay a dividend to the
shareholders.
3. Repayment of Long-Term Loans: Working capital is used to repay
long-term loans and debentures.
4. Increases Creditworthiness and Goodwill: A company that pays its
creditors and stakeholders well on time has a positive reputation in the
credit, labor and capital markets.
5. Boosts Efficiency and Productivity: of the company by employee
training, machinery maintained etc.
6. Helps to Fight Competition: by advertising/sales promotion and
longer credit terms to the customers.
7. Helps to Withstand Seasonal Fluctuations:. If the sales are down,
the money inflow is less.
viii) Inventory management

means efficient management control of capital invested in inventory for
obtaining maximum return by keeping inventory costs at minimum.
Inventory is a stock of items kept by an organization to meet internal or
external customer demand.
The purpose of inventory management is to determine the amount of
inventory to keep in stock –how much to order and when to replenish or
order.
Operating objectives
• Regular flow of material
• Minimization of risks due to stock out
• Avoid obsolescence of stored Goods due to change in demand,
technology
Financial objective
• Minimum investment or maximization of returns on investments
• Minimizing inventory costs.
vii) Capital budgeting

involves planning of expenditure for assets and return from them which
will be realized in future time period
A capital expenditure is an expenditure incurred for acquiring or
improving the fixed assets, the benefits of which are expected to be
received over a number of years in future.
Cost of capital is the rate of return that a firm must earn on its project
investments to maintain its market value and attract funds.
Cost of capital is the required rate of return on its investments which
belongs to equity, debt and retained earnings.
If a firm fails to earn return at the expected rate, the market value of the
shares of shareholders will fall.
7 Write down the types and methods of financial statement Analysis.

Financial statement analysis is the process of reviewing and analyzing a
company's financial statements to make better economic decisions to earn
income in future.
Common methods include horizontal and vertical analysis and the use of
financial ratios.
1) Horizontal and vertical analysis
When using the horizontal analysis method, financial information
is compared over a sequence of reporting periods.
The vertical analysis method allows analyzing financial
information in a proportional manner, where every line item on a
financial statement is recorded as a proportion of another item.
Naturally, this implies that each line item detailed on the income
statement is quantified as a proportion of gross sales, whereas each
line item detailed on a balance sheet is quantified as a proportion
of total assets.
2) Trend analysis
This entails reviewing financial statements of three or more
periods, an extension of horizontal analysis. The earliest year in the
set data represents the base year. In trend analysis, users assess
statements for incremental change patterns. A change in financial
statements can indicate that there are either increased income or
decreased expenses.
3) Ratio analysis
Ratio analysis is an attempt of developing meaningful relationship
between individual items (or group of items) in the balance sheet
or profit and loss account.
Ratio analysis highlights the liquidity, solvency, profitability and
capital gearing.
4) Cost Volume Profit Analysis
This analysis discloses the prevailing relationship among sales,
cost and profit.
The cost is divided into fixed cost and variable cost.
There is a constant relationship between sales and variable cost.
Cost analysis enables the management for better profit planning.
5 ) Cash Flow Analysis
Cash flow analysis is based on the movement of cash and bank
balances instead of movement of working capital.
There are two types of cash flows. They are actual cash flows and
notional cash flows
Q3) Explain the importance of Dividend policy and the determinants of Dividend
policy.
Importance of dividend policy:
 The dividend policy is important because it outlines the magnitude, method, type
and frequency of dividend distributions.
 At the highest level of decision making, companies have two basic options
regarding what to do with their profits: retain or distribute the earnings.
 The retention of profits allows their use for various business functions, including
additional investing in expansion and growth.
 The distribution of excess profits to the shareholders can come in the form of
either share repurchases or dividend distributions.
 Dividend policy can also be used as a powerful tool for attracting new investors
and enticing preferential treatment from financial and credit markets.
Determinants of Dividend Policy
1) Financial Position of the Firm – When a firm earns stable and adequate Profits, it
can distribute more dividends to its shareholders.
2) Legal Constrains – The Companies Act 1956 has put several restrictions
Regarding payments and declaration of dividends.
Similarly, Income Tax Act, 1961 also lays down certain restrictions on payment of
dividends.
3) Investment opportunities available – If a company has ample investment
Opportunities available at its disposal, promising high returns it may choose to

retain its profit.
4) Shareholders Preference and expectations – Dividend policy of a
Company depends upon the preferences of the shareholders and their
Expectations regarding the rate of dividend.
5) Sources of Finance – If the firm has external financial sources available at
Its disposal, it may not use funds from its retained earnings.
6) Growth Rate of the Firm – High growth rate implies that the firm can
Distribute more dividend to its shareholders.
7) Tax Policy – If the government provides tax incentives, the firm can pay
More dividend to its shareholders.
8) Capital Market Condition – If the capital market is prefect, it will result in
Higher earnings of the company and lead to increase in dividend of
Shareholders.
9) Liquidity position of the firm – A company facing liquidity constraints
may not be able to pay dividend for that period.
Q.4. Write down the meaning and purposes of Funds flow statement.
Meaning of Fund Flow Statement:

A fund flow statement is a statement in summary form that indicates changes in
terms of financial position between two different balance sheet dates showing clearly
the different sources from which funds are obtained and uses to which funds are put.
It summarizes the financing and investing activities of the enterprise during an
accounting period.
“The funds flow statement describes the sources from which additional funds were
derived and the uses to which these funds were put.”
Purpose of Fund Flow Statement::

1. Fund flow statement reveals clearly the changes in items of financial position
between two different balance sheet dates showing clearly the different sources and
applications of funds. Thus, it summarizes the financing and investing activities of the
enterprise.
2. It also reveals how much of the total funds is being collected by disposing of fixed
assets, how much from issuing shares or debentures, how much from long-term or
short-term loans, and how much from normal operational activities of the business.
3. It also provides information about the specific utilization of such funds i.e., how
much has been used for acquiring fixed assets, how much for redemption of
preference shares, debentures or short-term loans as well as payment of tax, dividend
etc.
4. It helps the management in depicting all inflows and outflows of funds which cause
a change in working capital of a business organization.
5. The projected fund flow statement helps management to exercise budgetary control
and capital expenditure control in the enterprise.
Management uses fund flow statement for judging the financial and operating
performance of the business.
I) Return on investment (ROI) is performance measure used to evaluate the efficiency of

investment. It compares the magnitude and timing of gains from investment directly to
the magnitude and timing of investment costs.
A higher ROI means that investment gains compare favorably to investment costs.
ROI is an important financial metric for:
 asset purchase decisions
 approval and funding decisions for projects and programs
 traditional investment decisions
Calculation (Formula)
To calculate return on investment, the benefits (or returns) of an investment are divided by the costs
of the investment. The result can be expressed as a percentage or a ratio.
Return on Investment (ROI) = (Gains from Investment – Cost of Investment) / Cost of Investment
To measure the profitability of a company the following formula can be used to calculate return on
investment.
Return on Investment = Net profit after interest and tax / Total Assets
Norms and Limits
One drawback of ROI is that it by itself says nothing about the likelihood that expected returns and
costs will appear as predicted nor about the risk of an investment.
II) Discounted Cash flow
Discounted cash flow (DCF) is a valuation method used to estimate the value of

an investment based on its future cash flows.
DCF analysis finds the present value of expected future cash flows using
a discount rate. A present value estimate is then used to evaluate a potential
investment.
DCF is calculated as follows:
 CF = Cash Flow
 r = discount rate (WACC)
 DCF is also known as the Discounted Cash Flows Model
Equity-approach
Flows to equity approach (FTE)
o Discount the cash flows available to the holders of equity capital, after allowing for
cost of servicing debt capital
Entity-approach
 Adjusted present value approach (APV)
o Discount the cash flows before allowing for the debt capital (but allowing for the tax
relief obtained on the debt capital)
 Weighted average cost of capital approach (WACC)
o Derive a weighted cost of the capital obtained from the various sources and use that
discount rate to discount the cash flows from the project
 Total cash flow approach (TCF)
o This distinction illustrates that the Discounted Cash Flow method can be used to
determine the value of various business ownership interests. These can include equity or
debt holders.

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BBA-301 (Financial Management)

Q.1. (i) Write down the objectives of financial planning

Objectives of Financial Planning

a.Determining capital requirements- This will depend upon factors like

(ii) What do you understand by Equity Shares ?

Equity Shares: An equity share, is a part ownership where each member is

Shares which do not carry any preferential rights in repayment of capital

The main features are:

i) Voting rights: Equity Shareholders possess voting rights and select

ii) Non-redeemable: It is a permanent source where funds are never refunded

vi) Importance of working capital

viii) Inventory management

vii) Capital budgeting

7 Write down the types and methods of financial statement Analysis.

Determinants of Dividend Policy

3) Investment opportunities available – If a company has ample investment

Opportunities available at its disposal, promising high returns it may choose to

Company depends upon the preferences of the shareholders and their

Expectations regarding the rate of dividend.

5) Sources of Finance – If the firm has external financial sources available at

Distribute more dividend to its shareholders.

More dividend to its shareholders.

8) Capital Market Condition – If the capital market is prefect, it will result in

Higher earnings of the company and lead to increase in dividend of

9) Liquidity position of the firm – A company facing liquidity constraints

may not be able to pay dividend for that period.

Meaning of Fund Flow Statement:

Purpose of Fund Flow Statement::

I) Return on investment (ROI) is performance measure used to evaluate the efficiency of

II) Discounted Cash flow

Discounted cash flow (DCF) is a valuation method used to estimate the value of

DCF is calculated as follows:

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