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manufacturer is in business to earn income with fixed assets such as machinery

and not with current assets. However, placing too high a percentage of its

assets in new building or new machinery may leave the firm short of cash to

meet an unexpected need or exploit sudden opportunity. The firms financial

manager must invest in fixed assets. but not too much. Besides determining the

assets mix financial manager must also decide what type of fixed and currentassets to acquire. All this covers area pertaining to capital budgeting and

working capital management.

2) Financing Decision : It is the next step in financial management for

executing the investment decisions once taken a look at the balance - sheet

of a company indicates that it obtains finance from shareholders ordinary,

preference, debenture holders, or long - term loans from the institutions, bank

and other sources. There are variations in the provisions contained in

preference shares, debentures, loans papers etc. Thus financing decisions i.e.

The financing mix of capital structure. Efforts are made to obtain an optimalfinancing mix for a particular company. This necessitates study of capital

structure as also the short and intermediate term financing plans of the

company.In more advanced companies financing decision today , has become fully -

integrated with top - management policy formulation via capital budgeting,

long - range planning , evalution of alternate uses of funds and establishmentof measurable standards of performance in financial terms.

3) Dividend Decisions : The third major decision of financial management is thedecision relating to the dividend policy. The dividend decision should beanalysed in relation to the financing decision of a firm . Two alternatives areavailable in dealing with the profits of a firm; they can be retained in thebusiness. Which courses should be followed - dividend or retention ? Onesignificant factor is that the dividend pay out ratio i.e. what proportion of netprofits should be paid out to the shareholders. The decision will depend uponthe preference of the shareholders and investment opportunitiesavailable within the firm. The second major aspect of the dividend decision isthe factors determining dividend policy of a firm in practice.

3. Critically analyze the functions of Financial Manager in a large scaleindustrial establishment.

The financial manager performs the following functions:

1. Finance manager manages the funds in such a way to ensure their optimum utilisation with

the available resources.

2. He forecasts the requirement of funds for both short term and long term purposes.

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3. He also actively takes part in budgeting, risk management and financial reporting.

4. He makes financial reports, have and eye on profits and losses, etc.

5. He decides how much of the firms profits should be invested, how much should be given

to the shareholders in the form of dividends and how much should be kept as reserves.

6. He also monitors the cash flows, prepares accounts and works on financial models.

7. He decides what type of capital structure is required be the company and decides whether

to raise funds from loans/borrowing or from share capital.

8. He also ensures that adequate funds at cheap rates are supplied to various parts of the

organization at the right time.

9. He constantly reviews the financial performance of various units of the organization.

10. He also ensures that no excess cash is lying idle.

4. What is capital budgeting? Examine its need and importance.

Capital budgeting is the process of making investment decisions in capital expenditure.

A capital expenditure may be defined as an expenditure the benefits of which are expected to be

received over period of time exceeding one year.

Examples would include the development of a major new product, a plant site location, or an

equipment replacement decision.

Capital budgeting decision must be approached with great care because of the followingreasons:

1. Long time period: consequences of capital expenditure extends into the future and will have tobe endured for a longer period whether the decision is good or bad.

2. Substantial expenditure: it involves large sums of money and necessitates a careful planningand evaluation.

3. Irreversibility: the decisions are quite often irreversible, because there is little or no secondhand market for may types of capital goods.

4. Over and under capacity: an erroneous forecast of asset requirements can result in seriousconsequences. First the equipment must be modern and secondly it has to be of adequate

capacity.

5. Long term effect on profitability: These decisions have a long-term and significance on theprofitability. An unwise decision may prove disastrous and fatal to the very existence of the

concern.

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5 What are the various types of capital investment decisions known toyou?

One of the classifications is as follows,

Expansion of existing business Expansion of new business Replacement and moderation

Expansion and Diversification

A company may add capacity to its existing product lines to expand existing operation. For

example, the Company Y may increase its plant capacity to manufacture more X. It is an

example of related diversification. A firm may expand its activities in a new business. Expansionof a new business requires investment in new products and a new kind of production activity

within the firm. If a packing manufacturing company invest in a new plant and machinery to

produce ball bearings, which the firm has not manufacture before, this represents expansion of

new business or unrelated diversification. Sometimes a company acquires existing firms to

expand its business. In either case, the firm makes investment in the expectation of additional

revenue. Investment in existing or new products may also be called as revenue expansion

investment.

Replacement and Modernization

The main objective of modernization and replacement is to improve operating efficiency andreduce costs. Cost savings will reflect in the increased profits, but the firms revenue may

remain unchanged. Assets become outdated and obsolete with technological changes. The firm

must decide to replace those assets with new assets that operate more economically. If a

Garment company changes from semi automatic washing equipment to fully automatic

washing equipment, it is an example of modernization and replacement. Replacement decisions

help to introduce more efficient and economical assets and therefore, are also called cost

reduction investments. However, replacement decisions that involve substantial modernization

and technological improvements expand revenues as well as reduce costs.