Ans 1- A dividend policy is a company’s strategy to decide how much money it will give out

as a dividend. A dividend policy also helps ensure that taxable distributions are distributed at
the correct rate to shareholders.

Factors determining the dividend policy

1. Liquidity: Liquidity is one of the most significant factors that impact a company’s
dividend policy. firms with higher liquidity pay dividends more frequently than
companies with cash locked up in fixed assets or inventory.
2. Repayment of Debt: Companies with high interest-bearing debts may be hesitant to
pay dividends. Dividend payout may be made difficult if the debt is due for
repayment because paying interest on interest-bearing assets is a necessity in virtually
all nations.
3. Stability of Profits: Certain cash and loan credits are limited to the company, so it has
to earn revenue. A company has to generate income from sales or other means to earn
money for its shareholders. At this point, the company’s earning capacity is known
and can be predicted.
4. Legal Considerations: The legal rules set out parameters within which a business can
declare dividends. It is done to safeguard the interests of creditors, lenders, and other
parties having a stake in the firm. The court or company law boards can regulate
whether or how much the firm can pay dividends.
5. Control: The utilisation of retained earnings to finance a new project maintains the
company’s ownership and control. This can be useful in businesses where the existing
ownership disposition is relevant.
6. The Level of Inflation: If the company doesn’t have enough cash flow to cover its
operating costs and dividends, it will have to cut or eliminate the dividend. Inflation
can also be a factor in determining a company’s dividend policy.
7. Expectations of the Management: The dividend policy is also affected by the
expectations of a company’s management. The dividend policy is high if the
management is confident about the company’s earnings.
8. Current and Anticipated Risks in the Market:As there is always a risk in the market, a
company’s dividend policy is determined by this risk. In the stock market, there are
fluctuations. A company has to face this risk while deciding on the dividend policy.

Ans 3- the term ‘leverage’ is used to describe the ability of a firm to use fixed cost assets or
funds to increase the return to its equity shareholders. In other words, leverage is the
employment of fixed assets or funds for which a firm has to meet fixed costs or fixed rate of
interest obligation—irrespective of the level of activities attained, or the level of operating
profit earned. Leverage occurs in varying degrees. The higher the degree of leverage, the
higher is the risk involved in meeting fixed payment obligations i.e., operating fixed costs
and cost of debt capital. But, at the same time, higher risk profile increases the possibility of
higher rate of return to the shareholders.

 1. Operating Leverage:
Operating leverage refers to the use of fixed operating costs such as depreciation, insurance
of assets, repairs and maintenance, property taxes etc. in the operations of a firm. But it does
not include interest on debt capital. Higher the proportion of fixed operating cost as compared
to variable cost, higher is the operating leverage, and vice versa.
2. Financial Leverage:
Financial leverage is primarily concerned with the financial activities which involve raising
of funds from the sources for which a firm has to bear fixed charges such as interest
expenses, loan fees etc. These sources include long-term debt (i.e., debentures, bonds etc.)
and preference share capital.
3. Combined Leverage:
Operating leverage shows the operating risk and is measured by the percentage change in
EBIT due to percentage change in sales. The financial leverage shows the financial risk and is
measured by the percentage change in EPS due to percentage change in EBIT.

Ans 4:

WHAT IS WORKING CAPITAL?

Working Capital (WC), also known as Net Working Capital (NWC), is the difference
between a company’s current assets and current liabilities. It is a good indicator of a
business’s liquidity and short-term financial health and its ability to utilise its assets
efficiently.
SHORT-TERM SOURCES OF WORKING CAPITAL
1. Loans from Commercial Banks: Businesses, mostly MSMEs, can get loans from
commercial banks with or without offering collateral security. There is no legal
formality involved except creating a mortgage on the assets. Repayment can be made
in parts or lump sum at the time of loan maturity.
2. Public Deposits: Many companies find it easy and convenient to raise funds for
meeting their short-term requirements from public deposits. In this process, the
companies invite their employees, shareholders, and the general public to deposit their
savings with the company.
3. Trade Credit: Companies generally source raw materials and other items from
suppliers on credit. The amount payable to these suppliers is also treated as a source
of working capital. Usually, the suppliers grant their buyers a credit period of 3 to 6
months.
4. Bill Discoun ng: Just as business buys goods on credit, they offer credit to their
buyers. The credit period may vary from 30 days to 90 days and sometimes extends,
even up to 180 days. During this period, the company funds get blocked, which is not
good.
5. Bank Overdraft: Some banks offer their esteemed customers and current account
holders a facility to withdraw a certain amount of money over and above the funds
held by them in their current account with the bank.

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 6. Advances from Customers: One effortless way to raise funds to meet the short-term
requirement is to ask customers for some payment in advance. This advance confirms
the order and gives much-needed cash to the business.

Ans 5 : Capital structure refers to a company's mix of capital—its debt and equity.
Equity is a company's common and preferred stock plus retained earnings. Debt
typically includes short-term borrowing, long-term debt, and a portion of the principal
amount of operating leases and redeemable preferred stock.

Factors Determining Capital Structure

1. Trading on Equity- The word “equity” denotes the ownership of the company.
Trading on equity means taking advantage of equity share capital to borrowed
funds on reasonable basis. It refers to additional profits that equity shareholders
earn because of issuance of debentures and preference shares.
2. Degree of control- In a company, it is the directors who are so called elected
representatives of equity shareholders. These members have got maximum voting
rights in a concern as compared to the preference shareholders and debenture
holders.
3. Flexibility of financial plan- In an enterprise, the capital structure should be
such that there is both contractions as well as relaxation in plans. Debentures and
loans can be refunded back as the time requires.
4. Choice of investors- The company’s policy generally is to have different
categories of investors for securities. Therefore, a capital structure should give
enough choice to all kind of investors to invest.
5. Capital market condition- In the lifetime of the company, the market price of
the shares has got an important influence. During the depression period, the
company’s capital structure generally consists of debentures and loans.
6. Period of financing- When company wants to raise finance for short period, it
goes for loans from banks and other institutions; while for long period it goes for
issue of shares and debentures.
7. Cost of financing- In a capital structure, the company has to look to the factor of
cost when securities are raised. It is seen that debentures at the time of profit
earning of company prove to be a cheaper source of finance as compared to
equity shares where equity shareholders demand an extra share in profits.

 8. Stability of sales- An established business which has a growing market and high
sales turnover, the company is in position to meet fixed commitments. Interest on
debentures has to be paid regardless of profit.
9. Sizes of a company- Small size business firms capital structure generally
consists of loans from banks and retained profits. While on the other hand, big
companies having goodwill, stability and an established profit can easily go for
issuance of shares and debentures as well as loans and borrowings from financial
institutions. The bigger the size, the wider is total capitalization.

Ans 6 – i) Trade credit means many things but the simplest definition is an arrangement to
buy goods and/or services on account without making immediate cash or cheque payments.
Trade credit is a helpful tool for growing businesses, when favourable terms are agreed with a
business’s supplier. This arrangement effectively puts less pressure on cashflow that
immediate payment would make. This type of finance is helpful in reducing and managing
the capital requirements of a business.
Common use This is short-term finance that is relatively quick to arrange. The typical
amount involved and the terms will depend entirely on your trading activity. The reverse is
also common, where a business’s customers or clients will request trade credit terms.
Costs
There are three main indirect costs of trade credit as there is no direct cost involved:
• loss of early payment discount

• spoiling your relationship with your supplier if you do not adhere to the agreed trade
credit terms
• working capital cost if the net effect of receiving and providing trade credit puts your
business in a negative working capital situation.
Advantages
• an agreement can be very easy to organise

• an agreement is relatively easy to maintain, as long as the conditions are met

• can be used by most business, for supplies of goods or services
• businesses are protected by late payment legislation
• a potentially low-cost form of working capital finance.
Disadvantages
• possible loss of early payment discount

• failure to comply with the conditions could lead to the loss of a supplier
• provision of cashflow advantage rather than additional finance
• cannot be used by all businesses, such as online retailers
• there are no guarantees, as customers may pay late.

 ii) What is Net Operating Cycle?

The net opera ng cycle, also called the 'cash conversion cycle,' is the number of days it takes
a company to generate revenues with assets.
How Does Net Operating Cycle Work?
Analysts can calculate the length of the cycle with the following formula:
Net Opera ng Cycle = Days Inventory Outstanding + Days Sales Outstanding + Days
Payables Outstanding
Note that DPO is a negative number.
The net operating cycle involves determining how long it takes to create inventory, sell
inventory and collect on invoices to customers. For example, let's say Company XYZ makes
widgets, which typically sit in the warehouse for 10 days. Let's also assume that it typically
takes 15 days to collect on the sale of each widget, and that it takes 14 days to pay invoices to
Company XYZ's vendors. Using the formula above, Company XYZ's net operating cycle is:
Net Opera ng Cycle = 10 + 15 + -14 = 11 days
This means that Company XYZ generates cash from its assets within 11 days.

The net opera ng cycle is a measure of how long an investment is locked up in production
before turning into cash.
Changes in net operating cycle can be very telling. For example, when companies take a long
time to collect on outstanding bills, or they overproduce and fill up the warehouse because
they can't figure out what sells, their net operating cycles lengthen. For small businesses
especially, long net operating cycles can be the difference between profit and bankruptcy.
After all, companies can only pay for things with cash, not profits. In turn, the net operating
cycle is a measure of managerial competency as well as operational efficiency.
It is important to note that different industries have different capital requirements and
standards, and determining whether a company has a long or short net operating cycle should
be made within that context.
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