Q: Capital budgeting Process.

Ans: 1. Identification of Investment Proposals: The capital budgeting process begins with the
identification of investment proposals. The proposal or the idea about potential investment
opportunities may originate from the top management or may come from the rank and file
worker of any department or from any officer of the organization.
2. Screening the Proposals: The Expenditure Planning Committee screens the various proposals
received from different departments. The committee views these proposals from various angles
to ensure that these are in accordance with the corporate strategies or selection criterion of the
firm and also do not lead to departmental imbalances.
3. Evaluation of Various Proposals: The next step in the capital budgeting process is to
evaluate the profitability of various proposals.
4. Fixing Priorities: After evaluating various proposals, the unprofitable or uneconomic
proposals may be rejected straight away. But it may not be possible for the firm to invest
immediately in all the acceptable proposals due to limitation of funds.
5. Final Approval and Preparation of Capital Expenditure Budget: Proposals meeting the
evaluation and other criteria are finally approved to be included in the Capital Expenditure
Budget. However, proposals involving smaller investment may be decided at the lower levels for
expeditious action
6. Implementing Proposal: Preparation of a capital expenditure budgeting and incorporation of
a particular proposal in the budget does not itself authorize to go ahead with the implementation
of the project.
7. Performance Review: The last stage in the process of capital budgeting is the evaluation of
the performance of the project. The evaluation is made through post completion audit by way of
comparison of actual expenditure on the project
Q: Cost of Capital?
Ans: Cost of capital is a calculation of the minimum return that would be necessary in order to
justify undertaking a capital budgeting project, such as building a new factory. It is an evaluation
of whether a projected decision can be justified by its cost.
*Cost of obtaining
*Minimum rate of return expected by its investors.
* Risk involved
* Play a crucial role in capital budgeting and decisions relating to planning of capital structure.
 Q: Functions of Financial Management
Ans: the functions of financial management explain bellow:
1. Financial Planning and Forecasting: One of the financial management functions involves
financial managers performing financial planning. It is the estimation of the value of the set of
variables at some point in the future
2. Cash Management: One of the functions of financial management is cash management.
Decisions must be made in regards to what is to be done with the cash. Financial managers need
to decide if they want to pay back to creditors, pay bills, meet current liabilities or invest in
maintaining stock.
3. Cash flow forecasting: Another important function of financial management is the forecast of
cash flow. It involves the estimation of future sales as well as expenses. This forecast helps the
business in understanding if it has enough cash for expansion in future.
4. Choosing Sources of Funds: Another important financial management function is choosing
the source of funds. This choice should be made after assessing the advantages and
disadvantages of sources as well as the financing period
5. Procurement of Funds: One of the functions of financial management includes the
procurement of funds to run the business. This is performed after deciding on the sources of
funds.
6. Investment of Funds: While procuring funds is difficult, it is important to wisely invest these
funds so that profit can be maximized. Proper calculation of the risk and ROI is crucial to
prevent loss of funds.
Q: Ploughing back to profit.
Ans: The ‘Ploughing Back of Profits ‘is a technique of financial management under which all
profits of a company are not distributed amongst the shareholders as dividend, but a part of the
profits is retained or reinvested in the company. This process of retaining profits year after year
and their utilization in the business is also known as ploughing back of profits.

1. The need for re-investment of retained earnings or ploughing back of profits arises for the following
purposes:
2. For the replacement of old assets, which have become obsolete.
3. For the expansion and growth of the business.
4. For contributing towards the fixed as well as the working capital needs of the company.
5. For improving the efficiency of the plant and equipment.
6. For making the company self-dependent of finance from outside sources.
Q: Importance of Capital budgeting.
Ans: There are some importance of capital budgeting:
1. Long-lasting effect on profitability: A long-term vision is crucial for the business to grow
and succeed. A slightly wrong decision will impact the company negatively in the long run
affecting capital budgeting.
2. Big investments: A company should make wise decisions regarding the investment it makes
for the company to grow. If there are limited resources, depending on the available resources
capital budgeting should be planned.
3. Decisions initiated cannot be undone: Capital investment decisions are vast and are not
irreversible. It is difficult most of the time to find a suitable market for capital budgeting.
4. Expenditure Control: Research and development for the investment project has to be done.
Capital budgeting lays more focus on expenditure
5. Data Flow: The inception of a project begins as a concept, and its acceptance or rejection
hinges on factors such as levels of authority and prevailing circumstances
Q: Scope of financial Management.
Ans: There are some Scope of financial bellow:
1.Financial Planning: This involves formulating strategies and action plans to achieve specific
financial goals. It includes forecasting financial needs, setting budgets, and determining the
allocation of resources to meet financial objectives.
2.Capital Budgeting: Financial management evaluates and selects investment opportunities that
align with the organization’s long-term goals. This process involves analyzing various projects
and determining their viability and potential returns on investment.
3.Financial Analysis and Reporting: Financial management entails assessing the organization’s
financial performance and position through various tools and techniques. It involves preparing
financial statements, interpreting financial ratios, and generating reports to aid decision-making.
4.Working Capital Management: This aspect deals with managing the day-to-day operational
needs of a business, ensuring sufficient liquidity to cover short-term obligations, and optimizing
cash flow efficiency.
5.Risk Management: Financial management involves identifying, assessing, and mitigating
financial risks, such as market fluctuations, credit risks, and operational uncertainties, to
safeguard the organization’s financial stability.
6.Capital Structure Management: It involves determining the appropriate mix of debt and
equity financing to minimize the cost of capital while maximizing shareholder value.
Q: Wealth Maximization?
Ans: Wealth Maximization: The ability of a company to increase the value of its stock for all
the stakeholders is referred to as Wealth Maximization. It is a long-term goal and involves
multiple external factors like sales, products, services, market share, etc. It assumes the risk. It
recognizes the time value of money given the business environment of the operating entity.
Profit Maximization: The process of increasing the profit earning capability of the
company is referred to as Profit Maximization. It is mainly a short-term goal and is primarily
restricted to the accounting analysis of the financial year. It ignores the risk and avoids the time
value of money. It primarily concerns the company’s survival and growth in the existing
competitive business environment.
Q: Time value of money.
Ans: Money has time value. In simpler terms, the value of a certain amount of money today is
more valuable than its value tomorrow. It is not because of the uncertainty involved with time
but purely on account of timing. The difference in the value of money today and tomorrow is
referred to as the time value of money.
Money has time value because of the following reasons:
1.Risk and Uncertainty: Future is always uncertain and risky. Outflow of cash is in our control
as payments to parties are made by us. There is no certainty for future cash inflows
2.Inflation: In an inflationary economy, the money received today, has more purchasing power
than the money to be received in future
3. Consumption: Individuals generally prefer current consumption to future consumption.
4. Investment opportunities: An investor can profitably employ a rupee received today, to give
him a higher value to be received tomorrow or after a certain period of time.
Q: Objectives of optimum capital structure.
Ans: 1. Simplicity: All businessmen are not educated. A complicated capital structure may not
be understood by all; on the contrary it may raise suspicions and create confusion.
2. Profitability: An optimum capital structure is one which maximises earning per equity share
and minimizes cost of financing.
3. Solvency: In a sound capital structure, content of debt will be a reasonable proportion of the
total capital employed in the business. As a result, it has minimum risk of becoming insolvent.
4. Flexibility: The capital structure of a firm should be such that it can raise funds as when
required.
5. Conservatism: The debt content in the capital structure of a firm should be within its
borrowing limits. It should be free from the risk of insolvency.
Q: What Is Ratio Analysis? 12 mark
Ans: Ratio analysis is a quantitative method of gaining insight into a company's liquidity,
operational efficiency, and profitability by studying its financial statements such as the balance
sheet and income statement. Ratio analysis is a cornerstone of fundamental equity analysis. Ratio
analysis compares line-item data from a company's financial statements to reveal insights
regarding profitability, liquidity, operational efficiency, and solvency. Ratio analysis can mark
how a company is performing over time, while comparing a company to another within the same
industry or sector. Ratio analysis may also be required by external parties that set benchmarks
often tied to risk.
Types of Ratio Analysis:
1. Liquidity Ratios: Liquidity ratios measure a company's ability to pay off its short-term debts
as they become due, using the company's current or quick assets. Liquidity ratios include the
current ratio, quick ratio, and working capital ratio.
2. Solvency Ratios: Also called financial leverage ratios, solvency ratios compare a company's
debt levels with its assets, equity, and earnings, to evaluate the likelihood of a company staying
afloat over the long haul, by paying off its long-term debt as well as the interest on its debt. 3.
Profitability Ratios: These ratios convey how well a company can generate profits from its
operations. Profit margin, return on assets, return on equity, return on capital employed, and
gross margin ratios are all examples of profitability ratios.
4. Efficiency Ratios: Also called activity ratios, efficiency ratios evaluate how efficiently a
company uses its assets and liabilities to generate sales and maximize profits. Key efficiency
ratios include: turnover ratio, inventory turnover, and days' sales in inventory.
5. Coverage Ratios: Coverage ratios measure a company's ability to make the interest payments
and other obligations associated with its debts.
6. Market Prospect Ratios: These are the most commonly used ratios in fundamental analysis.