The Financing Decision is concerned with how much to be raised from which source, determining the mix of debt and equity, which directly impacts the overall cost of capital and financial risk.

Current assets are those which, in the normal routine of the business, get converted into cash or cash equivalents within one year, such as inventory and debtors.

Financial planning aims to ensure fund availability and avoid unnecessary resource raising. Maximizing shareholder wealth is the objective of financial management, not financial planning specifically.

Trading on Equity refers to the increase in profit earned by the equity shareholders due to the presence of fixed financial charges like interest, specifically when the Return on Investment (RoI) is higher than the cost of debt.

During a bearish phase, raising equity capital may be difficult, so the company may opt for debt financing instead.

A long-term investment decision is also called a Capital Budgeting decision. These decisions involve committing finance long-term and affect the earning capacity in the long run.

A company having unstable earnings is likely to pay a smaller dividend compared to a company having stable earnings, other things remaining the same.

Capital budgeting decisions normally involve huge investments and are irreversible except at a huge cost, making it almost impossible to wriggle out of them once made.

When a company increases debt, the financial risk for equity holders increases, potentially raising their desired rate of return (Cost of Equity). This limits how much debt can be used to maximize shareholder wealth.

The Production Cycle is the time span between the receipt of raw material and their conversion into finished goods, affecting the working capital requirement.

The Debt Service Coverage Ratio (DSCR) takes care of the deficiencies in the ICR by comparing cash profits (after tax + depreciation + interest + non-cash exp.) with total cash required for debt service (Pref. Div + Interest + Repayment obligation).

When the company’s RoI is less than the cost of debt, the use of debt reduces the EPS, resulting in a situation of unfavourable financial leverage.

If a business has high fixed operating costs, it must reduce fixed financing costs; hence, lower debt financing is preferred to balance the total fixed obligations.

For optimal procurement, different available sources of finance are identified and compared in terms of their costs and associated risks.

Debt is considered cheaper than equity because interest paid on debt is a deductible expense for computation of tax liability, making the after-tax cost lower.

A labour-intensive organisation relies less on plant and machinery, requiring less investment in fixed assets and hence lower fixed capital.

Decisions related to the proportion of long-term finance, like debt (Financing Decision) and expansion (Capital Budgeting Decision), affect interest and depreciation, thereby impacting virtually all items in the profit and loss account.

Decisions about credit and inventory management affect the amount of debtors and inventory, which in turn affect the total current assets as well as their composition.

Equity is considered riskless for the business because there is no such compulsion to pay dividend or repay capital, unlike debt which is obligatory.

Even if a company earns profit, the availability of enough cash is necessary for the declaration of a dividend, as dividend payment involves an outflow of cash.

Financial planning is the process of estimating fund requirements and specifying sources, striving for a proper matching of fund requirements and availability.

The Interest Coverage Ratio (ICR) calculates how many times EBIT covers the interest obligation (EBIT / Interest). A higher ratio indicates a lower risk of failing to meet interest payments.

The wealth-maximisation concept aims at maximising the market value of equity shares, thus maximising the current price of equity shares of the company.

Financial planning helps in forecasting what may happen under different business situations, making the firm better prepared to face the future and avoid shocks and surprises.

The Investment Decision relates to how the firm’s scarce funds are invested in different assets, aiming to earn the highest possible return for investors.