Test: Financial Management - 1 - Commerce MCQ

The cheapest source of finance is retained earnings. Retained income refers to that portion of net income or profits of an organisation that it retains after paying off dividends.

 Investment decision is related to careful selection of assets in winch funds will be invested by firms. Thus, the above case comes under the investment decision.

 

When there is an increase in the tax on corporate profit, the debt becomes relatively cheaper. This is because interest that is to be paid to the debtors is deducted from the total income before calculating the value of tax. Thus, as the value of tax increases, the debt becomes relatively cheaper.

Companies with a higher growth pattern are likely to:
Answer: C. pay lower dividends
Explanation:
Companies with a higher growth pattern tend to reinvest their earnings back into the business to fuel further growth opportunities. This typically leads to lower dividend payouts. Here's why:
1. Reinvestment for growth: Companies experiencing higher growth often need to allocate a significant portion of their profits towards expanding their operations, investing in research and development, acquiring new technologies, or entering new markets. This requires substantial capital investments, which may limit the amount of cash available for dividend payments.
2. Focus on future value: Companies with higher growth potential prioritize reinvesting their profits to generate long-term value for shareholders. By retaining earnings and reinvesting them into the business, these companies aim to achieve higher profitability and increase their stock price over time, which can ultimately result in greater returns for investors.
3. Capital allocation decisions: Management teams of growth-oriented companies often make strategic decisions to utilize earnings for internal growth opportunities rather than distributing them as dividends. This is because they believe that reinvesting in the business will generate higher returns in the future compared to paying out dividends.
4. Investor expectations: Investors who are interested in companies with a higher growth potential are often willing to forgo immediate dividend income in exchange for the potential capital appreciation of the stock. These investors understand that the company's reinvestment of earnings into growth opportunities can lead to higher stock prices and overall returns in the long run.
In summary, companies with a higher growth pattern tend to pay lower dividends as they prioritize reinvesting their earnings for future growth and value creation.

Financial Leverage refers to the proportion of debt in the overall capital. It is said to be a favourable situation when the return on investment becomes higher than the cost of debt. In other words, as the Return on investment becomes greater, the earning per share also increases and the financial leverage is said to be favourable.

Higher debt- equity ratio refers to a situation where the proportion of debt in total capital is higher. This implies higher degree of financial risk. This is because in case of debt, it is obligatory for a business to make interest payments and the return of principal to the debtors. Thus, higher debt increases the financial risk for the business.

Companies with high amounts of working are easily able to meet their short-term obligations as they have sufficient liquid funds. Which means they have a higher current ratio. The higher the ratio, the more capable the company.
As the company has high working capital they are able to loan and advance money to small business which increases their risk of bad debts and lack of return.
If the company has high working capital means it will run more smoothly than any company, making the company having a high rate of profit.

Explanation:
Current assets are assets that are expected to be converted into cash or used up within one year or within the operating cycle of a business, whichever is longer. These assets are typically liquid and easily convertible to cash. Examples of current assets include cash, accounts receivable, inventory, and prepaid expenses.
Reasoning:
In this question, we need to identify the correct time frame for current assets to get converted into cash. Let's evaluate each option:

A: Between one and three years:
This option does not align with the definition of current assets, as current assets are expected to be converted into cash within one year or the operating cycle of a business.

B: Between three and five years:
Similar to option A, this time frame is too long to be considered as current assets.

C: Within one year:
This option aligns with the definition of current assets. Current assets are expected to be converted into cash within one year or the operating cycle of a business, whichever is longer. Therefore, this is the correct answer.

D: Within six months:
Although this option falls within the one-year time frame, it is more specific and does not encompass the entire range of current assets.
Therefore, the correct answer is option C: Within one year.

Financial Planning aims at ensuring that the firm faces neither a shortage nor a glut (excess) of unusable funds. If there is a shortage of funds then the firm will not be able to carry out its planned activities and commitments. On the other hand, if there are excess funds available then it adds to the cost of business and also encourages wastage of funds. Thus, financial planning focuses on ensuring the availability of just enough funds at the right time.

If Company is having smooth cash flow then they can prefer to give high rate on dividend...If a company have stable earning then they can give high rate on dividend but if a company is having unstable earning they prefer to give low rate of dividend If a company has low growth opportunity they must go for higher rate of dividend but if a company is having good growth opportunity they prefer to give less dividend more or profit retained in the business