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FM 006

Capital budgeting, capital structure, dividend distribution, and working capital requirements are four elements used to calculate a corporate company's financial position. Capital budgeting involves evaluating potential investments and maximizing future value. Capital structure refers to the mix of equity and debt used to finance assets and operations. Dividend distribution policies balance paying dividends to shareholders with reinvesting profits. Working capital ensures adequate short-term liquidity to pay upcoming bills through a balance of current assets and liabilities.

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32 views

FM 006

Capital budgeting, capital structure, dividend distribution, and working capital requirements are four elements used to calculate a corporate company's financial position. Capital budgeting involves evaluating potential investments and maximizing future value. Capital structure refers to the mix of equity and debt used to finance assets and operations. Dividend distribution policies balance paying dividends to shareholders with reinvesting profits. Working capital ensures adequate short-term liquidity to pay upcoming bills through a balance of current assets and liabilities.

Uploaded by

Eswara kumar J
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Why 4 elements are using to calculate financial position of a corporate company?

Capital budgeting

Capital structure

Dividend distribution

Working capital requirement

What is capital budgeting?

Capital budgeting is a formal process used for evaluating potential expenditures or


investments that are significant in amount for the company. It involves the
decision to invest funds for addition, disposition, modification or replacement of
fixed assets. This type of capital expenditures include the purchase of fixed assets
such as, land, new buildings and equipments, or rebuilding or replacing existing
buildings and equipments, etc. Capital Budgeting is a tool for maximizing a
company’s future value. Companies are able to manage only a limited number of
large projects at any one time. These investments are so important that ultimately
they decide the future of the company Most capital expenditures cannot be
reversed at a low cost, consequently, mistakes are very costly.

Capital budgeting is used for How to raise companies funds and also to develop for
future forecasting.

The seven essential capital budgeting tools or techniques include payback period,
discounted payment period, net present value, profitability index, internal
rate of return, and modified internal rate of return

Capital budgeting is the process by which investors determine the value of a


potential investment project. The three most common approaches to project
selection are
payback period (PB), internal rate of return (IRR), and net present value
(NPV).
CAPITAL STRUCTURE

Capital structure is using in the present cenario.it is mix of equity and debt and
equity used to finance a companys assets and operations.From a corporate
perspective,equity represents a more expensive,permanent source of capital with
the greater financial flexibility.

The types of capital structure are

Equity capital

Equity is the money owned by the shareholders or owners

Eg: Retained earnings,contributed capital

Debt capital

Debt capital is referred to as the borrowed money that is utilized in business

Eg:-Longterm bomds,Short term commercial papers

Finanacial leverage

Financial leverage is the use of borrowed money (debt) to finance the purchase
of assets with the expectation that the income or capital gain from the new
asset will exceed the cost of borrowing

Dividend distribution

Cash dividend

A dividend that is paid out in cash and will reduce the cash reserves of a company.

Bonus shares

Bonus shares refer to shares in the company are distributed to shareholders at no


cost. It is usually done in addition to a cash dividend, not in place of it.
A dividend is a distribution of profits by a corporation to its shareholders.
When a corporation earns a profit or surplus, it is able to pay a portion of the profit
as a dividend to shareholders. Any amount not distributed is taken to be re-invested
in the business (called retained earnings).

Dividend payment policy is measured using dividend payout ratio which is


dividend per share (DPS) divided by earnings per share (EPS), and given the
symbol of DPR. The size of the company in this it is expressed by total assets, the
greater the total assets of the company will be the greater the size of the company.
The amount allocated for the dividend, should appear on the Profit and Loss
Report after the net profit value. As Accounting doesn't show this, we suggest
you post the dividend entries to a nominal ledger account in the Equity section of
your Balance Sheet Report.

There are three types of dividend policies a stable dividend policy, a constant
dividend policy, and a residual dividend policy.
(or)
Regular dividend policy
Irregular dividend policy
Stable dividend policy
No dividend policy

Working capital requirements

Working Capital = Current Assets – Current Liabilities

The working capital formula tells us the short-term liquid assets available after short-
term liabilities have been paid off. It is a measure of a company’s short-term liquidity
and is important for performing financial analysis, financial modeling, and
managing cash flow.

Working capital is the amount of cash and other current assets a business has
available after all list current liabilities are accounted for. Understanding how
much working capital you have on hand to pay bills as they come due is critical to
the success of an organization.
Capital budgeting

The capital budgeting process discloses the viability of investment proposals


and helps invest in profitable projects. The goal is to maximize the growth
and profitability of the business. As part of capital budgeting, financial
analysts go over various investment alternatives. They conduct a comparative
analysis of investments’ present and future value to interpret their risk-return
aspects concerning organizational goals. Only the most suitable projects are
given a chance.

Capital Structure

The capital structure tells us the method of financing used by the entity. The
capital structure, for example, might include equity, retained earnings, and
debts. In the perspective of investors, a combination of too much debt or
equity is unappealing. They want a well-balanced combination of debt and
equity funding instead. Consequently, the proper financial decision produces
an optimum mix of various types of funding and enhances the company’s
value.

Working Capital

Working capital refers to the capital for day-to-day business operations.


Efficient financial management can ensure an adequate cash flow in line with
business policies. In this way, maintaining the liquidity of the organization can
save them from going bankrupt.

Dividend Distribution

Public companies hold answerability to their shareholders. As a result, they


often wonder how much of the business profit they should distribute as
dividends. If they re-invest surplus as retained earnings, it must be backed
with a strong conviction that the sum will generate business growth. At the
same time, a certain amount of dividend distribution is also essential for many
companies to serve their shareholders better.

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