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Financial Management
Question
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How does ‘Risk Consideration’ affect the Capital Structure Decision?

Answer

There are two types of risks in business:

(i) Operating Risk or Business Risk: This refers to the risk of inability to discharge permanent operating costs (e.g., rent of the building, payment of salary, insurance instalment, etc).

(ii) Financial Risk: This refers to the risk of inability to pay fixed financial payments (e.g., payment of interest, preference dividend, return of the debt capital, etc.) as promised by the company. The total risk of business depends on both these types of risks. If the operating risk in business is less, the financial risk can be faced which means that more debt capital can be utilised. On the contrary, if the operating risk is high, the financial risk likely to be created after the greater use of debt capital, should be avoided.

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Some More Questions From Financial Management Chapter

Explain briefly the factors affecting the investment decision.

Explain, in brief, any five factors that should be taken into consideration while determining the long-term dividend policy.

Or

Explain factors affecting the dividend policy of a company.

“Determining the relative proportion of various types of funds depends upon various factors”. Explain any five such factors.

Or

“Determining the overall cost of capital and the financial risk of the enterprise depends upon various factors”. Explain any five such factors.

Investment decision can be long-term or short-term. Explain long-term investment decision and state any two factors affecting this decision.

Identify the financial decision which determines the amount of profit earned to be distributed and to be retained in the business. Explain any four factors affecting this decision.

Explain, in brief, any three decisions involved in financial management.

What is meant by investment decision?

From the point of view of ‘Floatation costs’ which source of finance is most appropriate?

From the point of view of ‘Control’ which source of finance should be avoided?

How the ‘Stability of Earning’ affects the dividend decision?