Business Finance and Financial Management
What this domain tests
The finance function, financial management objectives, capital structure, working capital and sources of finance, including Indian primary-market terms.
Core rules
- Financial management decisions: investment (capital budgeting), financing (capital structure) and dividend decisions.
- Objective: wealth maximisation, based on long-term value, is generally preferred to profit maximisation, which is accounting-based and ignores risk and time.
- Sources: equity shares, preference shares, debentures, retained earnings and bank loans; SEBI regulates the primary market; IPO, FPO and rights issue are equity-raising routes.
- Working capital = current assets minus current liabilities; the operating cycle measures cash conversion.
Worked example
Inventory holding = 60 days, receivables = 45 days and payables = 30 days. Operating cycle = 60 + 45 - 30 = 75 days. If daily cash operating cost is Rs 20,000, the working capital need is about Rs 15 lakh. Show each line; do not just write 75.
Traps that cost marks
- Treating profit maximisation and wealth maximisation as identical.
- Confusing capital structure, the debt-equity mix, with capital budgeting, project choice.
- Calling debentures owners' funds; they are debt.
- Ignoring payables as a spontaneous source that shortens the cycle.