2 Financial Planning
Transcript of 2 Financial Planning
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Financial Management Unit 2
Sikkim Manipal University 15
Unit 2 Financial Planning
Structure
2.1. Introduction
2.2. Steps in financial planning
2.3. Factors affecting financial plan
2.4. Estimation of financial requirements of a firm.
2.5. Capitalizations
2.1.1 Cost Theory
2.1.2 Earnings theory:
2.1.3 Overcapitalization
2.1.4 Undercapitalization
2.6 Summary
Terminal Questions
Answer to SAQs and TQs
2.1 Introduction
Liberalization and globalization policies initiated by the Government have changed the dimension
of business environment. It has changed the dimension of competition that a firm faces today.
Therefore for survival and growth a firm has to execute planned strategy systematically.
To execute any strategic plan, resources are required. Resources may be manpower, plant and
machinery, building, technology or any intangible asset.
To acquire all these assets financial resources are essentially required. Therefore, finance
manager of a company must have both long-range and short-range financial plans. Integration of
both these plans is required for the effective utilization of all the resources of the firm.
The long-range plan must consider (1) Funds required to execute the planned course of action.
(2) Funds available at the disposal of the company. (3) Determination of funds to be procured
from outside sources.
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Learning Objectives:
After studying this unit you should
1. Explain the steps involved in financial planning.
2. Explain the factors affecting the financial planning.
3. List out the causes of over- capitation
4. Explain the effects of under capitation.
Objectives of Financial Planning
Financial Planning is a process by which funds required for each course of action is decided. It
must consider expected business Scenario and develop appropriate courses of action. A
financial plan has to consider Capital Structure, Capital expenditure and cash flow. In this
connection decisions on the composition of debt and equity must be taken.
Financial planning generates financial plan. Financial plan indicates:
1. The quantum of funds required to execute business plans.
2. Composition of debt and equity, keeping in view the risk profile of the existing business, new
business to be taken up and the dynamics of capital market conditions.
3. Formulation of policies for giving effect to the financial plans under consideration.
A financial plan is at the core of value creation process. A successful value creation process can
effectively meet the bench marks of investor’s expectations.
Benefits that accrue to a firm out of the financial planning
1. Effective utilization of funds: Shortage is managed by a plan that ensures flow of cash at the
least cost. Surplus is deployed through well planned treasury management. Ultimately the
productivity of assets is enhanced.
2. Flexibility in capital structure is given adequate consideration. Here flexibility means the firms
ability to change the composition of funds that constitute its capital structure in accordance
with the changing conditions of capital market. Flexibility refers to the ability of a firm to obtain
funds at the right time, in the right quantity and at the least cost as per requirements to
finance emerging opportunities.3. Formulation of policies and instituting procedures for elimination of all types of wastages in
the process of execution of strategic plans.
4. Maintaining the operating capability of the firm through the evolution of scientific replacement
schemes for plant and machinery and other fixed assets. This will help the firm in reducing its
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operating capital. Operating capital refers to the ratio of capital employed to sales generated.
A perusal of annual reports of Dell computers will throw light on how Dell strategically
minimized the operating capital required to support sales. Such companies are admired by
investing community.5. Integration of long range plans with the shortage plans.
Guidelines for financial planning
1. Never ignore the coordinal principle that fixed asset requirements be met from the long term
sources.
2. Make maximum use of spontaneous source of finance to achieve highest productivity of
resources.
3. Maintain the operating capital intact by providing adequately out of the current periods
earnings. Due attention to be given to physical capital maintenance or operating capability.
4. Never ignore the need for financial capital maintenance in units of constant purchasing power.
5. Employ current cost principle wherever required.
6. Give due weightage to cost and risk in using debt and equity.
7. Keeping the need for finance for expansion of business, formulate plough back policy of
earnings.
8. Exercise thorough control over overheads.
9. Seasonal peak requirements to be met from short term borrowings from banks.
2.2 Steps In Financial Planning
1. Establish Corporate Objectives: Corporate objectives could be grouped into qualitative and
quantitative. For example, a company’s mission statement may specify “create economic –
value added.” But this qualitative statement has to be stated in quantitative terms such as a
25 % ROE or a 12 % earnings growth rates. Since business enterprises operate in a dynamic
environment, there is a need to formulate both short run and long run objectives.
2. Next stage is formulation of strategies for attaining the objectives set. In this connection
corporates develop operating plans. Operating plans are framed with a time horizon. It could
be a five year plan or a ten year plan.
3. Once the plans are formulated, responsibility for achieving sales target, operating targets,
cost management bench marks, profit targets etc is fixed on respective executives.
4. Forecast the various financial variables such as sales, assets required, flow of funds, cost to
be incurred and then translate the same into financial statements. Such forecasts help the
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finance manager to monitor the deviations of actual from the forecasts and take effective
remedial measures to ensure that targets set are achieved without any time overrun and cost
overrun.
5. Develop a detailed plan for funds required for the plan period under various heads of expenditure.
6. From the funds required plan, develop a forecast of funds that can be obtained from internal
as well as external sources during the time horizon for which plans are developed. In this
connection legal constrains in obtaining funds on the basis of covenants of borrowings should
be given due weightage. There is also a need to collaborate the firm’s business risk with risk
implications of a particular source of funds.
7. Develop a control mechanism for allocation of funds and their effective use.
8. At the time of formulating the plans certain assumptions need to be made about the economic
environment. But when plans are implemented economic environment may change. To
manage such situations, there is a need to incorporate an inbuilt mechanism which would
scale up or scale down the operations accordingly.
Forecast of Income Statement and Balance Sheet
There are three methods of preparing income statement:
1. Percent of sales method or constant ratio method
2. Expense method
3. Combination of both these two
Percent of Sales method: This approach is based on the assumptions that each element of cost
bears some constant relationship with the sales revenue.
For example, Raw material cost is 40 % of sales revenue of the year ended 31.03.2007. But this
method assumes that the ratio of raw material cost to sales will continue to be the same in 2008
also. Such an assumption may not hold good in most of the situations. For example, Raw
material cost increases by 10 % in 2008 but selling price of finished goods increases only by 5 %.
In this case raw material cost will be 44 / 105 of the sales revenue in 2008. This can be solved to
some extent by taking average for same representative years. However, inflation, change in Govt
policies, wage agreements, technological innovation totally invalidate this approach on a long run
basis.
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2. Budgeted Expense Method: Expenses for the planning period are budgeted on the basis of
anticipated behaviour of various items of cost and revenue. This demands effective data
base for reasonable budgeting of expenses.
3. Combination of both these methods is used because some expenses can be budgeted by themanagement taking into account the expected business environment and some other
expenses could be based on their relationship with the sales revenue expected to be earned.
Forecast of Balance Sheet
1. Items of certain assets and liabilities which have a close relationship with the sales revenue
could be computed based on the forecast of sales and the historical data base of their
relationship with the sales.
2. Determine the equity and debt mix on the basis of funds requirements and the company’s
policy on Capital structure.
Example : The following details have been extracted from the books of X Ltd
Income Statement (Rs. In millions)
2006 2007
Sales less returns 1000 1300
Gross Profit 300 520
Selling Expenses 100 120
Administration 40 45Deprecation 60 75
Operating Profit 100 280
Non operating income 20 40
EBIT (Earnings before interest & Tax 120 320
Interest 15 18
Profit before tax 105 302
Tax 30 100
Profit after tax 75 202
Dividend 38 100
Retained earnings 37 102
Balance Sheet (Rs. In million)
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Liabilities 2006 2007 Assets 2006 2007
Share holders fund Fixed Assets 400 510
Share Capital Less: Depreciation 100 120
Equity 120 120 300 390
Preference 50 50 Investments 50 50
Reserves & Surplus 122 224
Secured Loans 100 120 Current Assets, loans
& Advances
Unsecured loans 50 60 Cash at Bank 10 12
Receivables 80 128
Current Liabilities Inventories 200 300
Trade Crs 210 250 Loans & Advances 50 80
Provisions Miscellaneous
expenditure10 24
Tax 10 60
Proposed Dividend 38 100
760 984 700 984
Forecast the income statement and balance sheet for the year 2008 based on the following
assumptions.
1. Sales for the year 2008 will increase by 30% over the sales value for 2007.
2. Use percent of sales method to forecast the values for various items of income statement
using the percentage for the year 2007.
3. Depreciation is to charged at 25 % of fixed assets.
4. Fixed assets will increase by Rs.100 million.
5. Investments will increase by Rs.100 million.
6. Current assets and Current liabilities are to be decided based on their relationship to sales in
the year 2007.7. Miscellaneous expenditure will increase by Rs.19 million.
8. Secured loans in 2008 will be based on its relationship to sales in the year 2007.
9. Additional funds required, if any, will be met by bank borrowings.
10. Tax rates will be 30 %.
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11. Dividends will be 50 % of profit after tax.
12. Non operating income will increase by 10%.
13. There will be no change in the total amount of administration expenses to be spent in the year
200814. There is no change in equity and preference capital in 2008.
15. Interest for 2008 will maintain the same ratio as it has in 2007 with the sales of 2007.
Income Statement for the Year 2008 (Rs. In million)
(Forecast)
Particulars Basis Working Amount (Rs.)
a. Sales Increase by 30 % 1300 x 1.3 1690
b. Cost of Sales Increase by 30 % 780 x 1.3 1014
c. Gross profit Sales–Cost of sales 1690 - 1014 676
d. Selling expenses 30 % increase 120 x 1.3 156
e. Administration No change 45
f. Depreciation % given 390 + 100
4
123 (Rounded off)
g. Operating Profit C - (D + E + F) 352
h. Non operating Income Increase by 10 % 1.1 x 40 44
i. Earnings Before
Interest & Taxes (EBIT)
396
j. Interest 18 of sales
1300
18 x 1690
1300
23 (Decimal ignored)
k. Profit before tax 373
l. Tax 112
m. Profit after tax 261
n. Dividends 130
o. Retained earnings 131
Balance Sheet for the year 2008 (Rs. In million)
(Forecast)
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Particulars Basis Working Amount (Rs.)
Assets
Fixed Assets Given 510
Add: Addition 100
610
Depreciation 120 + 123 243
1. Net fixed assets 367
2. Investments 150
3. Current Assets & Loans
& advances
Cash at bank 12
1300
12 x 1690
130016 (Rounded off)
Receivables 128
1300
128 x 1690
1300166
Inventories 300
1300
300 x 1690
1300390
Loans & Advances 80
1300
80 x 1690
1300104
4. Miscellaneous
ExpenditureGiven 24 + 19 43
Total 1236
Liabilities
1. Share Capital
Equity 120
Preference 50
2. Reserves & Surplus Increase by current
year’s retained
earnings
355
3. Secured Loan 60
1300
60 x 1690
130078
Bank borrowings 40 (Difference –
Balancing figure)
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4. Unsecured Loan 60 60
5. Current Liabilities &
Provision
Trade creditors 250
1300
250 x 1690
1300325
Provision for tax 60
1300
60 x 1690
130078
Proposed Dividend Current year given 130
Total Liabilities 1236
Computerised Financial Planning Systems
All corporate forecasts use Computerised forecasting models.
Additional funds required to finance the increase in sales could be ascertained using a
mathematical relationship based on the following:
Additional funds = Required increase -- Spontaneous -- Increase in
Required in assets increase in retained
liabilities earnings
(This formula has been recommended by Engene.F.Brighaom and Michael C Ehrharte in their
book financial management – Theory and Practice, 10th
edition.
Prof. Prasanna Chandra, in his book Financial Management, has given a comprehensive formula
for ascertaining the external financing requirements:
EFR = A (Ds) – L (Ds) – ms (1-d) – (D1m + SR)
S S
Here
A = Expected increase in assets, both fixed and current required for the
S expected increase in sales in the next year.
L = Expected Spontaneous financing available for the expected increase in
S sales
MS1 (1-d) = It is the product of
Profit margin x Expected sales for the next year x Retention Ratio
X Ds
X Ds
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Here, retention ratio is 1 – payout ratio. Payout ratio refers to the ratio of dividend paid to
earnings per share
D1m = Expected change in the level of investments and miscellaneous expenditure
SR = It is the firm’s repayment liability on term loans and debenture for the next year.
This formula has certain features:-
1. Ratios of assets and spontaneous liabilities to sales remain constant over the planning period.
2. Dividend payout and profit margin for the next year can be reasonably planned in advance.
3. Since external funds requirements involve borrowings from financial institution, the formula
rightly incorporates the management’s liability on repayments.
Example
A Ltd has given the following forecasts:
“Sales in 2008 will increase to Rs.2000 from Rs.1000 in 2007”
The balance sheet of the company as on December 31, 2007 gives the following details:
Liabilities Rs Assets Rs
Share Capital Net Fixed Assets 500
Equity (Shares of Rs.10 each) 100 Inventories 200
Reserves & Surplus 250 Cash 100
Long term loan 400 Bills Receivable 200
Crs for expenses outstanding 50
Trade creditors 50
Bills Payable 150
1000 1000
Ascertain the external funds requirements for the year 2008, taking into account the following
information:
1. The Company’s utilization of fixed assets in 2007 was 50 % of capacity but its current assets
were at their proper levels.
2. Current assets increase at the same rate as sales.
3. Company’s after-tax profit margin is expected to be 5%, and its payout ratio will be 60 %.
4. Creditors for expenses are closely related to sales ( Adapted from IGNOU MBA)
Answers
Preliminary workings
A = Current assets = Cash + Bills Receivables + Inventories
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= 100 + 200 +200 = 500
A = 500 = Rs.500
S 1000
L = Trade creditors + Bills payable + Expenses outstanding= 50 + 150 + 50 = Rs.250
L = 250 = Rs.250
S 1000
M (Profit Margin)= 5 / 100 = 0.05
S1 = Rs.200
1-d = 1 – 0.6 = 0.4 or 40 %
D1m = NIL
SR = NIL
Therefore:
)1()1()(
1 SRmd mS S xS
L
S
s A EFR +D---D-
D=
= 500 – 250 – (0.05 x 200 x 0.4) – (0 + 0)
= 500 – 250 – 40 - (0 + 0)
= Rs.210
Therefore, external funds requirements (additional funds required) for 2008 will be Rs.210.
This additional funds requirements will be procured by the firm based on its policy on capital
structure.
Self Assessment Questions 1
1. Corporate objectives could be group into ________ and ________.
2. Control mechanism is developed for _____________ and their effective use.
3. Seasonal peak requirements to be met from ___________________ from banks.
4. Exercise through _________ over overheads.
2.3 Factors Affecting Financial Plan
1. Nature of the industry: Here, we must consider whether it is a capital intensive or labour
intensive industry. This will have a major impact on the total assets that the firm owns.
2. Size of the Company: The size of the company greatly influences the availability of funds
from different sources. A small company normally finds it difficult to raise funds from long
X Ds X 1000
X Ds X 1000
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term sources at competitive terms. On the other hand, large companies like Reliance enjoy
the privilege of obtaining funds both short term and long term at attractive rates.
3. Status of the company in the industry: A well established company enjoying a good
market share, for its products normally commands investors’ confidence. Such a companycan tap the capital market for raising funds in competitive terms for implementing new projects
to exploit the new opportunities emerging from changing business environment.
4. Sources of finance available: Sources of finance could be grouped into debt and equity.
Debt is cheap but risky whereas equity is costly. A firm should aim at optimum capital
structure that would achieve the least cost capital structure. A large firm with a diversified
product mix may manage higher quantum of debt because the firm may manage higher
financial risk with a lower business risk. Selection of sources of finance is closely linked to the
firm’s capacity to manage the risk exposure.
5. The Capital structure of a company is influenced by the desire of the existing management
(promoters) of the company to retain control over the affairs of the company. The promoters
who do not like to lose their grip over the affairs of the company normally obtain extra funds
for growth by issuing preference shares and debentures to outsiders.
6. Matching the sources with utilization: The prudent policy of any good financial plan is to
match the term of the source with the term of investment. To finance fluctuating working
capital needs the firm resorts to short terms finance. All fixed assets financed investments are
to be financial by long term sources. It is a cardinal principle of financial planning.
7. Flexibility: The financial plan of a company should possess flexibility so as to effect changesin the composition of capital structure when ever need arises. If the capital structure of a
company is flexible, it will not face any difficulty in changing the sources of funds. This factor
has become a significant one today because of the globalization of capital market.
8. Government Policy: SEBI guidelines, finance ministry circulars, various clauses of Standard
Listing Agreement and regulatory mechanism imposed by FEMA and Department of
corporate affairs (Govt of India) influence the financial plans of corporates today.
Management of public issues of shares demands the compliances with many statues in India.
They are to be complied with a time constraint.
Self Assessment Questions 2:
1. ___________ has a major impact on the total assets that the firm owns.
2. Sources of finance could be grouped into __ and _______________.
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3. ___________ of any good financial plan is to match the term of the source with the term of
the source with the term of the investment.
4. ________________ refers the ability to ______________________ whenever need arises.
2.4 Estimation Of Financial Requirements Of a Firm.
The estimation of capital requirements of a firm involves a complex process. Even with expertise,
managements of successful firms could not arrive at the optimum capital composition in terms of
the quantum and the sources. Capital requirements of a firm could be grouped into fixed capital
and working capital. The long term requirements such as investment in fixed assets will have to
be met out of funds obtained on long term basis. Variable working capital requirements which
fluctuate from season to season will have to be financed only by short term sources. Any
departure from this well accepted norm causes negative impacts on firm’s finances.
Self Assessment Question 3:
1. Capital requirement of a firm could be grouped into ________ and __________.
2. Variable working capital will have to be financed only by _______________.
2.5 Capitalizations
Meaning: Capitalization of a firm refers the composition of its long-term funds. It refers to the
capital structure of the firm. It has two components viz debt and equity.
After estimating the financial requirements of a firm, then the next decision that the management
has to take is to arrive at the value at which the company has to be capitalized.
There are two theories of Capitalization for new companies:
1. Cost theory and 2. Earnings theory
2.5.1 Cost Theory:
Under this approach, the total amount of capitalization for a new company is the sum of the
following:
1. Cost of fixed assets.
2. Cost of establishing the business.
3. Amount of working capital required
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Merits of cost approach:
1. It helps promoters to estimate the amount of capital required for incorporation of company
conducting market surveys, preparing detailed project report, procuring funds, procuring
assets both fixed and current, trial production run and successfully producing, positioning andmarketing of its products or rendering of services.
2. If done systematically it will lay foundation for successful initiation of the working of the firm.
Demerits
1. If the firm establishes its production facilities at inflated prices, productivity of the firm will be
less than that of the industry.
2. Net worth of a company is decided by the investors by the earnings of a company. Earnings
capacity based net worth helps a firm to arrive at the total capital in terms of industry specified
yardstick ( i,e, operating capital based on bench marks in that industry) cost theory fails in
this respect.
2.5.2 Earnings Theory:
Earnings are forecast and capitalized at a rate of return which is representative of the industry. It
involves two steps.
1. Estimation of the average annual future earnings.
2. Normal earning rate of the industry to which the company belongs.
Merits 1. It is superior to cost theory because there are, the least chances of neither under not over
capitalization.
2. Comparison of earnings approach with that of cost approach will make the management to be
cautious in negotiating the technology and cost of procuring and establishing the new
business.
Demerits
1. The major challenge that a new firm faces is in deciding on capitalization and its division
thereof into various procurement sources.
2. Arriving at capitalization rate is equally a formidable task because the investors’ perception of
established companies cannot be really representative of what investors perceive of the
earning power of new company.
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Because of the problem, most of the new companies are forced to adopt the cost theory of
capitalization.
Ideally every company should have normal capitalization. But it is an utopian way of thinking.
Changing business environment, role of international forces and dynamics of capital marketconditions force us to think in terms of what is optimal today need not be so tomorrow. Even with
these constraints, management of every firm should continuously monitor the firms capital
structure to ensure to avoid the bad consequences of over and under capitalization.
2.5.3 Overcapitalization
A company is said to be overcapitalized, when its total capital (both equity and debt) exceeds the
true value of its assets. It is wrong to identify overcapitalization with excess of capital because
most of the overcapitalized firms suffer from the problems of liquidity. The correct indicator of
overcapitalization is the earnings capacity of the firm. If the earnings of the firm are less then that
of the market expectation, it will not be in a position to pay dividends to its shareholders as per
their expectations. It is a sign of overcapitalization. It is also possible that a company has more
funds than its requirements based on current operation levels, and yet have low earnings.
Overcapitalization may be on account of any of the following:
1. Acquiring assets at inflated rates
2. Acquiring unproductive assets.
3. High initial cost of establishing the firm
4. Companies which establish their new business during boom condition are forced to pay morefor acquiring assets, causing a situation of overcapitalization once the boom conditions
subside.
5. Total funds requirements have been over estimated.
6. Unpredictable circumstances (like change in import –export policy, change in market rates of
interest, changes in international economic and political environment) reduce substantially the
earning capacity of the firm. For example, rupee appreciation against U.S.dollar has affected
earning capacity of firms engaged mainly in export business because they invoice their sales
in US dollar.
7. Inadequate provision for depreciation adversely affects the earning capacity of a company ,
leading to overcapitalization of the firm.
8. Existence of idle funds.
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Effects of over capitalization
1. Decline in the earnings of the company.
2. Fall in dividend rates.
3. Market value of company’s share falls, and company loses investors confidence.4. Company may collapse at any time because of anemic financial conditions – it will affect its
employees, society, consumers and its shareholders. Employees will lose jobs. If the
company is engaged in the production and marketing of certain essential goods and services
to the society, the collapse of the company will cause social damage.
Remedies for Overcapitalization:
Restructuring the firm is to be executed to avoid the situation of company becoming sick.
It involves
1. Reduction of debt burden.
2. Negotiation with term lending institutions for reduction in interest obligation.
3. Redemption of preference shares through a scheme of capital reduction.
4. Reducing the face value and paid-up value of equity shares.
5. Initiating merger with well managed profit making companies interested in taking over ailing
company.
2.5.4 Undercapitalization
Under-capitalization is just the reverse of over-capitalization. A company is considered to beunder-capitalized when its actual capitalization is lower than its proper capitalization as warranted
by its earning capacity.
Symptoms of under-capitalization
1. Actual capitalization is less than that warranted by its earning capacity.
2. Its rate of earnings is exceptionally high in relation to the return enjoyed by similar situated
companies in the same industry.
Causes of under-capitalization
1. Under estimation of future earnings at the time of promotion of the company.
2. Abnormal increase in earnings from new economic and business environment.
3. Under estimation of total funds requirements.
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4. Maintaining very high efficiency through improved means of production of goods or rendering
of services.
5. Companies which are set up during recession start making higher earning capacity as soon
as the recession is over.6. Use of low capitalization rate.
7. Companies which follow conservative dividend policy will achieve a process of gradually rising
profits.
8. Purchase of assets at exceptionally low prices during recession.
Effects of under-capitalization
1. Encouragement to competition: under-capitalization encourages competition by creating a
feeling that the line of business is lucrative.
2. It encourages the management of the company to manipulate the company’s share prices.
3. High profits will attract higher amount of taxes.
4. High profits will make the workers demand higher wages. Such a feeling on the part of
employees leads to labour unrest.
5. High margin of profit may create among consumers an impression that the company is
charging high prices for its products.
6. High margin of profits and the consequent dissatisfaction among its employees and
consumer, may invite governmental enquiry into the pricing mechanism of the company.
Remedies
1. Splitting up of the shares – This will reduce the dividend per share.
2. Issue of bonus shares: This will reduce both the dividend per share and earnings per share.
Both over-capitalization and under-capitalization are detrimental to the interests of the society.
Self Assessment Question 4
1. ______________ of a firm refers to the composition of its long –term funds.
2. Two theories of capitalization for new companies are ________ and earnings theory.
3. A company is said to be ___________, when its total capital exceeds the true value of its
assets.
4. A company is considered to be ________________ when its actual capitalization is lower than
its proper capitalization as warranted by its earning capacity.
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2.6 Summary
Financial planning deals with the planning, execution and monitoring of the procurement and
utilization of funds. Financial planning process gives birth to financial plan. It could be thought of
a blueprint explaining the proposed strategy and its execution. There are many financial planning
models. All these models forecast the future operations and then translate them into income
statements and balance sheets. It will also help the finance managers to ascertain the funds to
be procured from outside sources. The essence of all these is to achieve a least cost capital
structure which would match with the risk exposure of the company. Failure to follow the principle
of financial planning may lead a new firm to over or under-capitalization when the economic
environment undergoes a change. Ideally every firm should aim at optimum capitalization. Other
wise it may face a situation of over or under-capitalization. Both are detrimental to the interests of
the society. There are two theories of capitalization viz cost theory and earnings theory.
Terminal Questions
1. Explain the steps involved in Financial Planning.
2. Explain the factors affecting Financial Plan
3. List out the causes of Over – Capitalization.
4. Explain the effects of Under – Capitalization.
Answers To Self Assessment Questions
Self Assessment Questions 1 1. Qualitative, Quantitative.
2. Allocation of funds
3. Short term borrowings
Self Assessment Question 2
1. Nature of the industry
2. Debt, Equity
3. The product policy
4. Flexibility in capital structure, effect changes in the composites of capital structure
Self Assessment Question 3
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1. Fixed capital, working capital.
2. Short term sources
Self Assessment Question 4 1. Capitalization
2. Cost theory
3. Over Capitalized
4. Under capitalized
Answer to Terminal Questions
1. Refer to unit 2.2
2. Refer to unit 2.3
3. Refer to unit 2.5.3
4. Refer to unit 2.5.4