Posts Selected From the Category "Financial management"

The measurement of the cost of preference capital poses some conceptual difficulty. In the case of debt, there is a binding legal obligation on the firm to pay interest, and the interest constitutes the basis to calculate the cost of debt. However, in the case of preference capital, payment of dividends is not legally binding on the firm and even if the dividends are paid, it is not a charge on earnings; rather it is a distribution or appropriation of earnings to preference shareholders. One may be, therefore, tempted to conclude that the dividends on preference capital do not constitute cost. This is not true.

The cost of preference capital is a function of the dividend expected by investors. Preference capital is never issued with an intention not to pay dividends. Although it is not legally binding upon the firm to pay dividends on preference capital, yet it is generally paid when the firm makes sufficient profits. The failure to pay dividends, although does not cause bankruptcy, yet it can be a serious matter from the ordinary shareholders’ point of view.…

The ‘Ploughing Back of Profits‘ is a technique of financial management under which all profits of a company are not distributed amongst the shareholders as dividend, but a part of the profits is retained or reinvested in the company. This process of retaining profits year after year and their utilization in the business is also known as ploughing back of profits.

It is actually an economical step, which a company takes, in the sense, that instead of distributing the entire earnings by way of dividend, it keeps a certain percentage of profit to be re-introduced into the business for its development. Such a phenomenon is also known as ‘Self-Financing’,‘Internal Financing’, or ‘Inter- Financing’. A part of profits is ploughed back or re-employed into the business and is regarded as in ideal source of financing expansion and modernization schemes as there is no immediate pressure to pay a return on this portion of stockholders equity. Under this method, a part of total profits is transferred to various reserves such as General Reserve, Replacement Fund, Reserve Fund, and Reserve for Repairs and Renewals, etc.…

There are different views regarding the meaning and concept of surplus in financial management. According to one school of thought, the balance remaining after deducting the liabilities and share capital from the total of assets is known as ‘surplus‘. In the opinion of the other school, ‘surplus‘ represents the ‘undistributed earnings’ of a company, i.e., the balance of profits remaining after paying dividends to the shareholders. Still, there are others in whose opinion ‘surplus‘ is a left over which represents an addition to assets that is carried over on the ‘equity side’. But, surplus is solely equity of stock-holders and not an asset in any sense of the word. In simple words, ‘surplus‘ may be described as the net income of the company remaining after payment of dividend and all other expenses. It is the difference between the book value of the assets and the sum of liabilities and capital.

Surplus is considered to be a sort of a blanket covering of many corporate purposes.…