Question 1 (a)
Financial management as decisions on the asset mix, the capital mix and profit allocation
6 marks
- Time to write
- About 12 minutes
Question
Question 1 (a) · 6 marks"Financial management encapsulates managerial decision making on the assets mix, the capital mix and profit allocation." Explain the statement.
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- ExplainTie the answer to the quoted statement: say what it means first, and come back to it at the end.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Assets mix as the investment decision: capital budgeting and working capital 2 marks 3 min
- 2 Capital mix as the financing decision: capital structure, return and risk 2 marks 3 min
- 3 Profit allocation as the dividend decision; the decisions are inter-related 2 marks 3 min
- Check: every ask answered, key terms underlined 2 min
Short on time? Trim steps 1–3 evenly rather than skip one: each is capped at its own marks.
Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
The statement sums up the modern view of financial management: it is about three inter-related decisions, each taken to raise the value of the firm to its shareholders. Each phrase in the statement names one of them.
1. Assets mix: the investment decision. This decides how the firm's funds are invested, that is, the composition of its assets.
- Long-term assets (capital budgeting): which fixed assets or projects to acquire, buy or lease, make or buy, whether to acquire another business. The aim is to pick assets worth more than their cost, so the elements are the long-term assets and their composition, the business risk of the firm, and the cost of capital.
- Current assets (working capital management): how much to hold in inventory, receivables and cash. Here the trade-off is between profitability and liquidity: too little working capital risks insolvency, too much lowers profitability.
2. Capital mix: the financing decision. This decides when, where from and how to raise the funds the investment decision needs. The two broad sources are shareholders' funds and borrowed funds, and the central issue is the proportion of debt and equity, the firm's capital structure. Debt can raise the return to shareholders but always adds to their risk (financial leverage), so the finance manager balances return against risk; the capital structure is optimum when the market value of the shares is maximised.
3. Profit allocation: the dividend decision. This decides how the profit is divided between dividends paid to shareholders and earnings retained in the business: distribute all, retain all, or pay part and retain the rest. The share paid out is the payout ratio and the share kept is the retention ratio. The choice depends on shareholders' preferences and on the investment opportunities open to the firm, and it is linked to the financing decision, since retained earnings are a source of finance.
Conclusion. The three decisions are not separate: what the firm invests in fixes how much it must raise, the mix of funds fixes its cost of capital and risk, and the dividend decision fixes how much of the funds come from within. Financial management is the joint making of these three decisions so as to maximise the wealth of the shareholders.
Where the 6 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Assets mix as the investment decision: capital budgeting and working capital | 2 |
| 2 | Capital mix as the financing decision: capital structure, return and risk | 2 |
| 3 | Profit allocation as the dividend decision; the decisions are inter-related | 2 |
| Total | 6 |
Report a problemopens an email to admin@getkunji.com with the question ID835-Q1aalready filled in.