Financial Management Solved Question Paper 2023 [Dibrugarh University B.Com 5th Sem CBCS Pattern]

Financial Management Solved Question Paper 2023
Dibrugarh University BCOM 5^th SEM CBCS Pattern

5 SEM TDC FIMT (CBCS) C 512

2023 (November)

COMMERCE (Core)

Paper: C-512 (Financial Management)

Full Marks: 80

Pass Marks: 32

Time: 3 hours

The figures in the margin indicate full marks for the questions

1. (a) Fill in the blanks:   1x4=4

a) Financial function is the most important of all management functions.

b) Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production.

c) Cost of capital is the minimum rate of return expected by its investors.

d) The value of the firm can be maximized, if the shareholders’ wealth is maximised.

(b) Write True or False:                  1x4=4

a) ‘Finance’ has been rightly termed as universal lubricant which keeps the enterprise dynamic.  [True]

b) Working capital is also known as revolving or circulating capital.     [True]

c) Operating Leverage x Composite Leverage = Financial Leverage.        [False]

d) Payment of dividend at the usual rate is termed as regular dividend.                   [True]

2. Write short notes on any four of the following:            4x4=16

(a) Finance function.

Ans: Finance function is the most important of all business functions. It means a focus of all activities. It is not possible to substitute or eliminate this function because the business will close down in the absence of finance. The need for money is continuous. It starts with the setting up of an enterprise and remains at all times. The development and expansion of business rather needs more commitment for funds. The funds will have to be raised from various sources. The sources will be selected in relation to the implications attached with them. The receiving of money is not enough, its utilization is more important. The money once received will have to be returned also. It its use is proper then its return will be easy otherwise it will create difficulties for repayment. The management should have an idea of using the money profitably. It may be easy to raise funds but it may be difficult to repay them. The inflows and outflows of funds should be properly matched.

(b) Types of working capital.

Ans: Classification of Working Capital

Some portion of working capital is fixed natured and some portion fluctuates for some time. In the view point working capital classified in to 2 classes,

a)       Fixed or permanent working capital

b)      Variable or temporary working capital

Fixed or permanent working capital: The fund, which is required to produce a certain amount of goods or services at a certain period of time, is called fixed working capital. The minimum amount of cash money, A/R, which is kept to operate the business is called fixed working capital.

Variable working capital: When extra working capital is required then an addition to fixed working capital due to seasonal causes or increased production or sales, this working capital is variable working capital. So, the working capital which fluctuates with keeping the relation between production & Sales is variable working capital.

(c) Cost of capital.

Ans: Cost of capital is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. Cost of capital is the required rate of return on its investments which belongs to equity, debt and retained earnings. If a firm fails to earn return at the expected rate, the market value of the shares will fall and it will result in the reduction of overall wealth of the shareholders.

According to the definition of John J. Hampton “ Cost of capital is the rate of return the firm required from investment in order to increase the value of the firm in the market place”.

According to the definition of Solomon Ezra, “Cost of capital is the minimum required rate of earnings or the cut-off rate of capital expenditure”.

(d) Financial leverage.

Ans: Financial Leverage: A Leverage activity with financing activities is called financial leverage. Financial leverage represents the relationship between the company’s earnings before interest and taxes (EBIT) or operating profit and the earning available to equity shareholders. Financial leverage is defined as “the ability of a firm to use fixed financial charges to magnify the effects of changes in EBIT on the earnings per share”. It involves the use of funds obtained at a fixed cost in the hope of increasing the return to the shareholders. Financial leverage can be calculated with the help of the following formula:

FL = OP/PBT

Where,

FL = Financial leverage

OP = Operating profit (EBIT)

PBT = Profit before tax.

Degree of Financial Leverage: Degree of financial leverage may be defined as the percentage change in taxable profit as a result of percentage change in earnings before interest and tax (EBIT). This can be calculated by the following formula: DFL= Percentage change in taxable Income / Percentage change in EBIT 

(e) Risk-return tradeoff.

Ans: Investing is inherently risky, and it is important for investors to understand the concept of the risk-return trade-off. The risk-return trade-off refers to the relationship between the potential return on investment and the risk associated with that investment.

Usually, investors expect to earn a higher return for taking on higher levels of risk. This is because riskier investments have a greater chance of losing money, and investors require a higher potential return to compensate for that risk. Understanding the risk-return trade-off is essential for investors to make informed decisions about their investments.

To calculate the risk-return trade-off, investors need to consider the potential returns and risks associated with different investments. The potential return on an investment is the profit that the investor could make if the investment performs well. The risk associated with an investment is the likelihood that the investor will lose money on the investment.

3. (a) “Profit maximization is not the adequate criterion to judge the efficiency of a firm.” Explain the statement. What should be the right criterion and why?  6+8=14

Ans: The firm’s investment and financing decision are unavoidable and continuous. In order to make them rational, the firm must have a goal. Two financial objectives predominate amongst many objectives. These are:

1. Profit maximization

2. Shareholders’ Wealth Maximization (SWM)

Profit maximization refers to the rupee income while wealth maximization refers to the maximization of the market value of the firm’s shares. Although profit maximization has been traditionally considered as the main objective of the firm, it has faced criticism. Wealth maximization is regarded as operationally and managerially the better objective. 

1. Profit maximization: Profit maximization implies that either a firm produces maximum output for a given input or uses minimum input for a given level of output. Profit maximization causes the efficient allocation of resources in competitive market condition and profit is considered as the most important measure of firm performance. The underlying logic of profit maximization is efficiency.

In a market economy, prices are driven by competitive forces and firms are expected to produce goods and services desired by society as efficiently as possible. Demand for goods and services leads price. Goods and services which are in great demand can command higher prices. This leads to higher profits for the firm. This in turn attracts other firms to produce such goods and services. Competition grows and intensifies leading to a match in demand and supply. Thus, an equilibrium price is reached. On the other hand, goods and services not in demand fetches low price which forces producers to stop producing such goods and services and go for goods and services in demand. This shows that the price system directs the managerial effort towards more profitable goods and services. Competitive forces direct price movement and guides the allocation of resources for various productive activities. 

Objections to Profit Maximization:

Certain objections have been raised against the goal of profit maximization which strengthens the case for wealth maximization as the goal of business enterprise. The objections are:

(a) Profit cannot be ascertained well in advance to express the probability of return as future is uncertain. It is not at all possible to maximize what cannot be known. Moreover, the return profit vague and has not been explained clearly what it means. It may be total profit before tax and after tax of profitability tax. Profitability rate, again is ambiguous as it may be in relation to capital employed, share capital, owner’s fund or sales. This vagueness is not present in wealth maximisation goal as the concept of wealth is very clear. It represents value of benefits minus the cost of investment.

(b) The executive or the decision maker may not have enough confidence in the estimates of future returns so that he does not attempt further to maximize. It is argued that firm’s goal cannot be to maximize profits but to attain a certain level or rate of profit holding certain share of the market or certain level of sales. Firms should try to ‘satisfy’ rather than to ‘maximise’.

(c)There must be a balance between expected return and risk. The possibility of higher expected yields are associated with greater risk to recognize such a balance and wealth maximisation is brought in to the analysis. In such cases, higher capitalization rate involves. Such combination of expected returns with risk variations and related capitalization rate cannot be considered in the concept of profit maximisation.

(d) The goal of maximisation of profits is considered to be a narrow outlook. Evidently when profit maximisation becomes the basis of financial decision of the concern, it ignores the interests of the community on the one hand and that of the government, workers and other concerned persons in the enterprise on the other hand.

WEALTH MAXIMIZATION AS PRIMARY OBJECTIVE OF FINANCIAL MANAGEMENT

The primary objective of financial management is wealth maximization. The concept of wealth in the context of wealth maximization objective refers to the shareholders’ wealth as reflected by the price of their shares in the share market. Therefore, wealth maximization means maximization of the market price of the equity shares of the company. However, this maximization of the price of company’s equity shares should be in the long run by making efficient decisions which are desirable for the growth of a company and are valued positively by the investors at large and not by manipulating the share prices in the short run. The long run implies a period which is long enough to reflect the normal market price of the shares irrespective of short-term fluctuations. The long run price of an equity share is a function of two basic factors:

a)      The likely rate of earnings or earnings per share (EPS) of the company; and

b)      The capitalization rate reflecting the liking of the investors of a company.

The financial manager must identify those avenues of investment; modes of financing, ways of handling various components of working capital which ultimately will lead to an increase in the price of equity share. If shareholders are gaining, it implies that all other claimants are also gaining because the equity share holders are paid only after the claims of all other claimants (such as creditors, employees, and lenders) have been duly paid.

The following arguments are advanced in favour of wealth maximization as the goal of financial management:

a)       It serves the interests of owners, (shareholders) as well as other stakeholders in the firm; i.e. suppliers of loaned capital, employees, creditors and society.

b)      It is consistent with the objective of owners’ economic welfare.

c)       The objective of wealth maximization implies long-run survival and growth of the firm.

d)      It takes into consideration the risk factor and the time value of money as the current present value of any particular course of action is measured.

e)      The effect of dividend policy on market price of shares is also considered as the decisions are taken to increase the market value of the shares.

f)        The goal of wealth maximization leads towards maximizing stockholder’s utility or value maximization of equity shareholders through increase in stock price per share.

Or

(b) Critically analyze the function of a financial manager in a large-scale industrial establishment. What are the responsibilities of a financial manager in a modern business organization? 8+6=14

Ans: In the modern enterprise, a finance manager occupies a key position, he being one of the dynamic member of corporate managerial team. His role, is becoming more and more pervasive and significant in solving complex managerial problems. Traditionally, the role of a finance manager was confined to raising funds from a number of sources, but due to recent developments in the socio-economic and political scenario throughout the world, he is placed in a central position in the organisation. He is responsible for shaping the fortunes of the enterprise and is involved in the most vital decision of allocation of capital like mergers, acquisitions, etc. A finance manager, as other members of the corporate team cannot be averse to the fast developments, around him and has to take note of the changes in order to take relevant steps in view of the dynamic changes in circumstances.

The nature of job of an accountant and finance manager is different, an accountant's job is primarily to record the business transactions, prepare financial statements showing results of the organisation for a given period and its financial condition at a given point of time. He is to record various happenings in monetary terms to ensure that assets, liabilities, incomes and expenses are properly grouped, classified and disclosed in the financial statements. Accountant is not concerned with management of funds that is a specialised task and in modern times a complex one. The finance manager or controller has a task entirely different from that of an accountant, he is to manage funds. Some of the important decisions as regards finance are as follows:

1)      Estimating the requirements of funds: A business requires funds for long term purposes i.e. investment in fixed assets and so on. A careful estimate of such funds is required to be made.  An assessment has to be made regarding requirements of working capital involving, estimation of amount of funds blocked in current assets and that likely to be generated for short periods through current liabilities. Forecasting the requirements of funds is done by use of techniques of budgetary control and long range planning.

2)      Decision regarding capital structure: Once the requirement of funds is estimated, a decision regarding various sources from where the funds would be raised is to be taken. A proper mix of the various sources is to be worked out, each source of funds involves different issues for consideration. The finance manager has to carefully look into the existing capital structure and see how the various proposals of raising funds will affect it. He is to maintain a proper balance between long and short term funds. 

3)      Investment decision: Funds procured from different sources have to be invested in various kinds of assets. Long term funds are used in a project for fixed and also current assets. The investment of funds in a project is to be made after careful assessment of various projects through capital budgeting. A part of long term funds is also to be kept for financing working capital requirements. Asset management policies are to be laid down regarding various items of current assets, inventory policy is to be determined by the production and finance manager, while keeping in mind the requirement of production and future price estimates of raw materials and availability of funds.

4)      Dividend decision: The finance manager is concerned with the decision to pay or declare dividend. He is to assist the top management in deciding as to what amount of dividend should be paid to the shareholders and what amount is retained by the company, it involves a large number of considerations. The principal function of a finance manager relates to decisions regarding procurement, investment and dividends. 

5)      Maintain Proper Liquidity: Every concern is required to maintain some liquidity for meeting day-to-day needs. Cash is the best source for maintaining liquidity. It is required to purchase raw materials, pay workers, meet other expenses, etc. A finance manager is required to determine the need for liquid assets and then arrange liquid assets in such a way that there is no scarcity of funds.

6)      Management of Cash, Receivables and Inventory: Finance manager is required to determine the quantum and manage the various components of working capital such as cash, receivables and inventories. On the one hand, he has to ensure sufficient availability of such assets as and when required, and on the other there should be no surplus or idle investment.

7)      Disposal of Surplus: A finance manager is also expected to make proper utilization of surplus funds. He has to make a decision as to how much earnings are to be retained for future expansion and growth and how much to be distributed among the shareholders.

8)      Evaluating financial performance: Management control systems are usually based on financial analysis, e.g. ROI (return on investment) system of divisional control. A finance manager has to constantly review the financial performance of various units of the organisation. Analysis of the financial performance helps the management for assessing how the funds are utilised in various divisions and what can be done to improve it.

9)      Financial negotiations: Finance manager's major time is utilised in carrying out negotiations with financial institutions, banks and public depositors. He has to furnish a lot of information to these institutions and persons in order to ensure that raising of funds is within the statutes. Negotiations for outside financing often require specialised skills.

10)  Helping in Valuation Decisions: A number of mergers and consolidations take place in the present competitive industrial world. A finance manager is supposed to assist management in making valuation etc. For this purpose, he should understand various methods of valuing shares and other assets so that correct values are arrived at.

4. (a) What are the benefits of adequate working capital? What are the repercussions if a firm has (i) redundant working capital and (ii) inadequate working capital?      4+5+5=14

Ans: Excess or inadequate working capital

Every business concern should have adequate working capital to run its business operations. It should have neither redundant or excess working capital nor inadequate or shortage of working capital. Both excess as well as short working capital positions are bad for any business. However, out of the two, it is the inadequacy of working capital which is more dangerous from the point of view of the firm.

Disadvantages of Redundant or Excessive Working Capital

1.       Excessive Working Capital means idle funds which earn no profits for the business and hence the business cannot earn a proper rate of return on its investments.

2.       When there is a redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more chances of theft, waste and losses.

3.       Excessive working capital implies excessive debtors and defective credit policy which may cause higher incidence of bad debts.

4.       It may result into overall inefficiency in the organisation.

5.       When there is excessive working capital, relations with banks and other financial institutions may not be maintained.

6.       Due to low rate of return on investments, the value of shares may also fall.

7.       The redundant working capital gives rise to speculative transactions.

Disadvantages or Dangers of Inadequate Working Capital

1.       A concern which has inadequate working capital cannot pay its short-term liabilities in time. Thus, it will lose its reputation and shall not be able to get good credit facilities.

2.       It cannot buy its requirements in bulk and cannot avail of discounts, etc.

3.       It becomes difficult for the firm to exploit favourable market conditions and undertake profitable projects due to lack of working capital.

4.       The firm cannot pay day-to-day expenses of its operations and it creates inefficiencies, increases costs and reduces the profits of the business.

5.       It becomes impossible to utilise efficiently the fixed assets due to non-availability of liquid funds.

6.       The rate of return on investments also falls with the shortage of working capital.

Or

(b) From the following information, you are required to estimate the Net Working Capital: 14

Particulars	Cost per Unit (Rs.)
Raw materials Direct labour Overhead (excluding depreciation)	400 150 300
Total cost	850

Additional information:

Selling price – Rs. 1,000 per unit

Output – 52000 units

Raw materials in stock – average 4 weeks

Work-in progress (Assume 50% completion stage with full material consumption) – average 2 weeks.

Finished goods in stock – average 4 weeks

Credit allowed by suppliers – average 4 weeks

Credit allowed to debtors – average 4 weeks

Cash at bank expected to be Rs. 50,000

Assume that production is sustained at an even pace during 52 weeks of the year. All sales are on credit basis.

5. (a) “Capital budgeting is long-term planning for making and financing proposed capital outlay.” Explain. What are the limitations of capital budgeting? 6+8=14

Ans: Meaning of Capital Budgeting or Investment Decision

The term capital budgeting or investment decision means planning for capital assets. Capital budgeting decision means the decision as to whether or not to invest in long-term projects such as setting up of a factory or installing a machinery or creating additional capacities to manufacture a part which at present may be purchased from outside and so on. It includes the financial analysis of the various proposals regarding capital expenditure to evaluate their impact on the financial condition of the company for the purpose to choose the best out of the various alternatives.

According to Milton “Capital budgeting involves planning of expenditure for assets and return from them which will be realized in future time period”.

According to I.M Pandey “Capital budgeting refers to the total process of generating, evaluating, selecting, and follow up of capital expenditure alternative”

Capital budgeting decision is thus, evaluation of expenditure decisions that involve current outlays but are likely to produce benefits over a period of time longer than one year. The benefit that arises from capital budgeting decision may be either in the form of increased revenues or reduced costs. Such decision requires evaluation of the proposed project to forecast likely or expected return from the project and determine whether return from the project is adequate.

Nature / Features of Capital budgeting decisions

a)       Long term effect: Such decisions have long term effect on future profitability and influence pace of firms growth. A good decision may bring amazing returns and wrong decision may endanger very survival of firm. Hence capital budgeting decisions determine future destiny of firm.

b)      High degree of risk: Decision is based on estimated return. Changes in taste, fashion, research and technological advancement leads to greater risk in such decisions.

c)       Huge funds: Large funds are required and sparing huge funds is problem and hence decision to be taken after proper care.

d)      Irreversible decision: Reverting back from a decision is very difficult as sale of high value asset would be a problem.

e)      Most difficult decision: Decision is based on future estimates/uncertainty. Future events are affected by economic, political and technological changes taking place.

f)        Impact on firm’s future competitive strengths: These decisions determine future profit or cost and hence affect the competitive strengths of firm.

g)       Impact on cost structure – Due to this vital decision, firm commits itself to fixed costs such as supervision, insurance, rent, interest etc. If investment does not generate anticipated profit, future profitability would be affected.

Limitations of Capital Budgeting:

Capital budgeting techniques suffer from the following limitations:

1) The techniques of capital budgeting require estimation of future cash inflows and outflows. The future is always uncertain and the data collected for future may not be exact. Obliviously the results based upon wrong data may not be good.

2) The economic life of the project and annual cash inflows are only estimation. The actual economic life of the project is either increased or decreased. Likewise, the actual annual cash inflows may be either more or less than the estimation. Hence, control over capital expenditure cannot be exercised.

3) Capital budgeting process does not take into consideration of various non-financial aspects of the projects while they play an important role in successful and profitable implementation of them. Hence, true profitability of the project cannot be highlighted.

4) All the techniques of capital budgeting presume that various investment proposals under consideration are mutually exclusive which may not be practically true in some particular circumstances.

5) There are certain factors like morale of the employees, goodwill of the firm, etc., which cannot be correctly quantified but which otherwise substantially influence the capital decision.

6) It is also not correct to assume that mathematically exact techniques always produce highly accurate results.

7) In case of urgency, the capital budgeting technique cannot be applied.

8) Only known factors are considered while applying capital budgeting decisions. There are so many unknown factors which are also affecting capital budgeting decisions. The unknown factors cannot be avoided or controlled.

Or

(b) A company is considering an investment proposal to purchase a machine costing Rs. 2,50,000. The machine has a life expectancy of 5 years and no salvage value. The company’s tax rate is 40%. The firm uses straight-line method for providing depreciation. The estimated cash flows before tax (CFBT) and after depreciation from the machine are as follows:

Year	CFBT (Rs.)
1 2 3 4 5	60,000 70,000 90,000 1,00,000 1,50,000

Calculate:

(1) Payback period.

(2) Average rate of return.

(3) Net present value.

(4) Profitability index at 10% discount rate.

You may use the following table:              3+4+4+3=14

Year:	1	2	3	4	5
P.V. Factor at 10%	0.909	0.826	0.751	0.683	0.621

 Solution: Same Question Asked in the Year 2014.

6. (a) Explain the various factors which influence the dividend decision of a firm. 14

Ans: Factors Influencing Dividend Decision

There are various factors which affect dividend decision. These are enumerated below with brief explanation.

a)       Legal position: Section 205 of the Companies Act, 2013 which lays down the sources from which dividend can be paid, provides for payment of dividend (i) out of past profits and (ii) out of moneys provided by the Central/State Government, apart from current profits. Thus, by law itself, a company may be allowed to declare a dividend even in a year when the profits are inadequate or when there is absence of profit.

b)      Magnitude and Trend in EPS: EPS is the basis for dividend. The size of the EPS and the trend in EPS in recent years set how much can be paid as dividend a high and steadily increasing EPS enables a high and steadily increasing DPS. When EPS fluctuates a different dividend policy has to be adopted.

c)       Taxability: According to Section 205(3) of the Companies Act, 1956 'no dividend shall be payable except in cash'. However, the Income-Tax Act defines the term dividend so as to include any distribution of property or rights having monetary value. Therefore, liberal dividend policy becomes unattractive from the point of view of the shareholders/investors in high income brackets. Thus a company which considers the taxability of its shareholders, may not declare liberal dividend though there may be huge profit, but may alternatively go for issuing bonus shares later.

d)      Liquidity and Working Capital Position: Apparently, distribution of dividend results in outflow of cash and as such a reduction in working capital position. Even in a year when a company has earned adequate profit to warrant a dividend declaration, it may confront with a week liquidity position. Under the circumstance, while one company may prefer not to pay dividend since the payment may impair liquidity, another company following a stable dividend policy, may wish to declare dividends even by resorting to borrowings for dividend payment in cash.

e)      Impact on share price: The impact of dividends on market price of shares, though cannot be precisely measured, still one could consider the influence of dividend on the market price of shares. The dividend policy pursued by a company naturally depends on how far the management is concerned about the market price of shares. Generally, an increase in dividend payout results in a hike in the market price of shares. This is significant as it has a bearing on new issues.

f)        Control consideration: Where the directors wish to retain control, they may desire to finance growth programmes by retained earnings, since issue of fresh equity shares for financing growth plan may lead to dilution of control of the dominating group. So, low dividend payout is favoured by Board.

g)       Type of Shareholders: When the shareholders of the company prefer current dividend rather man capital gain a high payment is desirable. This happens so, when the shareholders are in low tax brackets, they are less moneyed and require periodical income or they have better investment avenues than the company. Retired persons, economically weaker sections and similarly placed investors prefer current income i.e. dividend. If, on the other hand, majority of the shareholders are moneyed people, and want capital gain, then low payout ratio is desirable. This is known as clientele effect on dividend decision.

h)      Industry Norms: The industry norms have to be adhered to the extent possible. It most firms in me industry adopt a high payout policy, perhaps others also have to adopt such a policy.

i)        Age of the company: Newly formed companies adopt a conservative dividend policy so that they can get stabilized and think of growth and expansion.

j)        Investment opportunities for the company: If the company has better investment opportunities, and it is difficult to raise fresh capital quickly and at cheap costs, it is better to adopt a conservative dividend policy. By better investment opportunities we mean those with higher 'r' relative to the 'k'. So, if r>k, low payout is good. And vice versa.

k)       Restrictive covenants imposed by debt financiers: Debt financiers, especially term lending financial institutions, may impose restrictive conditions on the rate, timing and form of dividends declared. So, that consideration is also significant.

l)        Floatation cost, cost of fresh equity and access capital market: When floatation costs and cost of fresh equity are high and capital market conditions are not congenial for a fresh issue, a low payout ratio is adopted.

m)    Financial signaling: Dividends are the best medium to tell shareholder of better days ahead of the company. When a company enhances the target dividend rate, it overwhelmingly signals the shareholders that their company is on stable growth path. Share prices immediately react positively.

Or

(b) What do you mean by ‘Ploughing Back of Profit’? What are the purposes of ploughing back? Discuss the various factors that influence the ploughing back of profits.  3+3+8=14

Ans: Retained Earnings or Ploughing Back of Profit

Retained earnings are internal sources of finance for any company. Actually is not a method of raising finance, but it is called as accumulation of profits by a company for its expansion and diversification activities. Retained earnings are called under different names such as self-finance; inter finance, and plugging back of profits.  As prescribed by the central government, a part (not exceeding 10%) of the net profits after tax of a financial year have to be compulsorily transferred to reserve by a company before declaring dividends for the year.

Under the retained earnings sources of finance, a reasonable part of the total profits is transferred to various reserves such as general reserve, replacement fund, reserve for repairs and renewals, reserve funds and secrete reserves, etc.

Retained earnings or profits are ploughed back for the following purposes.

1)      Purchasing new assets required for betterment, development and expansion of the company.

2)      Replacing the old assets which have become obsolete.

3)      Meeting the working capital needs of the company.

4)      Repayment of the old debts of the company.

Determinants or Factors of Ploughing Back of Profits or Retained Earnings

(a)    Total Earnings of the Enterprise: The question of saving can arise only when there are sufficient profits. So larger the earnings larger the savings, it is a common principle of financial management.

(b)    Taxation Policy of the Government: The report submitted by Taxation Enquiry Commission has brought into light that taxation policy of the Government tells upon it the taxes are levied at high rates. Hence, it is also an important determinant of corporate savings.

(c)     Dividend Policy: It is policy adapted by the top management (board of directors) in regards to distribution of profits. A conservative dividend policy is essential for having good accumulation of corporate savings. But, dividend policy is highly influenced by the income expectation of shareholders and by general environment prevailing in the country.

(d)    Government Attitudes and Control: Govt. is not only a silent spectator but a regulatory body of economic system of the country. Its policies, control order and regulatory instructions-all compel the organizations to work in that very direction for example compulsory Deposit Scheme which had been in force.

(e)    Other Factors: Other factors affecting the retained earnings are:

(a)    Tradition of industry.

(b)    General economic and social environment prevailing in the country.

(c)     Managerial attitudes and philosophy, etc.

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