Various factors influencing capital structure
 

(i) Position of cash flow Size of projected cash flow must be considered before issuing debt. Cash flow must not only cover fixed cash payment obligations but there must be sufficient cash for smooth working of the business.
(ii) Return on Investment (Rol) It refers to the earning expected from the investment. If Rol of a company is high, it can opt for trading on equity to increase the earning per share. Thus, it is an important determinant of the extent of trading on equity.
(iii) Cost of capital It may be defined as the payment made by company to obtain capital. Thus, interest is the cost of debentures or loan and dividend paid by the company is the cost of equity and preference share capital.
The rate of dividend on preference shares is fixed which is generally lower than that of equity shares. The cost of debentures is generally lower and tax deductible.
(iv) Risk of consideration While deciding the capital structure, risk must be analysed and considered.
Total risk consists of two types of risks
(a) Financial risk It refers to a position when a company is unable to meet its fixed financial charges namely, interest payment, preference dividend and payment obligations. It arises when a company borrows. Use of debt increases the financial risk of a business.
(b) Business risk It depends upon fixed operating costs. IHigher fixed operating cost means higher business risk and vice-versa. If a firm's operating risk is lower, its capacity to use debt is higher and vice-versa.
(v) Flexibility To maintain flexibility, a firm should not use its debt potential in full, so that it can borrow in unforeseen circumstances.

Adequate working capital is essential for smooth and efficient working of every business enterprise
Adequate working capital provides the following advantages to a business enterprise:
(i) A firm with adequate working capital can meet its liabilities promptly.prompt payment helps to raise the credit-standing or reputation of the enterprise.
(ii) Adequacy of working capital enables the firm to take advantage of any favourable business opportunity,e.g. to purchase raw materials at a discount or to execute a special order.
(iii) Financial soundness of business boosts the morale of employees.
(iv) Lack of adequate working capital may result in interruptions in operations and underutilisation of plant capacity.
(v) Adequate working capital permits timely and regular payment of cash dividends.This helps to maintain cordial relations with shareholders.

With a loan component in the total capital, shareholders are likely to have the benefit of a higher rate of return on share capital. This is because loans carry a fixed charge and the amount of interest paid is deductible from earnings before tax payment. The benefit to shareholders will be realised only if the average rate of return on total capital invested is more than the rate of interest payable on loan.
Let us see the given example:

It should be clear from the given example that shareholders of B Ltd. have a higher rate of return than that of A Ltd. due to the loan component in the total capital of B Ltd.

Financial planning is the act of deciding in advance the financial activities necessary to achieve the goals and objectives of an organisation. Importance of financial planning is as follows:
(a) It helps in forecasting what may happen in future under different business situations. Preparation of alternative financial plans to meet different situations is clearly of immense help in running the business smoothly.
(b) It helps in avoiding business shocks and surprises and thus, helps the company in preparing for the future.
(c) It helps in coordinating various business functions by providing clear policies and procedures.
(d) It helps in reducing waste, duplication of efforts and gaps in planning through detailed plans of action.
(e) It helps in linking the present with the future.
(f) It helps as providing a link between investment and financing decisions on a continuous basis.
(g) It helps in better evaluation of actual performance through listing detailed objectives for various business segments

According to Weston and Brighan, 'Financial management is an area of financial decision-making harmonising individual motives and enterprise goals'.

Financing decision is concerned with the decisions about how much funds are to be raised from which long-term source,i.e. by means of shareholders' funds or borrowed funds.
Shareholders'  funds include share capital, reserves and surplus and retained earnings, whereas, borrowed funds include debentures, long-term loans and public deposits.
Cost
The cost of raising funds from different, A wise finance manager opt for the cheapest source of finance.
Cash Flow Position
A stronger cash flow position may make debt financing more viable than funding through equity.
Level of Fixed Operating Cost
If a firm is having a higher fixed operating burden like payment of interests, premiums, salaries, rent, etc.then it should avoid financing through debt.This because it will further increase the interest payment burden and the firm can reach an unfavourable position.However, if the firm has lower operating cost, then the firm can borrow funds
Control Consideration  
Issue of more equity may dilute shareholders' control over the business.Therefore, a company afraid of a takeover bid may prefer debt to equity.  

Stability of Dividends
Generally, companies try to stabilise dividends per share.A steady dividend is given each year A change is only made if the company's  earning potential has gone up and not just earnings of the current year.
Shareholders' preference
While declaring dividends, management must keep in mind the preferences of the shareholders.Some shareholders in general desire that atleast a certain amount is paid as dividend.The companies should consider the preferences of such shareholders.
Legal constraints
Certain provisions of the companies act, place restrictions on payouts as dividend .Such provisions must be adhered to, while declaring the dividend.
Access to capital market
Large and reputed companies generally have easy access to the capital market and, therefore, may depend less on retained earnings to finance their growth.These companies tend to pay higher dividends than the smaller companies.

Dividend decision relates to distribution of profit to the shareholders and its retention in the business for meeting the future investment requirements. How much of the profits earned by a company will be distributed as profit and how much will be retained in the business is affected by many factors. Some of the important factors are discussed as follows
(i) Earnings Dividends are paid out of current and past year earnings. Therefore, earnings is a major determinant of the decision about dividend.
(ii) Stability of Earnings Other things remaining the same, a company having stable earning is in a position to declare higher dividends. As against this, a company having unstable earnings is likely to pay smaller dividend.
(iii) Growth Opportunities Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. The dividend in growth companies, is therefore, smaller than that in non-growth companies.
(iv) Cash Flow Position Dividends involve an outflow of cash. A company may be profitable but short on cash. Availability of enough cash in the company is necessary for declaration of dividend by it.
(v) Shareholder Preference If the shareholder in general, desire that at least a certain amount should be paid as dividend, the companies are likely to declare the same.
(vi) Taxation Policy If tax on dividend is higher it would be better to pay less by way of dividends. As compared to this, higher dividends may be declared if tax rates are relatively lower.
(vii)Stock Market Reaction For investors, an increase in dividend is a good news and stock prices react positively to it. Similarly, a decrease in dividend may have a negative impact on the share prices in the stock market.
(viii) Access to Capital Market Large and reputed companies generally have easy access to the capital market and therefore, depend less on retained earnings to finance their growth. These companies tend to pay higher dividends than the smaller companies which have relatively low access to the market.
(ix) Legal constraints Certain provisions of the Company’s Act place restriction on payouts as dividend. Such provisions have to be adhered, while declaring dividends.
(x) Contractual Constraints While granting loans to a company, sometimes the lender may impose certain restrictions on the payment of dividends in future. The companies are required to ensure that the dividends does not violate the terms and conditions of the loan agreement in this regard.

Dividend decision relates to how much of the company's net profit is to be distributed to the shareholders and how much of it should be retained in the business for meeting the investment requirements.
This decision should be taken,keeping in view the overall objective of maximising shareholders, wealth.
(i) Stability of Earnings
A company having higher and stable earnings can declare higher dividends than a company with lower and unstable earnings.
(ii) Growth Opportunities
Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment.The dividend declared in growth companies is, therefore, our flow smaller than that in the non-growth companies.
(iii) Cash Flow position
Dividend involves an outflow of cash.Availability of enough cash is necessary for payment or declaration of dividends.
(iv) Taxation of policy
If the tax on the dividends is higher,it is  better to pay less by way of dividentd.But if the tax rates are lower, higher dividends may be declared. This is because as per the current taxation policy, a dividend distributions tax is levied on companies.However, dividends shareholders prefer dividends, as dividends are tax free in the hands of shareholders

Yes,financial management is concerned with taking decisions regarding optimal procurement and utilisation of funds.For the effective procurement of funds,different available sources of finance are identified and compared in terms of cost and risk associated with them Procurement of funds is done for both long-term needs as well as short-term needs.

For long-term financing needs, the funds can be sourced through debt and equity.Short-term financing involves management of working capital.Now, the funds so procured have to be invested in a manner that the returns are higher than the cost of funds.The outflow of money is through purchase of fixed assets, current assets,working needs, distribution of dividends, etc.