Hiren,
You can name your Database anything you want to. However, I would suggest naming it somethig that will let you remember what application is using it.
[ For example: if I were to install another application such as Community server I would lean toward naming my database something to the effect of Commserv.]
After you have created your database in MSSQL this will be the name that you will use in your Web.Config file.You can locate your DB on the same machine or on another dedicated Database machine as long as the name of the DB is correct and the path/address to the DB is correct.
Cheers
EJ