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1) Investment Decision - The most important decision.

It begins with the firm determining


the total amount of assets needed to be held by the firm. There are 2 types of investment
decision:

a) Capital Investment Decision - Involves large sums of money. The impact is critical.
examples acquire a new machine or to set up a new plant.

b) Working Capital Investment Decision - a more routine or schedule form of decision .


Examples are determination of the amount of inventories, cash and account receivables to
hold within a certain period.

2) Financing Decision - The second major decision. After deciding on what assets to buy or
what securities to invest in, the financial manager would have to decide on how to finance
these assets.

Sources of Finance - 2 sources ; Borrowings and/ or Capital

3) Assets Management Decision - The third and last decision. Once the assets have been
acquired and appropriate financing provided, these assets must be managed efficiently. By
managing currents assets effectively and efficiently, the company can increase its returns and
minimizes its risk of illiquidity.

2) Financial management refers to the efficient and effective management of money


(funds) in such a manner as to accomplish the objectives of the organization. It is the
specialized function directly associated with the top management. The significance of this
function is not seen in the 'Line' but also in the capacity of the 'Staff' in overall of a
company. It has been defined differently by different experts in the field.
3) The term typically applies to an organization or company's financial strategy,
while personal finance or financial life management refers to an individual's management
strategy. It includes how to raise the capital and how to allocate capital, i.e. capital
budgeting. Not only for long term budgeting, but also how to allocate the short term
resources like current liabilities. It also deals with the dividend policies of the share
holders.

Type # 1. Investment Decisions:


Investment Decision relates to the determination of total amount of
assets to be held in the firm, the composition of these assets and the
business risk complexions of the firm as perceived by its investors.
It is the most important financial decision. Since funds involve cost
and are available in a limited quantity, its proper utilisation is very
necessary to achieve the goal of wealth maximisation.

The investment decisions can be classified under two


broad groups:
(i) Long-term investment decision and

(ii) Short-term investment decision.


The long-term investment decision is referred to as the capital
budgeting and the short-term investment decision as working
capital management.

Capital budgeting is the process of making investment decisions in


capital expenditure. These are expenditures, the benefits of which
are expected to be received over a long period of time exceeding one
year. The finance manager has to assess the profitability of various
projects before committing the funds.

The investment proposals should be evaluated in terms of expected


profitability, costs involved and the risks associated with the
projects.

The investment decision is important not only for the setting up of


new units but also for the expansion of present units, replacement
of permanent assets, research and development project costs, and
reallocation of funds, in case, investments made earlier do not fetch
result as anticipated earlier.

Short-term investment decision, on the other hand, relates to the


allocation of funds as among cash and equivalents, receivables and
inventories. Such a decision is influenced by tradeoff between
liquidity and profitability.

The reason is that, the more liquid the asset, the less it is likely to
yield and the more profitable an asset, the more illiquid it is. A
sound short-term investment decision or working capital
management policy is one which ensures higher profitability,
proper liquidity and sound structural health of the organisation.

Type # 2. Financing Decisions:


Once the firm has taken the investment decision and committed
itself to new investment, it must decide the best means of financing
these commitments. Since, firms regularly make new investments;
the needs for financing and financial decisions are ongoing.

Hence, a firm will be continuously planning for new financial needs.


The financing decision is not only concerned with how best to
finance new assets, but also concerned with the best overall mix of
financing for the firm.

A finance manager has to select such sources of funds which will


make optimum capital structure. The important thing to be decided
here is the proportion of various sources in the overall capital mix of
the firm. The debt-equity ratio should be fixed in such a way that it
helps in maximising the profitability of the concern.

The raising of more debts will involve fixed interest liability and
dependence upon outsiders. It may help in increasing the return on
equity but will also enhance the risk.

The raising of funds through equity will bring permanent funds to


the business but the shareholders will expect higher rates of
earnings. The financial manager has to strike a balance between
various sources so that the overall profitability of the concern
improves.

If the capital structure is able to minimise the risk and raise the
profitability then the market prices of the shares will go up
maximising the wealth of shareholders.

Type # 3. Dividend Decision:


The third major financial decision relates to the disbursement of
profits back to investors who supplied capital to the firm. The term
dividend refers to that part of profits of a company which is
distributed by it among its shareholders.

It is the reward of shareholders for investments made by them in


the share capital of the company. The dividend decision is
concerned with the quantum of profits to be distributed among
shareholders.

A decision has to be taken whether all the profits are to be


distributed, to retain all the profits in business or to keep a part of
profits in the business and distribute others among shareholders.
The higher rate of dividend may raise the market price of shares and
thus, maximise the wealth of shareholders. The firm should also
consider the question of dividend stability, stock dividend (bonus
shares) and cash dividend.

Importance:

Among different financial decisions, the one relating to investment


in fixed assets or capital budgeting is of special significance. While
taking this decision financial manager has to take special
precautions. These decisions are relatively more important because
of the following reasons:

(1) Long-term Growth and Effect:


These decisions are concerned with long-term assets. These assets
are helpful in production. Profit is earned by selling the goods so
produced. It can, therefore, be said the more correct these decisions
are, the greater will be the growth of business in the long run. In
addition to that, these affect future possibilities of the business.

(2) Large Amount of Funds Involved:


Decisions regarding fixed assets are included in the preview of
capital budgeting. Large amount of capital is invested in these
assets. If these decisions turn out to be wrong, there occurs heavy
loss of capital which is a scarce resource.

(3) Risk Involved:


Capital budgeting decisions are full of risk. There are two reasons
for it. First, these decisions refer to a long period, and as such
expected profits for several years are to be anticipated. These
estimates may turn out to be wrong. Second, because of heavy
investment involved, it is very difficult to change the decision once
taken.
(4) Irreversible Decisions:
Nature of these decisions is such as cannot be changed so quickly.
For instance, if soon after setting up a cotton mill, it is thought of
changing it, then the old machinery and other fixed assets will have
to be sold at throwaway price. In doing so, heavy loss will have to be
incurred. Changing of these decisions, therefore, is very difficult.
INTRODUCTION:
International financial decision is not a simple one and it is mainly characteristic to
multinational companies or to companies located in countries with a reduced saving
rate that is not sufficient to cover all internal financing needs (is the case of emerging
markets like Romania is). The financial managers of Romanian companies need to
have tools to decide if they will use a credit in lei from local banks or will try to obtain
a credit from abroad in a foreign currency (in Euro, USD etc.). The required
assumption in this case is that capital account between Romania and other countries
is totally free. This decision is not a simple one and it should be based on theoretical
background. The financing decision depends upon two main criteria: cost and risks
assumed by the company. This paper will discuss the solution in this case to
compare different international financing opportunities that are expressed in different
currencies from the perspective of a debtor (company).

EXAMPLE:

Quality Financial Decisions


The goal of our financial strategy is to make Triton a leasing company our customers can rely upon over the long
haul, through good times and bad. Our capital structure is designed specifically to address two well-recognized
factors in the container leasing industry: it is capital intensive and subject to cyclical economic conditions. The
flexibility and strength of our structure have served us well. As a result, we’ve been able to actively participate in
our industry and to provide consistent, reliable service even during periods of economic adversity, while
maintaining our fleet in peak condition and steadily expanding our operations.

The following explanation will help in understanding each finance function in detail

Investment Decision

One of the most important finance functions is to intelligently allocate capital to long term assets. This
activity is also known as capital budgeting. It is important to allocate capital in those long term assets
so as to get maximum yield in future. Following are the two aspects of investment decision

a. Evaluation of new investment in terms of profitability


b. Comparison of cut off rate against new investment and prevailing investment.

Since the future is uncertain therefore there are difficulties in calculation of expected return. Along
with uncertainty comes the risk factor which has to be taken into consideration. This risk factor plays a
very significant role in calculating the expected return of the prospective investment. Therefore while
considering investment proposal it is important to take into consideration both expected return and the
risk involved.
Investment decision not only involves allocating capital to long term assets but also involves decisions
of using funds which are obtained by selling those assets which become less profitable and less
productive. It wise decisions to decompose depreciated assets which are not adding value and utilize
those funds in securing other beneficial assets. An opportunity cost of capital needs to be calculating
while dissolving such assets. The correct cut off rate is calculated by using this opportunity cost of the
required rate of return (RRR)

Financial Decision

Financial decision is yet another important function which a financial manger must perform. It is
important to make wise decisions about when, where and how should a business acquire funds.
Funds can be acquired through many ways and channels. Broadly speaking a correct ratio of an
equity and debt has to be maintained. This mix of equity capital and debt is known as a firm’s capital
structure.

A firm tends to benefit most when the market value of a company’s share maximizes this not only is a
sign of growth for the firm but also maximizes shareholders wealth. On the other hand the use of debt
affects the risk and return of a shareholder. It is more risky though it may increase the return on equity
funds.

A sound financial structure is said to be one which aims at maximizing shareholders return with
minimum risk. In such a scenario the market value of the firm will maximize and hence an optimum
capital structure would be achieved. Other than equity and debt there are several other tools which
are used in deciding a firm capital structure.

Dividend Decision

Earning profit or a positive return is a common aim of all the businesses. But the key function a
financial manger performs in case of profitability is to decide whether to distribute all the profits to the
shareholder or retain all the profits or distribute part of the profits to the shareholder and retain the
other half in the business.

It’s the financial manager’s responsibility to decide a optimum dividend policy which maximizes the
market value of the firm. Hence an optimum dividend payout ratio is calculated. It is a common
practice to pay regular dividends in case of profitability Another way is to issue bonus shares to
existing shareholders.

Liquidity Decision

It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm’s profitability,
liquidity and risk all are associated with the investment in current assets. In order to maintain a
tradeoff between profitability and liquidity it is important to invest sufficient funds in current assets. But
since current assets do not earn anything for business therefore a proper calculation must be done
before investing in current assets.

Current assets should properly be valued and disposed of from time to time once they become non
profitable. Currents assets must be used in times of liquidity problems and times of insolvency.

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