Question

EXAMINE the RELATIONSHIP between investment decisions, dividend decisions and financing decisions in the context of financial management, illustrating your discussion with examples(100marks)

Please answer this question with more flesh because 3 full pages are required.

Answer 1

A finance decision concerned with how the firm’s funds are invested in different assets is known as investment decision. Investment decision can be long-term or short-term. Capital budgeting decisions come under investment decision. Example : Purchase of machinery for production.

The financing decision is concerned with various long term sources from which the finance is to be raised like, equity shares, preference shares, debentures, bank loans etc. It is the decision on the capital structure or capital mix of the company. Example : Issue of shares, issue of debentures.

Dividend is the portion of the profit distributed to shareholders. Dividend decision is deciding how much of the profit of the company should be distributed among shareholders and how much should be retained in the company for the future projects. Example : Deciding the dividend pay out ratio.

Investment decisions are based on the financing decision taken by the company. The dividend decisions are based on which capital the company has invested in. Thus these three financial management decisions are interrelated.