Question

when determinig the finacial objective of the company it is necessary to take three types of policies into account investment policy, financing policy and dividend policy. Discuss the nature of the three types of policy dicissions, comment on how they are interelated and how they may affect the value of the firm.

Answer 1

The financing policy refers to the choices or the decisions or the regulations that are related to the financial system of the organization. These financial systems could be the lending system, payment system or the borrowing system. The financial policies increases the market stability, thus promoting and enhancing the market efficiency and value of the firm for its stakeholders.

Investment Policy basically outlines the general rules for the portfolio managers and clients. It provides the general investment objectives and goals and also lists the strategies adopted for achieving those goals. The information that is included in the Investment Policies are the asset allocations, liquidity requirements and risk tolerance.

Dividend Policy basically states the information about the payment to shareholders in the form of dividends. There are three types of dividends policy - stability, residual or the hybrid of the two.

The company has to decide what is best for their company by using thei capital efficiently. Hence if they think that the investment can reap more returns as compared to a project then they will invest. They also need to keep their balance sheet healthy by keeping the tab on borrowings and hence they will take debt through financing policies efficiently. They also need to figure, if the requirements for project investments were less than the surplus capital, then they can distribute dividends.