Question

The title of section 3.4 (p.43) is “Consequences for Investment and Financing decisions”. What is the difference between an investment decision and a financing decision?

Answer 1

To increase and maximise the shareholder value for a company is the primary goal of both investement and financing decision, however, there are certain differences too which are :-

• Best allocation of money to maximise their value is the investement decision while how to equally distribute for the investments and expenses is the headache for financing decisions.
• Decision in respect of different projects in a companuy such as expansion, modernization, joint venttures etc are investement decisions.While decsion in respect to the financial sources like equity, bonds, borrowings, leasing, creditors etc are financial decisions.
• Investment decisions are mainly done by the top level management or the owners or partners while the financing decisions are taken care by the managerial personnel.
• Various projects and their importance are the base of investment decision where as the plans that will give out maximum results are the base for financing decisions.
• Investment decisions give a goal to the financing decisions while financing decisions help to achieve the investment decisions.
• Investment decisons help in getting the goals right while the financing decisins help in getting the path right towards achieivng goals.

However, the key lies in proper balance between both.