Question

what are the 3 types of financial management decisions? for each type of decision, give an example of a business transaction that would be relevant.

Answer 1

Three types of financial management decisions are as follows-

A. Financing decisions- these decisions are related to to generation of funds from different sources and it is related to nature of the firm and risk appetite of the firm along with the requirement of the firm that whether the the financing is done through equity financing or it is done through debt financing and there should be an appropriate trade off between the cost of financial distress of debt and interest tax shield benefits.

Example of Financing decision is to whether to issue the shares in the primary market or acquire the funding through commercial banking loans.

B) investment decision-this decision is basically related to deployment of the capital of the company into different sources so that it will be helpful for the company in order to generate a higher rate of return.investment decisions are basically meant for investment into different Assets and projects which will be helpful for the company in order to generate a sustainable rate of return.

Example of investment decision would be to invest into a long term projects which will be having positive net present value.

C) Dividend decisions- dividend decision is another type of Financial decisions which should be helpful in deciding whether the company wants to pay the dividend or whether the company wants to invest their profits back into the business and this will be done through appropriate analysis of various investment projects and the shareholder ability to generate rate of return.

Dividend decision can be exampled through that a growing company will not be paying dividend and instead it will be reinvesting its profits back into the business in order to grow.