Question

The text refers to three types of financial decision – the investment decision, the financing decision and the dividend decision.  Describe each in detail, and explain how these decisions relate to the corporate objective.  Categorise each of the following decisions in terms of whether it is an investment, financing or dividend decision and explain why it is in that category.

(a)        Javelin Pharmaceutical Ltd purchases all of the shares in O’Hara Ltd.

(b)        Tabcorp Holdings Ltd buys new poker machines for its business.

(c)        Brushwood Ltd hopes to raise $53 million in an equity issue of ordinary shares and will use the funds to repay its long-term debt.

(d)        Devastation Games Ltd purchases the copyright for a new video game.

(e)        News Corporation declares a dividend of 20c per share.

(f)         Brushwood Ltd pays $5 million to repurchase 1% of the shares held by its current shareholders.

(g)        Creek Ltd announces the raising of $50 million in bonds in the United States.

(h)        Charles Grogin sells shares to finance his new online wine cellar.

Answer 1

Answer:

Investment decision:

Objective of any business entity is to maximize shareholder wealth. It has to embark on its stated business operation to help achieve its objective. To embark on any business operation, investment in fixed assets and working capital to run the business has to be made.

As such corporate have to evaluate and invest. It has to evaluate in terms of value add or returns any investment can bring in and decide and execute.

Finance decision:

As discussed above, corporate have to investment decisions to achieve its objective. Investment requires finance and there have to be source of finances for these usages. Financing decision involves evaluating cost of finance and sources of finance and capital structure decisions.

Sources of finance could be equity, debt, loans etc. Each of these has cost and impacts the leverage of the firm. Financing decisions involves evaluating different sources of finance and cost of finance against target optimal capital structure.

Dividend decision:

When corporate earns decisions regarding return to shareholders and reinvestment have to be made. Decisions in this regards involves how much to reinvest and how much to return and in what ways.