Question

Describe the basic types of financial decisions firms have to make? Give an example of each

Answer 1

There are three basic types of financial decisions each firm has to make:

1. Investment decisions: This is the type of decisions that have to made regarding how the funds have to be channelized and invested in various assets. Investment decisions are key to ensure that money is growing at a certain rate and is not lying vacant at the banks earning minimal interest rate.

An example of this would be investment in Treasury Bills.

2. Financing decisions: These are the types of decisions that are related to how the funds will be raised for the firm, whether in debt or in equity, both have their own features and advantages, therefore it is important to decide which type of funding a firm wants. This also involves choosing the source of funds, for example a bank loan or issuing shares.

Example: Issuing of equities to the public.

3. Dividend Decisions: These are decisions related to how and when the dividend should be paid back to each shareholder, it shows how the net profit of the firm should be utilised, it may be reinvested in the firm or it may be distributed in the form of dividend.

Example: Paying a 6% rate of dividend to all share holders.