Question

WHAT IS THE RELATIONSHIP BETWEEN FINANCIAL DECISIONS AND RISK AND PERFORMANCE

Answer 1

There exists a significant relationship between financial decisions and risk and performance. Financial decisions of an organization pertain to both investment decisions and financing decisions. The financial decisions are taken with the objective of profit maximization and maximization of shareholder’s wealth on one hand and on the other hand to minimize risks so that survival and continuity of the organization is ensured. Thus financial decisions enable an organization to maximize its performance while minimizing the associated risks.

Financial decisions often involve alternative courses of action and each action has a different risk-return implication. For example a company might have to select between the alternatives of building a one million tons plant or a two million tons plant. A large plant will have a higher expected return and a higher risk exposure while a small plant will have a lower expected return and a lower risk exposure.

Financial decisions have to be taken with regards to capital budgeting decisions, capital structure decisions, dividend decisions and working capital decisions. All these decisions aims at optimizing the risk-return tradeoff.