What are the basic financial decisions? How do they involve risk-return trade-off?

Expert Solution

According to archer and ambrosio,” Financial Management is the application of the planning and control functions to the finance function.”

Financial decisions are decisions concerning the financial matters of a Firm. The financial decisions are grouped into three categories.

1. Investment decisions.

2. Financing decisions.

3. Dividend decisions.

Investment decisions:

It is concerned with deciding the total amount of assets to be held in the firm and their composition.

Investment decisions are two types.

Long –term investment decision :
It is decision refers to the capital expenditure decision. it involves the evaluation of various capital expenditure proposals in terms of their cost,revenve,profits and risks..
Short term investment decision:

It is concerned with the management of working capital. it is also known as liquidity decision.

It involves decisions regarding investment in current assets, allocation of funds among cash, receivables inventories etc.

Financing decision:

Debt
Equity

Dividend decision:

Payout decision.

Risk –return trade off:

The financial decisions are interrelated and affect the risk and return of the firm. They have a combined effect on its market value. if a financial decision increases the risk ,the market value will be adversely affected ,even though there may be chances of a higher return.

jeff jeffy answered 2 years ago

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