Question

What are the three basic questions addressed by a financial manager? Describe in detail.

Answer 1

Three basic questions which are addressed by financial manager are related to decisions of capital budgeting and related to decisions of capital structure and related to decision of Working Capital management.

1. Capital budgeting decisions-a financial manager must look at managing the capital budgeting decisions because these are long term decisions and they involve a lot of capital so it should be selected after going through various processes like net present values and internal rate of return to arrive at the best possible combination of projects.

2. Capital structure decisions-this is a decision regarding the optimum capital structure of the company and whether it is to be financed by the equity capital or whether it is to be financed by the debt capital so a finance manager will always look for an optimum mix of equity and debt which will be traded off between the benefit of interest expenses and cost of financial distress.

3. Working Capital management-a financial manager must be looking for management of its current assets as well as management of its current liabilities because these are very important in maintaining the liquidity of the company in the short run as well as in the long run and it also provides with guarantee to the creditors that the company is highly solvent in order to finance it debt and it is highly liquid to take over new projects.