Question

Analyze investment strategy, financing strategy as well as dividend strategy that maximize the value of the firm

Answer 1

Investment Decisions:

Investment on Long Term Projects should be made after Capital Budgeting and Uncertainity analysis

Projects which give reasonable returns (higher than cost) in order to add to the surplus of the shareholder's should be selected. The returns should be high enough as to distribute reasonable dividends and also retain adequate resources for the company' growth prospects.

Financing Decision:

Proper balancing between long term and short term funds as well as own funds and loan funds will help the firm to minimise its overall cost of capital and increase its wealth/value

Low cost of funds will mean higher profit margins which can be used for dividend distribution as well as internal financing of new projects / growth plans

Dividend Decision:

The optimum dividend pay out ratio ensures that shareholder's wealth is optimised

Where the funds at the disposal of the company earn a higher return than if distributed to shareholder's, wealth maximisation can be achieved by retaining the funds, rather than declaration of dividend.