Question

What are some of the most important financial management decisions? Provide some real-life examples.

Answer 1

There are three most important financial management decisions which every company has to undertake and are as follows :-

1. Investment decision - this invoves decision to invest funds in assets to generate returns on them. This include working capital decision as well as long term capital decision. This requires lot of due dilligence to be done.

For example - a firn calculating NPV of future cash flows of a machine is called investment decision

2. Financing decision - This includes raising funds from various sources of capital like equity shares, preference shares, debt etc.

For example - a company calculating wrighted Average cost of capital to determine optiomal capital structure using different sources of capital is an example of financing decision

3. Dividend decision - the decision involving how much of the company's earnings to be declared as dividends is related to dividend decision. .

For example - a company deciding to share 0.1 % of company's earnings as dividends is related to dividend decision.

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