Question

) Explain the three financial decisions made by the financial manager. How are they interrelated?

Answer 1

There are three main Financial Decision that a Financial manager makes:

(i). Investment Decision (ii). Financing Decision and (iii). Dividend Decision.

(i). Investment Decision: This type of Financial decision is also known as Capital Budgeting Decision, where a financial manager makes decision about the company's assets and where to invest, which project will be good for the company and will bring more cashflows for the company. Manager makes the careful selection of assets where funds can be invested.

There are certain factors which affects investment decisions:

(a). Cashflow of the firm.

(b). Profits.

(c). Investment Criteria.

(ii). Financing Decision: It is very crucial decision which a Financial manager makes, from where we have to get funds for the company, what would be the cost of acquiring, right capital mix for the firm.

Factors affecting Financing Decision:

(i). Cost

(ii). Risk

(iii). Cashflow position

(iv). Control

(v). Condition of the market.

(iii). Dividend Decision: It is the decision which pertains to the distribution of profits earned by the organisation. The major decision is about whether to retain the earnings or to distribute the profits.

Factors affecting Dividend Decision:

(a). Earnings

(b). Dependability in earnings

(c). Balancing dividends

(d). Development opportunity

There are links between these three decisions and a financial manager has to make decision about where to get funds for the investment in the assets and how to make dividend decisions for the shareholders.