 INVESMENT, FINANCE AND DIVEDEND

DECISION
 Introduction:
 Corporate finance is decision made by financial
officers at business. Such strategic production
and marketing decision all posses a significant
corporate financial component.
 CORPORATE FINANCIAL DECISION
categorised into three groups.
 Investment Financing Decision
policy Decision Dividend Decision
Investment Decision:

Definition: Investment Decision not only those that

create revenue and profits, but also those that
save money. How much and what inventory to
maintain?
 How much credit to grant to customers? Which
markets to enter and acquisition of other
companies, are considered as Investment
decision.
 It relates to selection of assets. Which fund will
be invested by a firm? The assets which can be
acquired fall into two broad groups:
 a) Long term Assets – which yield a return over
a period of time in future.
 b) Short term (or) Current Assets, defined as
those assets which in normal course of
business are converter in to Cash without
diminution in value usually within a year.
 The aspect of financial decision making with
reference to current assets or short term
assets is popularly termed as working capital
management.
 b) Capital Budgeting: relates to selection
of an assets or investment proposal
whose benefits are likely to be available
in future over the life time of the project.
The Long term Assets can be either new
or old or existing ones.
 The measurement of worth of investment
proposal is major element in capital
Budget. Capital Budgeting is the analysis
of risk & uncertainty estimated under
various assumptions volume of sale &
level of prices.
 The main elements of capital budgeting
decision are:
 1. long term assets & their composition
 2. Business risk & complexion of the
form.
 3. Concept & measurement of cost of
capital.
Financing Decision: (F .D)

 A firm make decision concerning where to

invest their resource and decide how they
should raise additional resources.
 * in the broadest term funds can be raised
either from owners as equity or it can borrow
money from various sources.
 * financing lies in the fixed commitments
created by borrowing to pay interest and
principal.
Tw o aspects of f inanci ng
deci si on
 1) Theory of capital structure shows
relationship between the employment of debt
and the return to the share holders.
 A proper balance between debt and equity to
ensure a trade-off between risk and return to
the shareholders is necessary.
 Thus Financing Decision covers two aspects
 a) Capital structure theory b) Capital structure
Decision.
Dividend Decisions:
 Definition:
 Dividends are defined as any cash
returned by a business to its owners. All
corporation from smallest to largest have
to decide how much of the cash they
generate from operation? Should be
reinvested back into the business? And
how much taken out in the form of
dividends and return on capital?.
 ) Dividend policy Decision. Dividend should
be analyzed in relation to financing decision of
a firm. Two alternatives dealing with profits of
a firm,
 They can be distributed to shareholders in the
form of dividends largely on a significant
element in the dividend decision, pay out ratio.
That is what proportion of net profits should be
paid out to the shareholders.
 The final decision will depend upon the
preference of the shareholders and investment
opportunities available within the firm.
CON CL USI ON
 The firm must forecast future needs of funds and
taking into account external availabilities of
funds and market considerations and
 also determine both retained earnings needed
and the amount of retained earnings available
after the minimum dividend have been paid.
 The traditional approach and the modern
approach has broadened the scope of financial
management which involves the solution of three
major decisions, namely, investment, financing
and dividend.
 The conceptual framework for optimum financial
decisions is - objective of financial management.