bst ch 9

Financial decisions

1. Investment decision

2. Financing decision

3. Dividend decision

Investment decision

A firm has many options to invest their funds but firm has to select the most appropriate investment which will bring maximum benefit for the firm is investment decision.

Importance/scope of investment decision

1. long term growth

2. large amount of funds involved

3. risk involved

4. irreversible decision

Factors affecting investment decisions

1. C-Cash flow position

2. R-Return on investment

3. I-Investment decision

   or CRI

Financing decision

This decision is about the amount of finance to be raised from long term sources. A company can raise finance from various sources such as by issue of shares, debentures or by taking loan and advances. It can be divided into two sources 1. Owners fund 2. Borrowed fund

Factors affecting financing decisions

1. cost

2. risk

3. cash flow position

4. control consideration

5. floatation cost

6. fixed operation cost

7. state of capital market

   or 3c 2f rs

Dividend decision

This decision is concerned with distribution of surplus funds. The profit of the firm is distributed among various parties such as creditors, employees, debenture holders, shareholders, etc.

Factors affecting dividend decision

1. earning

2. Stability of earning

3. cash flow position

4. growth opportunities

5. taxation policy

6. legal restrictions

Capital structure

Capital structure means the proportion of debt and equity used for financing the operations of business. Capital structure = Debt/Equity

Financial leverage

Financial leverage refers to proportion of debt in the overall capital FL=D/E ORD/D+E

Factors determining the capital structure

Acronym - DISC4

1. D-Debt service coverage ratio (DSCR)

2. I-Interest coverage ratio (ICR)

3. S-Stock market condition

4. C-Cost of debt

5. C-Cost of equity

6. C-Cash flow position

7. C-Control consideration