Investment decision in financial management ppt

One determination of the amount required for running of business and second financing these assets. Everything you need to know about the types of financial decisions taken by a company. Dividend is a part of profits, which are available for distribution to equity shareholders. This decision determines the overall cost of capital and the financial risk for the enterprise. After a careful analysis of risk return trade-off, the size of plant should be determined. The investment decision in short-term assets is crucial for an organization as a short term survival is necessary for the long-term success.

FINANCIAL DECISIONS

Everything you need to know about the types of financial decisions taken by a company. The key aspects of financial decision-making relate to financing, investment, dividends and working capital management. Decision making helps to utilise the available investment decision in financial management ppt for achieving the objectives of the organization, unless minimum financial performance levels are achieved, it is impossible for a business enterprise to survive over time. Therefore financial management basically provides a conceptual and analytical framework for financial decision making. The types of financial decisions can classified under:- 1.

These are decisions concerning financial matters of a business firm. Investment decision should be evaluated in the terms of expected profitability, costs involved and the risks associated. This decision is important for setting new units, expansion of present units, reallocation of funds etc. Such decision is influenced by trade off between liquidity and profitability. Proper working capital management policy ensures higher profitability, proper liquidity and sound structural health of the organization. Dividend Decisions Relates to the disbursement of profits back to investors who supplied capital to the firm.

Everything you need to know about the types of financial decisions taken by a company. The key aspects of financial decision-making relate to financing, investment, dividends and working capital management. Decision making helps to utilise the available resources for achieving the objectives of the organization, unless minimum financial performance levels are achieved, it is impossible for a business enterprise to survive over time.

Therefore financial management basically provides a conceptual and analytical framework for financial decision making. The types of financial decisions can classified under:- 1. Long-Term Finance Decisions 2. Short-Term Finance Decisions. There are four main financial decisions:- 1. Capital Budgeting or Long term Investment Decision 2.

Capital Structure or Financing Decision 3. Dividend Decision 4. Working Capital Management Decision. Every company is required to take three main financial decisions, they are:.

Investment decision can be long-term or short-term. A long term investment decision is called capital budgeting decisions which involve huge amounts of long term investments and are irreversible except at a huge cost. Short-term investment decisions are called working capital decisions, which affect day to day working of a business.

It includes the decisions about the levels of cash, inventory and receivables. A bad capital budgeting decision normally has the capacity to severely damage the financial fortune of a business. A bad working capital decision affects the liquidity and profitability of a business. Cash flows of the project- The series of cash receipts and payments over the life of an investment proposal should be considered and analyzed for selecting the best proposal.

Rate of return- The expected returns from each proposal and risk involved in them should be taken into account to select the best proposal. Investment criteria involved- The various investment proposals are evaluated on the basis of capital budgeting techniques. Which involve calculation regarding investment amount, interest rate, cash flows, rate of return.

It is to be considered which technique to use for evaluation of projects. A financial decision which is concerned with the amount of finance to be raised from various long investment decision in financial management ppt sources of funds like, equity shares, preference shares, debentures, bank loans.

Is called financing decision. Cost- The cost of raising funds from different sources is different. The cost of equity is more than the cost of debts.

The cheapest source should be selected prudently. Risk- The risk associated with different sources is different. Is called flotation cost. Higher the flotation cost, less attractive is the source of finance. Cash flow position of the business- In case the cash flow position of a company is good enough then it can easily use borrowed funds. Control considerations- In case the existing shareholders want to retain the complete control of business then finance can be raised through borrowed funds but when they are ready for dilution of control over business, equity shares can be used for raising finance.

State of capital markets- During boom period, finance can easily be raised by issuing shares but during depression period, raising finance by means of debt is easy. A financial decision which is concerned with deciding how much of the profit earned by the company should be distributed among shareholders dividend and how much should be retained for the future contingencies retained earnings is called dividend decision.

Dividend refers to that part of the profit which is distributed to shareholders. The decision regarding dividend should be taken keeping in view the overall objective of maximizing shareholder s wealth. Factors affecting Dividend Decision :. Earnings- Company having high and stable earning could declare high rate of dividends as dividends are paid out of current and past earnings.

Stability of dividends- Companies generally follow the policy of stable dividend. The dividend per share is not altered in case earning changes by small proportion or increase in earnings is temporary in nature.

Growth prospects- In case there are growth prospects for the company in the near future then, it will retain its earnings and thus, no or less dividend will be declared. Cash flow positions- Dividends involve an outflow of cash and thus, availability of adequate cash is foremost requirement for declaration of dividends. Preference of shareholders- While deciding about dividend the preference of shareholders is also taken into account.

In case shareholders desire for dividend then company may go for declaring the. In such case the amount of dividend depends upon the degree of expectations of shareholders.

Taxation policy- A company is required to pay tax on dividend declared by it. If tax on dividend is higher, company will prefer to pay less by way of dividends whereas if tax rates are lower, then more dividends can be declared by the company. Financial management is concerned with the acquisition, financing and management of assets with some over all goals in mind. The contents of modern approach of financial management can be broken down into three major decisions, viz.

A firm takes these decisions simultaneously and continuously in the normal course of business. It is more important than the other two decisions. It begins with a determination of the total amount of assets needed to be held by the firm. In other words, investment decision relates to the selection of assets, on which a firm will invest funds. It relates to the management of current assets.

It is an important decision of a firm, as short-survival is the prerequisite for long-term success. Firm should not maintain more or less assets. More assets reduces return and there will be no risk, but having less assets is more risky and more profitable.

Hence, the main aspects of working capital management are the trade-off between risk and return. Management of working capital involves two aspects. One determination of the amount required for running of business and second financing these assets.

After estimation of the amount required and the selection of assets required to be purchased, the next financing decision comes into the picture. Financial manager is concerned with makeup of the right hand side of the balance sheet. It is related to the financing mix or capital structure or leverage. Financial manager has to determine the proportion of debt and equity in capital structure.

A proper balance will have to be struck between risk and return. Debt involves fixed cost interestwhich may help in increasing the return on equity but also increases risk. Raising of funds by issue of equity shares is one permanent source, but the shareholders will expect higher rates of earnings.

The two aspects of capital structure are- One capital structure theories and two determination of optimum capital structure.

This is the third financial decision, which relates to dividend policy. Dividend is a part of profits, which are available for distribution to equity shareholders. Payment of dividends should be analysed in relation to the financial decision of a firm. There are two options available in dealing with net profits of a firm, viz. Financial manager should determine the optimum dividend policy, which maximises market value of the share thereby market value of the firm.

Considering the factors to be considered while determining dividends is another aspect of dividend policy. There are four main financial decisions- Capital Budgeting or Long term Investment decision Application of fundsCapital Structure or Financing decision Procurement of fundsDividend decision Distribution of funds and Working Capital Management Decision in order to accomplish goal of the firm viz.

Sometimes all the above four decisions are classified into three decisions as follows:. Investment decision — which involves capital budgeting decision long term investment decision and working capital management. In capital budgeting, the financial manager tries to identify profitable investment opportunities, i. A finance manager has to find answers to questions such as:.

Capital budgeting decision gives rise to operating risk or business risk of a firm. Risk and return move in tandem. Higher the risk, higher the return. Lower the risk, lower the return.

Hence there is a risk return trade off in case of capital budgeting decision. Investment in small plant is less risky than investment in large plant. But at the same time small plant generates lower return than a large plant. Hence deciding about the optimal size of the plant requires a careful analysis of risk and return. It refers to the specific mixture of long-term debt and equity, which the firm uses to finance its assets.

The finance manager has to decide exactly how much funds to raise, from which sources to raise and when to raise. Capital structure decision gives rise to financial risk of a firm. Risk return tradeoff is involved in capital structure decision as.

Usually Debt is considered cheaper than equity capital because interest on debt is tax deductible. Also since debt is paid before equity, risk is lower for investors and so they demand lower return on debt investments. Thus there is a risk-return trade-off in deciding the optimal financing mix. On one hand, debt has lower cost of capital thus employing more debt would mean higher returns but is riskier while on the other hand, equity capital gives lower return due to higher cost of capital but is less risky.

Dividend Decision :. Dividend decision involves two issues-whether to distribute dividends and how much of profits to distribute as dividends.

How can you make good investment decisions?

A profitable company is in a position to declare dividends but it may have liquidity problems. Short-Term Finance Decisions. Raising of decisionn by issue of equity shares is one permanent source, but the shareholders will expect higher rates of earnings. When operating risk of a business is high due to huge investment in long term assets i. After estimation of the amount required and the selection of assets required to be purchased, the investment decision in financial management ppt financing decision comes into the picture. A finance manager estimates the floatation cost of various sources and selects the source with least floatation cost. While taking financing decision following points need to be considered:. Since the benefits are to be accrued in the future, the uncertainty is high with respect to its returns. The decision of investing funds in the long term assets is known as Capital Budgeting. Dividend is a part of profits, which are available for distribution to equity shareholders. Therefore, the decision regarding the amount of profit to be distributed as dividends depends ptp the tax rate. But at the same time small plant generates lower return than a managemrnt plant. But investkent assets provide lower return than fixed assets and hence reduce profitability as funds that could earn higher return via investment in fixed assets are blocked in current assets.