Question

Financial management decisions Discuss the relationship between investment decisions, dividend decisions and financing decisions in the context of financial management, illustrating your discussion with examples where appropriate

corporate finance

Answer 1

Financial management decisions

Investment decision is an important financial management decision regarding the investment of money in profitable investments. The finance manager analyses various investment opportunities based on liquidity and profitability and takes decisions.

Dividend decision is regarding the share of profits to be distributed to the shareholders. The profits after payment of tax and after considering various investment opportunities and need of retained earnings only must be distributed to the shareholders.

Financing decision is regarding the various sources of finance for the business. The finance manager may consider both debt and equity sources based on the risk factor and profitability.

The relationship between investment decisions, dividend decisions and financing decisions

These financial management decisions are interrelated. The objectives of financial management are Profit maximisation and Wealth maximisation.

• These three decisions are taken by finance manager for the achievement of these objectives. That means the main aim of these decisions are same.
• Investment decisions depend upon the financing decisions, as the management should find sources of finance to invest.
• The dividend decision of the company calls for the need of raising finance to the company. Thus dividend decision is linked with financing decision

Thus these three financing decisions are interrelated.