Financial Management Test - 35

Financial decisions include:

• Investment decision
• Financing decision
• Dividend decision

Long term investment decisions are also called capital budgeting decisions which include purchase of land and building, plant and machinery, change of technology, research and development and expenditure of advertising campaign etc. Inventory management comes under working capital management decisions.

The funds raised through loans or borrowings are known as borrowed funds. Main sources for raising borrowed funds are issue of debentures, public deposits, loans from commercial banks, etc.

Financial planning means deciding in advance how much to spend, on what to spend according to funds at your disposal. In financial planning finance manager analyses various short term and long term investment  plans and selects the most appropriate.

The primary aim of financial management is to maximise shareholders' wealth, which is referred to as the wealth-maximisation concept.

Financial Risk refers to the chance that a firm will fail to meet its payment obligations. A higher debt to equity ratio indicates that more creditor financing (bank loans) is used than investor financing (shareholders). Higher use of debt increases the fixed financial charges (Interest on Debt) of a firm. As a result, increased used of debt increases the financial risk of a firm.

Capital budgeting is another name used for a long-term investment decision.

Investment decision revolves around maximising shareholders’ wealth and financial decision are concerned about how to pay the investments and expenses. Planning is what ensures both of these happen smoothly.

Companies with higher growth opportunities tend to retain more money out of their earnings so as to finance the required investments. Therefore, higher growth prospects result in lower dividend payment.

Under dividend decision the finance manager decides how much to be distributed in the form of dividend and how much to keep aside as retained earning. This decision is also called residual decision because it is concerned with distribution of residual or left over income.