Question 3 OR (a)

Main decisions in financial management

4 marks

Time to write
About 8 minutes

From an older CBCS paper

Question

Question 3 OR (a) · 4 marks

Discuss the main decisions taken in financial management.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

8 minfor 4 marks

Read from the question

  • DiscussEach point named and explained, not just listed.

Write it in this order

  1. Read; underline the asks; jot your points 1 min
  2. 1 Investment decision: capital budgeting and working capital 1½ marks 3 min
  3. 2 Financing decision 1 mark 2 min
  4. 3 Dividend decision; common aim and interdependence 1½ marks 2 min

Short on time? Trim steps 1 and 3 evenly rather than skip one: each is capped at its own marks.

Try it first. About 8 minutes for 4 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Financial management is concerned with three major problems, corresponding to the questions of investment, financing and dividend decisions; all three aim at maximising the shareholders' wealth, reflected in the market value of the shares.

  1. Investment decision. The asset composition of the firm: where to invest. It covers capital budgeting, investment in long-term assets whose benefits come over many years (choosing among assets, buying or leasing, making or buying, acquiring a firm), and working capital management, investment in current assets, balancing profitability against liquidity.
  2. Financing decision. When, where from and how to raise the funds the investments need, from shareholders' funds and borrowed funds; the central issue is the mix of debt and equity, the capital structure.
  3. Dividend decision. How much of the profit to distribute to the shareholders and how much to retain to finance growth, so as to meet the shareholders' expectations.

The three are interdependent: the investments chosen decide how much finance is needed, and the dividend decision decides how much of it can come from retained earnings.

Where the 4 marks sit

#ComponentMarks
1Investment decision: capital budgeting and working capital1.5
2Financing decision1
3Dividend decision; common aim and interdependence1.5
Total4
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