Question 1 OR (a)

Major types of financial management decisions

5 marks

Time to write: About 10 minutes

From an older CBCS paper

Question

Question 1 OR (a) · 5 marks

Briefly describe the major types of financial management decisions a firm makes.

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

10 minfor 5 marks

Read from the question

BrieflyShort headed points, no long paragraphs.

Write it in this order

Read; underline the asks; jot your points 1 min
1 Investment decision: capital budgeting and working capital 2 marks 3 min
2 Financing decision 1½ marks 2 min
3 Dividend decision, and the common aim 1½ marks 2 min
Check: every ask answered, key terms underlined 2 min

123

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

Try it first. About 10 minutes for 5 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 deals with three major problems, corresponding to the questions of investment, financing and dividend decisions: procuring funds at the lowest cost, investing them profitably, and distributing returns to the shareholders.

Investment decision. It concerns the asset composition of the firm: where to invest.
- Capital budgeting: investment in long-term assets whose benefits come over many years, such as buying an asset, choosing between alternatives, buying or leasing, or acquiring a firm. Its aim is to pick assets worth more than their cost.
- Working capital management: investment in current assets (inventory, credit to customers), balancing profitability against liquidity.
Financing decision. When, where from and how to raise the funds the investments need. The two main sources are shareholders' funds and borrowed funds, and the central issue is the proportion of each, the firm's capital structure.
Dividend decision. How much of the profit to distribute to the shareholders and how much to retain for reinvestment, so as to satisfy shareholders' expectations while funding growth. It is weighed together with the financing decision, since profit kept back is itself a source of finance: the manager decides whether to pay out all the profit, retain it all, or pay out part and retain the rest.

All three are taken with one aim: to maximise the shareholders' wealth, that is, the market value of the shares.

Where the 5 marks sit

#	Component	Marks
1	Investment decision: capital budgeting and working capital	2
2	Financing decision	1.5
3	Dividend decision, and the common aim	1.5
	Total	5

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