name the financial decision which is concerned with allocation of prophets among the owner of the company.
Answers
Answer:
igdtidt8fy8youfygy99ryfyfydydyfoy
1.Financial Decisions
These are the decisions which are concerned with the selection of best financing alternative or best investment alternative. It is broadly concerned with three aspects, viz investment, financing and dividend.
2.Classification of Financial Decision
(i)Investment decision The investment decision relates to how the firm’s funds are invested in different assets. Investment decision may be long-term or short-term. Long-term investment decision is called capital budgeting decision and short-term investment decision is called working capital decision.
(a)Capital budgeting decisions or long-term investment decisions Factors affecting capital budgeting decisions are:
Rate of return
Cash flow of the projects
Investment criteria involved
(b)Working capital decisions or short-term investment decisions They are concerned with level of inventories, cash and debtors.
(ii)Financing decision It deals with quantum of finance to be raised from long-term sources, viz debt equity. In other words, it refers to the determination as how the total funds required by the business will be obtained from various long-term sources. Factors affecting financial decisions are:
(a)Cost (g)Return on investment
(b)Risk (h)Tax rate
(c)Floatation costs (i)Flexibility
(d)Cash flow position of the company (j)Regulatory framework
(e)Fixed operating costs (k)Control considerations
(f)State of the capital market
(iii)Dividend decision This decision involves how much of the ‘after tax profits’ is to be distributed as dividends to shareholders and how much to retain in the business to meet future investment requirements.
Factors affecting dividend decisions are:
(a)Earnings (g) Taxation policy
(b)Stability of earnings (h) Stock market reaction
(c)Stability of dividends (i) Access to capital market
(d)Growth opportunities (j) Legal constraints
(e)Cash flow position (k) Contractual constraints
(f)Shareholders’ preference
3.Meaning of Capital Structure Capital structure refers to the mix between owners’ fund (equity) and borrowed funds (debt). Capital structure of a business affects both the profitability and financial risk of business. Since, use of equity and debt in the capital structure has both its merits and demerits, a judicious mix of both are used in the capital structure.
4.Optimal Capital Structure A capital structure is said to be optimal when the proportion of debt and equity is such that it results in the increase of shareholders’ wealth.
5.Factors Affecting Capital Structure
(i) Cash flow position (viii) Floatation costs
(ii) Interest coverage ratio (ix) Risk considerations
(iii) Debt service coverage ratio (x) Flexibility
(iv) Return on Investment (Rol) (xi) Control
(v) Cost of debt (xii) Regulatory framework
(vi) Tax rate (xiii) Stock market conditions
(vii) Cost of equity (xiv) Capital structure of other companies