It relates to the management of current assets. Investment in current assets is popularly termed as “working capital management”. (ii) Short-term Assets (current assets – raw materials, work-in-process, finished goods, debtors, cash, etc.,) that can be converted into cash within a financial year without diminution in value. It may be defined as the firm’s decision to invest its current funds most efficiently in fixed assets with an expected flow of benefits over a series of years. Investment in long-term assets is popularly known as “capital budgeting”. (i) Long-term Assets (fixed assets – plant & machinery land & buildings, etc.,) which involve huge investment and yield a return over a period of time in future. The required assets fall into two groups: In other words, investment decision relates to the selection of assets, on which a firm will invest funds. It begins with a determination of the total amount of assets needed to be held by the firm. It is more important than the other two decisions. Firm may not take these decisions in a sequence, but decisions have to be taken with the objective of maximising shareholders’ wealth. The contents of modern approach of financial management can be broken down into three major decisions, viz., (1) Investment decision (2) Financing decision and (3) Dividend decision.Ī firm takes these decisions simultaneously and continuously in the normal course of business. Types of Financial Decisions – 3 Types: Investment Decision, Financing Decision and Dividend Decisionįinancial management is concerned with the acquisition, financing and management of assets with some over all goals in mind. If tax on dividend is higher, company will prefer to pay less by way of dividends whereas if tax rates are lower, then more dividends can be declared by the company. Taxation policy- A company is required to pay tax on dividend declared by it. In such case the amount of dividend depends upon the degree of expectations of shareholders.Ħ. In case shareholders desire for dividend then company may go for declaring the same. Preference of shareholders- While deciding about dividend the preference of shareholders is also taken into account. Cash flow positions- Dividends involve an outflow of cash and thus, availability of adequate cash is foremost requirement for declaration of dividends.ĥ. Growth prospects- In case there are growth prospects for the company in the near future then, it will retain its earnings and thus, no or less dividend will be declared.Ĥ. The dividend per share is not altered in case earning changes by small proportion or increase in earnings is temporary in nature.ģ. Stability of dividends- Companies generally follow the policy of stable dividend. Earnings- Company having high and stable earning could declare high rate of dividends as dividends are paid out of current and past earnings.Ģ. The decision regarding dividend should be taken keeping in view the overall objective of maximizing shareholder s wealth.ġ. A financial decision which is concerned with deciding how much of the profit earned by the company should be distributed among shareholders (dividend) and how much should be retained for the future contingencies (retained earnings) is called dividend decision.ĭividend refers to that part of the profit which is distributed to shareholders.
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