Investment and Financing Decisions

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Questions and Answers

What is the primary concern when making long-term investment decisions?

Minimizing operational costs

Expanding market reach

Maximizing shareholder returns with minimum risk (correct)

Increasing employee productivity

Which of the following is NOT a factor considered when declaring dividends?

Trend of earnings

Stability in dividends

Cash flow situation

Market share of assets (correct)

Which financing source is classified as borrowed funds?

Debentures (correct)

Preference share capital

Retained earnings

Equity share capital

What characterizes long-term finance functions or decisions?

They impact the firm's performance and value in the long run Signup and view all the answers

Which decision is associated with the sale of less profitable assets?

Investment decisions Signup and view all the answers

In financing decisions, what is considered an optimal capital structure?

A balanced approach maximizing market value with minimized risk Signup and view all the answers

What is a key aspect of investment decisions related to profits?

They involve deciding to retain or distribute profits Signup and view all the answers

Which factor is important for assessing risk in investment proposals?

Future earning projections Signup and view all the answers

Which of the following are methods a company can use to manage its dividends?

Identifying the rate of dividends Signup and view all the answers

What is a primary responsibility of the cash manager in a firm?

Maintaining daily cash balances Signup and view all the answers

What is one key purpose of cash management for a financial manager?

Payment of wages and salaries Signup and view all the answers

Which of the following techniques can be used for financial control?

Financial forecasting Signup and view all the answers

What role does a financial analyst perform in a company?

Prepares the firm's financial plans and budgets Signup and view all the answers

What aspect of financial management may include evaluating proposed long-term investments?

Capital expenditure management Signup and view all the answers

Which component is NOT part of the financial environment?

Human resources management Signup and view all the answers

Which role is responsible for monitoring and collecting accounts receivable?

Credit analyst/manager Signup and view all the answers

What is the primary goal of a sound financial structure?

Maximize shareholders' return with minimum risk Signup and view all the answers

Which of the following is NOT an important aspect of investment decision?

Maximizing short-term profits only Signup and view all the answers

What does the determination of capital composition primarily involve?

Comparison of long-term and short-term debt and equity Signup and view all the answers

What factor influences the choice of sources of funds?

Relative merits and demerits of each resource Signup and view all the answers

What is the role of the financial manager in the estimation of capital requirement?

To make estimations based on future costs, profits, and policies Signup and view all the answers

In terms of fund allocation, what must a financial manager consider?

Making decisions that ensure safety and regular returns Signup and view all the answers

What does disposal of surplus refer to?

Decisions on dividend declaration and retained earnings Signup and view all the answers

Which of the following is a source of funds for financial managers?

Loans from banks and financial institutions Signup and view all the answers

Which of the following best describes financial institutions?

They channel the savings of individuals, businesses, and governments into loans or investments. Signup and view all the answers

What distinguishes a public offering from a private placement?

Private placements involve selling securities directly to a specific group of investors. Signup and view all the answers

Which of the following represents negotiable financial instruments?

Assets that can include bonds, shares, and foreign currency. Signup and view all the answers

What is an Initial Public Offering (IPO)?

The first issuance of a corporation's shares to the public. Signup and view all the answers

Which type of market allows suppliers and demanders of funds to conduct business directly?

Financial markets in general. Signup and view all the answers

What is a key difference between money markets and capital markets?

Money markets primarily facilitate the trading of short-term debt instruments. Signup and view all the answers

Which of the following markets is specifically referred to as a centralized market?

Philippine Stock Exchange. Signup and view all the answers

What is typically a characteristic of primary markets?

They facilitate the sale of new securities directly from issuers. Signup and view all the answers

What is the main objective of profit maximization?

Earning a large amount of profits Signup and view all the answers

Which of the following is a drawback of profit maximization?

It ignores the time value of money Signup and view all the answers

Wealth maximization is also known as which of the following?

Net present worth maximization Signup and view all the answers

Which of the following is NOT a merit of wealth maximization?

It ignores risk Signup and view all the answers

How does wealth maximization differ from profit maximization in terms of time orientation?

Wealth maximization emphasizes long-term planning Signup and view all the answers

What does NPV stand for in the context of wealth maximization?

Net Present Value Signup and view all the answers

Which concept emphasizes the recognition of both risk and uncertainty?

Wealth maximization Signup and view all the answers

Economic Value Added (EVA) is calculated by subtracting what from after-tax operating benefits?

Cost of capital Signup and view all the answers

Study Notes

Investment Decisions

Key questions involve business engagement, acquisitions, property management, and modernization of facilities.
Considering future uncertainties, both expected returns and associated risks must guide investment proposals.
Investments require capital allocations to long-term assets and managing funds from selling unproductive assets.
Wise decisions involve decomposing depreciated assets to reallocate funds to more profitable ventures.

Financing Decisions

Financing entails acquiring necessary funds for long-term investments, assessing various sources for advantages and disadvantages.
Financing options include equity from shareholders (equity shares, preference shares, retained earnings) and external borrowings (debentures, loans).
A sound financial structure maximizes shareholder returns while minimizing risk to enhance market value and optimize capital structure.

Long-Term vs. Short-Term Decisions

Long-term decisions relate to strategies that affect the firm’s performance and value over a year or more.
Senior management plays a crucial role in making long-term financial decisions affecting company strategy.

Importance of Capital Budgeting

Investment decisions relate to appropriating profits, primarily focused on retaining profits or distributing them as dividends.
Factors influencing dividend declarations include earnings trends, cash flow situations, and future growth requirements.

Functions of Financial Management

Estimation of Capital Requirements: Involves projecting costs, profits, and policies to enhance earning capacity.
Determination of Capital Composition: Involves analyzing short-term and long-term debts against equity capital.
Choice of Sources of Funds: Based on merits and demerits of resource options, including shares, debentures, and loans.
Investment of Funds: Allocating funds into profitable investments ensures safety and regular returns.
Management of Cash: Focuses on cash flow for operational needs, such as paying salaries and maintaining stock.
Financial Control: Involves planning and controlling finances through techniques like ratio analysis and financial forecasting.

Roles of Financial Managers

Cash Manager: Maintains daily cash balances and oversees cash collection and disbursement.
Credit Analyst/Manager: Manages the firm's credit policies and monitors accounts receivable.
Financial Analyst: Prepares financial plans, budgets, and forecasts.
Capital Expenditures Manager: Evaluates long-term investments and oversees their financial aspects.
Project Finance Manager: Arranges financing for approved projects and coordinates with external consultants.
Pension Fund Manager: Manages pension fund assets and liabilities.

Financial Environment Components

Financial Institutions: Channel savings into loans or investments (e.g., banks, cooperatives).
Financial Securities: Tradable assets such as stocks, bonds, and currencies.
Financial Markets: Platforms for transactions between fund suppliers and demanders, including organized and centralized markets.

Market Types

Primary vs. Secondary Markets: Differentiates between initial sales of securities and subsequent trading.
Spot vs. Futures Markets: Spot markets involve immediate transactions, while futures involve contracts for future delivery.
Tertiary Markets: Deal with complex transactions that involve multiple transfer layers.

Profit vs. Wealth Maximization

Profit Maximization: Focuses on maximizing immediate profits; criticized for ignoring time value, risk, and long-term sustainability.
Wealth Maximization: Aims to maximize shareholder value over time, taking into account the time value of money, risk, and market considerations.

Merits and Drawbacks

Profit Maximization: Offers efficient resource allocation; detracted by ambiguity and risk neglect.
Wealth Maximization: Encourages long-term focus and risk consideration; well-aligned with stakeholders' interests.

Conclusion

Financial management objectives are central to enhancing firm sustainability and stakeholder wealth while navigating the complexities of investment, financing, and market dynamics.

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Description

This quiz covers the essential aspects of investment and financing decisions including business engagement, capital allocation, and the evaluation of financing sources. It also delves into the differences between long-term and short-term strategic choices. Test your understanding of how to optimize financial structures and allocate resources effectively.