CCT College Dublin

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Module Title: Financial Management 2

Assessment Title: CA 1 Individual

Assignment

Lecturer Name: James O’ Connor

Student Full Raissa Treptow Dias

Name:

Student Number: 2022072

Assessment Due 05/11/2023

Date:

Date of 09/11/2023
Submission:

Declaration

By submitting this assessment, I confirm that I have read the CCT policy on Academic
Misconduct and understand the implications of submitting work that is not my own or does
not appropriately reference material taken from a third party or other source. I declare it to
be my own work and that all material from third parties has been appropriately referenced.
I further confirm that this work has not previously been submitted for assessment by
myself or someone else in CCT College Dublin or any other higher education institution.
Table of context
1. Introduction
2. Financial decisions
2.1 Financing Decisions
2.2 Investment Decisions
2.3 Dividend Decisions
2.4 Working Capital Decisions
3. Conclusion
4. Reference
1. Introduction

Financial Management is fundamental for companies to be successful and sustainable,

seeking its continuity, this management focuses on the study of the financial decisions made
by organizations. In this sense, financial decisions correspond to the set of activities that
involve the bases of administration, planning, analysis and control, with the objective of
maximizing the economic and/or financial results generated by business operations.

Through financial management, it is possible to carry out plans, analysis of

investments of viable means and sources that can finance operations and activities of the
company, always aiming at development, avoiding unnecessary expenses and observing the
best ways for results to be achieved.

In this context, investment decisions involve the entire process of identifying,

evaluating and selecting alternatives for resource investments. On the other hand, financing
decisions involve the definition of the nature of the funds invested, i.e., the structure of the
sources of capital required by the investment decisions. Investment and financing decisions
are structuring of an organization's assets and liabilities, being the set of elements that can
generate benefits to the agents involved. Decisions of this type, especially those aimed at
achieving long-term benefits, require analysis that takes into account the risk inherent in the
decision.

Thus, knowing that any type of investment can be influenced by both internal and
external factors, it is up to the manager to have a certain degree of sensitivity to recognize
and analyze which of these variables have the greatest impact on the investment project.
2. Financial Decisions

Businesses are created to make a profit through the provision of services or the sale of
products. From there, the managers must make decisions by answering questions such as:
Which product? Which service? For which market? By what means? With what materials?

The financial manager constantly has to make financial decisions at various levels, and
there usually are four (4) types of financial decisions associated with financial management:
financing decision, investment decision, dividend decision, and working capital decision.

Therefore, the finances of a business are the study of the decisions that must be made
regarding the company's money. Moreover, they are not just about financial decisions
because they involve the very purpose of the business's existence, which is profit; we are
talking about practically all the company's decisions. After all, to open, close, reduce, or
expand a business depends on finances, whether or not there is profitability.

2.1. Financing Decisions

When talking about financial decisions, Gitman and Madura (2003) state that when
firms need to obtain funds, their financing can be classified as debt financing, where funds
are obtained through bank loans or issuance of (private) debt securities, or equity, where
funds are obtained in exchange for equity in the firm. On the other hand, Soares et al. (2015)
identify that financing decisions focus on defining the nature of the sources of financing,
raising funds, and the degree of leverage, i.e., the capital structure that reports the investment
needs.

According to Khramov (2012), financing decisions are crucial to any business's

emergence, maintenance, and growth. Financial managers must be cautious – and even
conservative – in their funding decisions. Complementary to this, Gitman and Madura (2003)
explain that financial managers must work with maximum attention, observing the following
key aspects: First, short- and long-term funding levels must be established. A second, equally
important concern is determining the best sources of funding.

As Neto (1997) explained, the first aspect of financing analysis is its financial cost.
What is the interest rate? Are there taxes? To answer these questions, financial managers
need to evaluate aspects such as the availability of credit, competition from the banking
sector, business return, default risk, interest rate, level of economic activity, and competitive
advantages. In the same way, Gitman and Madura (2003) state that the second aspect of
financing refers to the period of the operation. Depending on its goals, the company needs to
define whether the financing will be short-term (up to 12 months) or long-term (more than 12
months). Finally, the third critical aspect concerns the type of funding. As explained by
Gitman (2003), there are two types: debt financing and equity and the financial manager
needs to find the best composition for the debt as equity financing provides profits to
investors and debt financing is less risky for shareholders than equity, i.e., debt financing uses
the resources of third parties.

For Modigliani and Miller (1958), the firm's market value does not depend on
financial structure decisions since the quality of investment decisions usually determines this
value. On the contrary, Gitman and Madura (2003) D'Espallier e Guariglia (2012), and
Khramov (2012) agree that investment decisions involve the process of analysis, evaluation,
identification, and selection of alternatives for the application of resources, different from the
financing decisions that permeate the definition of the nature of the funds raised, regardless
the differences, these two decisions are made on an ongoing basis and integrated.

As an example, in order to finance the expansion of its production capacity, the

company ABC studied several strategies and came to the conclusion that to achieve this goal,
it needed to choose between issuing new shares or taking out a bank loan, and it is necessary
to decide on the optimal combination of equity and debt to finance the project considering
factors such as cost of capital, risk tolerance, and existing financial obligations.

2.2. Investment Decision

According to Negi and Manoher (2012), investments can be divided into exterior or
interior assets. Exterior assets are the purchases of land, buildings, and securities traded on
stock exchanges. In the category of interior assets are expenses with machinery, fittings, and
furniture. For both cases, it consists of an analysis of the cash flow projection. However, from
the business perspective of Mithá (2009), the concept of investment is associated with a
decision of a strategic nature. It consists of mobilizing financial, human, and material
resources to create more wealth for the entrepreneur.

Based on the ideas of Lippit et al. (1988), investment decisions depend on several
factors, such as the obsolescence of assets, changes in industry demand, the availability of
financial, human, and material resources, and the existence of new technologies, among other
factors. On the other hand, Bruni and Famá (2007) state that the process of evaluating the
investment decision consists of two analyses: one quantitative, estimating future cash flows
within the projection period, and the other qualitative, involves the reasonableness of the
process and is strictly subjective, as it is up to each company analyze the project.

Kalecki (1937) says that the investment decision arises according to the expectations
of future demand; if demand increases due to economic expansion, companies consequently
increase their investments, and in a situation of economic recession, companies reduce/adjust
their investments. In contrast, Keynes (1936) explained that entrepreneurs formulate their
investment decisions considering the expected return, called marginal efficiency, resulting
from comparing the expected return rate and the respective opportunity cost of the capital
invested.

In this way, it is understood that the investment decision assumes a decisive role in the
life of companies, being important in their creation, growth, and modernization and
represents, above all, an application of long-term resources to respond to market
opportunities and threats, creating or reinforcing their strategic potential.

For example, company ABC is evaluating two new investment projects; Project A
involves launching a new product line, and Project B involves a cost-saving production
automation initiative. In this case, using techniques such as the calculation of the net present
value (NPV) and the calculation of the internal rate of return (IRR), the company must decide
which project will be most interesting to proceed with based on the expected cash flows,
initial investment costs, and projected return on investment.

2.3. Dividend Decision

According to Frankfurter, Wood, and Wansley (2003), dividends are the distributions
of profits in tangible assets among the company's shareholders in proportion to their holdings.

The first discussions related to the subject arose when Lintner (1956) found the
relevance of the dividend policy for investors, considering it an element of significant
influence on the market valuation of companies. According to the author, managers are
reluctant to change their profit distribution policies, opting to stabilize payout rates. In this
way, entities could minimize the risk of being forced to cut dividends in the future. This
decision could be misinterpreted by investors and other external stakeholders, negatively
affecting the companies' share pricing. In the opposite direction, Miller and Modigliani
(1961) argue that dividend policy is irrelevant to maximizing shareholder wealth. In the
authors' view, the distribution of profits implies a future devaluation of the company's shares.
In the same way, the retention of cash leads to a subsequent appreciation of the shares, so this
trade-off will always exist. All these arguments are based on a perfect market, which is
inconsistent with reality.

According to Lintner, Gordon (1963) was among the first researchers to challenge
Miller and Modigliani's ideas. The author believes a dividend policy is essential for a firm's
market value. According to the bird-in-the-hand theory, the behavioral character of investors
is justified by future uncertainties. Shareholders prefer to receive dividends today rather than
dubious future capital gains. Since then, several theories and studies have been developed to
examine the determinants of dividend policies. According to Easterbrook (1984), companies
pay dividends to mitigate the costs arising from the main problem since lower retention of
profits consequently reduces the cash flow available to managers. On the other hand, Fama
and French (2001) attest that companies with high profitability and low growth prospects are
more likely to pay dividends, while those with the opposite characteristics to those mentioned
tend to retain cash flows.

To illustrate, the corporation has generated a significant number of profits. Now, the
company's board of directors must decide whether to distribute these profits to shareholders
as dividends or retain them for reinvestment in the business. The decision will depend on the
company's financial health, growth opportunities, and shareholder expectations.

2.4. Working Capital Decision

Brigham (1999) states that working capital is the company's investment in short-term
assets. On the other hand, according to Marques (2004), working capital plays a relevant role
in the operational performance of companies, generally covering more than half of their total
invested assets.

For Gitman (2001), the decision to invest in working capital and the strategy for
financing this investment is among the most complex decisions within the business activity
and aim to anticipate information such as how much the company will need to finance from
net investment in its working capital, with how much of net strategic sources it can count on
to finance this investment,

and whether it will also need to use short-term net bank debt for such a purpose or whether it
will need to maintain financial slack. In contrast, Silva (1997) suggests that the understanding
of working capital is inserted in the context of short-term financial decisions involving
managing current assets and liabilities. Every company needs to seek a satisfactory level of
working capital to ensure its operational life's sustainability.

When deciding how to invest in working capital, the company's management will
define how much working capital needs to be financed or how much leftovers from
spontaneous short-term sources it will have to apply financially. In the company's accounting,
the value of the working capital requirement is evidenced by the difference between the total
investments in assets and rights realizable in the short term and the short-term sources, which
are directly related to the operational cycle of the enterprise.

For example, the GHI retailer needs to manage their working capital effectively. To do
so, they need to determine the appropriate levels of cash reserves, inventories, and accounts
receivable to support their day-to-day operations, including deciding when to pay suppliers
and how to collect outstanding payments from customers while ensuring sufficient liquidity
to cover expenses.
3. Conclusion

Financial decisions are based on several assumptions, which fully support their
statements and models. There are significant concerns in discussing the relaxation of these
assumptions and their practical reflections on Financial Management. Progress in this
direction is considerable, allowing more excellent proximity between financial theory and the
reality of the market and companies.
The financial decisions of companies are not defined based on the assumptions of an
exact science in which absolute proof of results is allowed. The factors considered in
decision-making seek to portray the reality of the economic environment and are also based
on certain assumptions and behavioral hypotheses. Every decision-making model, for
example, develops expectations for establishing the expected results, the forecast period, and
the definition of the economic attractiveness rate of the enterprise.
Despite the limitations and difficulties inherent to the financial interdependence of
business decisions, many companies have been developing and overcoming difficulties and
barriers imposed by a financial market that is not adjusted to the balance of companies.
4. References
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FIPECAFI.

Brigham, E. (1999) Fundamentos da moderna administração financeira. São Paulo:

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Bruni, A. and Famá, R. (2007) Decisões de Investimentos. São Paulo: Editora Atlas.

D'Espallier, B. and Guariglia, A. (2012). Does investment opportunities bias affect the
investment-cash flow sensitivities of unlisted SMEs? The European journal of finance.

Frankfurter G., Wood B. and Wansley J. (2003). Dividend Policy: Theory and
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Gitman, J. and Madura, Jeff. (2003) Administração Financeira: uma abordagem

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