Module 3:

Financing, Investment &

Dividend decisions
• Financing decisions refer to the decisions that companies need to
take regarding what proportion of equity and debt capital to have in
their capital structure.
• Investment decision refers to selecting and acquiring the long-term
and short-term assets in which funds will be invested by the
business.
• Dividend decision relates to how much of the company's net profit is
to be distributed to the shareholders and how much of it should be
retained in the business for meeting the investment requirements.
This decision should be taken keeping in mind the overall objective of
maximising shareholders' wealth.
FINANCING DECISIONS:
• Capital structure: capital structure is the permanent long-term
financing that is represented by long-term debt, preference share
capital, equity share capital and retained earnings.
Factors affecting capital structure:
a)Internal factors:
• Nature of business
• Regularity and certainty of income
• Desire to control the business
• Future plans
• Attitude of management
• Freedom of working
• Operating ratio
• Trading on equity
b)External factors:
• Conditions of capital market
• Nature and type of investors
• Cost of capital
• Legal requirement
LEVERAGES:
• Leverage is used to describe the firm’s ability to use
fixed assets or funds to increase the returns to its
owners;i.e.,equity shareholders. It must note that
higher is the degree of leverage higher is the risk as
well as return to the owners.
TYPES OF LEVERAGES:
• Operating leverages
• Financial leverages
• Combined leverages