Fianancial Marketing

1) Discuss the three broad areas of Financial Decision Making?

A:

Finance functions deal with the functions performed by the finance manager. They are closely related to financial decisions. In the course of performing these functions, finance manager takes several decisions

· Finance decisions

· Investment decisions

· Liquidity decisions

· Dividend decisions

· Organization of a finance function

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Figure: Finance manager decisions

Finance decisions

Financing decisions relate to the acquisition of funds at the least cost. Cost has two dimensions:

· Explicit Cost

· Implicit cost

Explicit cost refers to the cost in the form of coupon rate, cost of floating and issuing the security.

Implicit cost is not a visible cost but it may seriously affect the company’s operations especially when it is exposed to business and financial risk

In India, if a company is unable to pay its debts, creditors of the company may use legal means to sue the company for winding up. This risk is normally known as risk of insolvency. A company which employs debt as a means of financing normally faces this risk especially when its operations are exposed to high degree of business risk.

In all financing decisions, a firm has to determine the proportion of equity and debt. The composition of debt and equity is called the capital structure of the firm.

Debt is cheap because interest payable on loan is allowed as deductions in computing taxable income on which the company is liable to pay income tax to the Government of India.

An investor in a company’s shares has two objectives for investing:

· Income from capital appreciation (capital gains on sale of shares at market price)

· Income from dividends

It is the ability of the company to give both these incomes to its shareholders that determines the market price of the company’s shares.

The most important goal of financial management is maximization of net wealth of the shareholders. Therefore, management of every...