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Decisions that involve: (1) determining the proper amount of funds to employ in a firm; (2) selecting projects and capital expenditure analysis; (3) raising funds on the most favorable terms possible; and (4) managing working capital such as inventory and accounts receivable. Some of the factors that affect investment decisions, financing decisions and dividend decisions are listed in this assignment.
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2. Risk: Savings becomes investment because of the risk factor. Different investment
products have different risk. Government securities, bank deposits have higher safety and negligible risk. Equity shares have higher risk on the other end. It can give hige profit and at the same time has the potential to erode the capital. Risk and return are directly related. Higher the risk taken, higher can be the return, similarly low return comes with low risk.
5. Tax efficiency: Some investments offer tax benefits, while others don't. An ideal
investment is that which offers tax efficient return commensurate to risk with safety and liquidity.
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2. Financial Flexibility: This is essentially the firm's ability to raise capital in bad
times. It should come as no surprise that companies typically have no problem raising capital when sales are growing and earnings are strong. However, given a company's strong cash flow in the good times, raising capital is not as hard. The lower a company's debt level, the more financial flexibility a company has. The airline industry is a good example. In good times, the industry generates significant amounts of sales and thus cash flow. However, in bad times, that situation is reversed and the industry is in a position where it needs to borrow funds. If an airline becomes too debt ridden, it may have a decreased ability to raise debt capital during these bad times because investors may doubt the airline's ability to service its existing debt when it has new debt loaded on top.
4. Growth Rate
Firms that are in the growth stage of their cycle typically finance that growth through debt, borrowing money to grow faster. The conflict that arises with this method is that the revenues of growth firms are typically unstable and unproven. As such, a high debt load is usually not appropriate. More stable and mature firms typically need less debt to finance growth as its revenues are stable and proven. These firms also generate cash flow, which can be used to finance projects when they arise.
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4. Age of the Company: A companys age also determine the quantum of profits
to be declared as dividends. A new company should restrict itself to lower dividend payment due to saving funds for the expansion and growth as compared to the already existing companies who can pay more dividends. policy and vice-versa.
5. Taxation Policy: The tax policy of a country also influences the dividend policy
of a company. The rate of tax directly influences the amount of profits available to the company for declaring dividends.