Overview of Financial Decision Analysis

Presented by: Abha Moradia

Financial Decisions are related to:

The firms financial position The nature of the firms business The everyday financial activities in the business The firms future prospects

Types of Financial Decisions

Capital Budgeting Capital Structure Working Capital Management Dividend

Capital Budgeting Decisions

The process of planning and managing a firms long-term investments Includes Expansion, Acquisition, Modernisation & Replacement decisions Concerns:

Evaluate the size, timing and risk of the cash flows Measurement of cut-off rate

Importance of Capital Budgeting

These decisions:

Influence the firms growth in the long run Affect the risk of the firm Involve commitment of large amount of funds Are mostly irreversible Are complex due to the uncertainty of future events

Capital Structure Decisions

The mixture of debt and equity maintained by a firm Concerns:

How much the firm should borrow? What are the least expensive sources of funds?

Importance of Capital Structure

It influences shareholders risk, return and value Difficulty in deciding the optimum financing mix Debt is cheaper than equity but higher amounts of debt increases risk

Working Capital Management

A firms short-term assets and liabilities Concerns:

How much current assets are needed? Devising the credit policy Short term financing sources

Importance of Working Capital Management

It affects the firms profitability and liquidity It influences the risk of insolvency Fluctuating needs with business activity

Dividend Decisions

The distribution or retention of the firms earnings to the shareholders Concerns:

Devising the dividend policy Deciding the optimum dividend payout ratio

Importance of Dividend Decisions

It influences the market price of the share It affects the shareholders value It affects the cash position of the firm

Financial Sector in India

Legal framework has been liberalised Privatisation of businesses Freedom in designing and pricing the securities Market-determined interest rates Aware customers and investors Introduction of derivatives and other complex financial instruments

Challenges for the Financial Sector in India

Investment Planning Financial Structure Mergers, Acquisitions and restructuring Working Capital Management Performance Management Risk Management Investor relations

Thank you!