Page 16 - DMGT409Basic Financial Management

Unit 1: An Overview of Financial Management

Financing decision is related to the financing mix or capital structure or leverage. While Notes

taking this decision, the financial manager has to determine the proportion of debt and
equity.
Dividend decision relates to dividend policy. Payment of dividends should be analyzed in
relation to the financial decision of a fi rm.

Financial management decisions are of different kinds but they are inter-related because the
underlying objective of all the three decisions is (same) the maximisation of shareholders’
wealth.

1.7 Keywords

Business Finance: It is that business activity which is concerned with the acquisition and

conservation of capital funds in meeting financial needs and overall objectives of business
enterprises.
Corporation: It is an association of two or more persons who contribute money or money’s worth

to a common stock and employs it in business, and who share profit and loss equally.
Corporate Finance: Corporate finance is the activity concerned with planning, raising, controlling

and administering of the funds used in the business.
Dividend: Dividend is a part of profits that are available for distribution to shareholders.

Financing Decision: It is related to the financing mix or capital structure or leverage and the
determination of the proportion of debt and equity.
Financial Management: It is the operational activity of a business that is responsible for obtaining
and effectively utilising the funds necessary for effi cient operations.
Investment Decision: Investment decision is related with the selection of assets, that a fi rm will
invest.
Wealth Maximization: It is maximizing the present value of a course of action (i.e. NPV = GPW

of benefits - Investment).
1.8 Self Assessment

Fill in the blanks:
1. Business Finance is wider than the ............................ .
2. ............................ Finance deals with the company form of business.
3. Maximization of ............................ is the main goal of fi nancial management.

4. ............................ and ............................ maximization are the goals of fi nancial management.
5. Profit maximisation ignores ............................ .

6. Equity shareholders’ expected return is equal to risk free rate plus ............................ .

7. ............................ is a conflict of interest between the agent and the owner.

State whether the following statements are true or false:
8. Traditional concept of finance was limited to acquisition of funds.

9. Investment decision, financing decision, dividend decision are the decisions of fi nance.
10. There is no relation among fi nance decisions.

LOVELY PROFESSIONAL UNIVERSITY 9