The Investment Decision, the Financing Decision and the Dividend Decision Are Sides of the Financial Management Triangle with Visible Interface. Examine This Statement Critically

1666 Words Nov 9th, 2011 7 Pages
THE INVESTMENT DECISION, THE FINANCING DECISION AND THE DIVIDEND DECISION ARE SIDES OF THE FINANCIAL MANAGEMENT TRIANGLE WITH VISIBLE INTERFACE. EXAMINE THIS STATEMENT CRITICALLY

A SEMINAR PAPER PRESENTED IN PARTIAL FULFILMENT OF COURSE REQUIREMENT FOR MANAGERIAL FINANCE

BY

EMUCHAY KENNETH AZUBUIKE

M.SC / FINANCE

MATRIC NO: LUC/PG/09/

LEAD CITY UNIVERSITY, IBADAN

LECTURER: PROF WOLE ADEWUMI

INTRODUCTION:

In illustrating the relationship between the investment, financing and dividend decision angles of financial management we would first need to have a clear understanding of the concept of financial management as it relates to economic organizations.
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To achieve the goal of corporate finance entails that any corporate investment be financed adequately and this involves identifying and determining the ‘’OPTIMAL MIX’’ of financing or capital structure that will result in maximum value.

The source by which an organization is funded is through combination of debts (both long term and short terms) and equity (share capital). The financing decision involves deciding on the level of funds required, which type of funds to raise and the raising of the funds. In deciding the level and type of funds to raise, the firm has to know the cost and risk of each type of capital.

Financing an investment through debt results in a liability that must be serviced, thus affecting cash flow independent of the project’s degree of success. Equity financing is less risky with respect to cash flow commitment but will results in a dilution of ownership, control and earning. Management must also attempt to match the financing mix to the asset being financed closely in terms of both timing and cash flow.

One of the main theories of how firms must make their financing decision is the pecking order theory which suggest that a firm should avoid external financing while making available internal financing and also avoid new equity financing while they engage in new debt financing at a reasonably low interest rate. Another major theory is the trade-off theory in which firms are assumed to trade off their tax benefits of debt with

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