Factors that influence financial decision
What are the major financial decisions taken by a finance manager?
• Long-term investment decision
• Working capital decision
• Financing decision
• Dividend decision
2. Enumerate factors influencing a financial decision.
• Micro-economic factors, such as nature and size of enterprise, level of risk, liquidity
position, asset structure and ownership pattern, and attitude of management.
• Macro-economic factors, such as state of the economy and the governmental policy.
3. What are the objectives of financial decisions?
• Profit maximisation
• Maximisation of corporate wealth
4. When is profit maximised? Is it a suitable objective of financial decisions?
• Profit is the maximum at a point of output when revenue exceeds the cost by the widest
margin or when MR = MC.
• Although profit maximisation is in conformity with the rational behaviour of a firm and it
helps firm achieve monopoly powers in an imperfect product market, it does not consider
long-term period, nor does it consider the opportunity cost. Moreover, the measure of
profit is often inaccurate.
5. How is corporate wealth measured?
• CW = D E = A W
6. Why is corporate wealth maximisation a suitable objective?
• It benefits all the different parties related to the firm, such as shareholders, creditors,
managers, employees, consumers, etc.
7. Is there any problem in maximising corporate wealth?
• It is the agency problem when the managers do not act in the best interest of the
shareholders, and also the creditors clash with the shareholders.
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