Chp9: Investment Principles

Question 1

What are the 4 main types of financial decisons?

Answer 1

1) Investment Decision
2) Capital Rationing Decision
3) Financial Decision
4) Capital Market Decision

Question 2

What is under Investment Decision?

Answer 2

• Profitable investments must be identified:
• 1) Acceptance of projects based on NPV and ROR
• 2) Availability of funds

Question 3

What is under Capital Rationing?

Answer 3

• Funds for investment: How much?
• Internal funds
• Borrowed funds

Question 4

What is under Financial Decision?

Answer 4

• From the capital market:
• What financial instruments?
‐ Issue new shares
‐ Issue bonds

• Obtain Loans:
• Long-term
• Short-term

Question 5

What is under Capital Market Decision?

Answer 5

• Individuals and organisations with cash willing to invest in firms to obtain a return.
• Borrowing firm must trade its capital instruments or physical assets as securities.

Financial Method:
1)Equity Financing 2)Bond Financing 3) Loan (Short &Long)

Securities:
1) New Shares 2) Bonds 3) Physical Assets

Question 6

Role of Financial Manager?

Answer 6

1) Investment Decisions: Buy real assets that would acquire value more than they cost.
2) Financing Decision: Find financing instruments that can best meet the firm’s needs.
3) Valuation: Estimates the value of the real assets.

A financial manager acts as an intermediary between the firm’s operations and the capital markets and manages the flow of cash as shown in figure below.

DRAWWW FIGURE!

1) Cash raised from investors
2) Cash invested in firm’s operations
3) Cash generated from firm’s operations
4) Cash returned to investors
5) Cash reinvested