Investment Financing Dividend Decisions by tue52347


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									37. Inter-relationship Between Investment , Financing
And Dividend: Three major functions of finance department are :

             Financing Decision: This function is mainly concerned
             with determination of optimum capital structure of the
             company keeping in mind cost , control and risk. It is also
             known as Procurement of Fund.

             Investment Decision: It is also known as Effective
             Utilization of Fund. In this respect finance department has
             to identify the investment opportunities and to choice the best
             one , after a proper evaluation.

             Dividend Decision: The finance manager is also
             concerned with the decisions to pay or declare dividend. He
             assists the top management to decide the portion of profit to
             be declared as dividend.

So far the objective is concerned , the above stated three functions are same
i.e. maximizing shareholders wealth. As their objectives are same the
decisions are interrelated. A company having profitable investment
opportunities , generally prefer lower dividend pay out ratio. On the other
hand having a good investment means profit of the company would be
more and more dividend can be paid to shareholders. Similarly , finance
function and investment functions are also highly correlated. Cost of
capital plays a major role whether to accept or not an investment
opportunities. Financing decisions also dependent on amount of to be
retained in the profit.

So , we can conclude that investment , financing and dividend decisions are
interrelated and are to be taken jointly keeping in view their joint effect on
the shareholders wealth.

38. Distinction Between Capital Market And Money
Market: Capital markets are markets for financial instrument ( e.g.
bonds , shares , etc.) with maturities of more than one year i.e. they are
markets for long term securities.
      On the other hand a money market may be defined as the market for
lending and borrowing of short term funds. The differences between these
two are as follows:

         Money Market                            Capital Market
1. It deals for funds of short term     1. It deals with funds of long term
requirement.                            requirement.
2. There is no classification between   2. There is a classification between
primary market and secondary            primary and secondary market.
3. Money market instruments             3. Capital     market     instrument
includes:                               includes:
             Inter bank call money                   Shares
             Notice money up to 14                   Debentures
             Commercial Papers
             91 days treasury bill
4. The participants are banks ,         4. The participants are retail
financial institutions , RBI ,          investors , Mutual Funds , Financial
Government , etc.                       Institutions , banks , etc.

39. Distinction Between Primary And Secondary
Market: Primary market is the market which deals with new issue of
securities only. On the other hand , in secondary market securities already
issued are being traded.

        Primary Market                        Secondary Market
1. It deals with new securities       1. It deals with old securities
2. It provides funds to the issuer    2. It does not provide funds to the
3. It is not rooted in any particular 3. It has physical existence in the
spot and has no geographical form of stock exchange.

40. Distinction Between Forward And Future
Contract: Both of them are contracts under which an underlying asset
is to be traded on a future date at a predetermined price. Till there are
some differences in between these two as follows:

             Forward                                  Future
1. These are private bilateral          1. These are standardized contracts
contracts.                              traded in the market.
2. Price not publicly disclosed.        2. Price is transparent
3. Liquidity problem is high            3. Liquidity problem is very low.
4. Settlement on a specific day         4. Range of delivery days
5. Settlement at the end only.          5. Daily settlement
41. Issues To Be Covered By Indian Investor For
Evaluation Of Foreign Investment Proposal: Following
are the issues to be considered by an Indian Investor for evaluation of
Foreign Investment Proposal:
            Tax Aspect: The tax structure varies from country to country.
            For the evaluation of investment in foreign country , tax
            structure of that country is to be studied very carefully.
            Because , tax plays a very important role to determine cash
            flow. Variation may be with respect to one or more of the
            a) Many countries rely heavily on indirect taxes.
            b) Definition of taxable income
            c) Exemption for special type of projects
            d) Double taxation avoidance agreement

            Political Risks: It refers to the probability that an overseas
            political event will affect adversely the domestic firm. Each
            country has a right to establish rules and regulations
            governing the operation of business. The risk may be with
            respect to one or more in the following ways:
            a) Expropriation of foreign projects without compensation or
            for inadequate consideration.
            b) Non-convertibility of foreign currency into home currency.
            c) Government control over day to day operations
            d) Some government may require certain amount of domestic
            equity participation
            e) Unstable government

            Economic Risk: Two principal economic risks are exchange
            rate fluctuation and inflation rate.

42. Restrictive Covenants By Lender To Borrower: In
case term loan the lender may impose some restrictions/requirements in
addition to the asset security , to protect itself. Normally they are in any
one or more of the following form:
             Maintenance of minimum asset base
             Restriction on raising additional debt
             Restriction on payment of dividend , capital expenditures , etc.
             Appointment of suitable staff , representative in the Board of
             Convertible option of loan into equity.
43. Green Shoe Option: It is an option that allows the underwriter
of an Initial Public Offer to sell additional shares if the demand is high.
Looking to the exceptional interests of investors in terms of
oversubscription of the issue , certain provisions are made to issue
additional securities for distribution. It is a special features of euro issues.
      In Indian context green shoe option has a limited connotation. SEBI
guideline includes appropriate provisions for accepting oversubscription.

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