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Investment Financing Dividend Decisions document sample
Investment Financing Dividend Decisions document sample
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. market. 3. Money market instruments 3. Capital market instrument includes: includes: Inter bank call money Shares Notice money up to 14 Debentures days 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 issuer. 3. It is not rooted in any particular 3. It has physical existence in the spot and has no geographical form of stock exchange. existence. 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: Aspect: 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 following: 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 Risks: 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 Risk: 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 Directors 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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