The first decision needs the Investment decision. Investment decision looks at which capital projects the company needs to invest its money behind. When it comes to capital projects, the company will have a lot of capital projects to select from as a profit-making entity, the company will consider a variety of capital projects at a given time. However, in order for the company to maximize shareholder wealth, it will have to select the optimal capital projects. To aid this decision, the financial manager can make use of investment appraisal techniques or in other words capital budgeting techniques. The main investment appraisal technique is the net present value or the NPV. Other than this technique, there are other investment appraisal techniques such as the IRR, MIRR, payback, discounted payback, and profitability index.
The second decision is the financing decision. This decision entails sourcing the upfront investment to fund the capital project. When it comes to the financing options, the financial manager can make use of the equity capital or the debt capital. The equity capital would include options such as making use of the company's existing retained earnings or issuing new shares in the Stock Exchange. If the company is financing the new project through debt capital, it can either pursue bank funding or issue new bonds.
The third key decision is the dividend decision. When the company has earned a positive after-tax net cash flow, it can distribute a part of the profit as a dividend to its shareholders. Dividends are gratuity payments for the contributions of the shareholders. When it comes to distributing dividends, the financial manager can select from many policies such as the constant dividend policy, the signaling policy, etc.
When it comes to these key financial decisions, there are no universally right or wrong decisions. The optimal decision for a given company will depend on many factors such as the industry of the company, the stage of the business life cycle the company is passing through, and many other considerations. Ultimately the financial management is responsible for shareholder wealth maximization and it needs to make these key decisions in a manner that will enable that ultimate objective.
