Menu
- 10 Marks
Question
K-Force Ltd, a newly established security company, has constituted its first board of directors. The directors are expected, among others, to take financial decisions in the areas of investment, financing, and dividend payment. A consultancy firm has been engaged to run an orientation program for the directors in the coming week.
You work with the consultancy firm that has been engaged to run the orientation program for the new directors. You have been asked by your boss to prepare briefing notes on the specific roles the directors are expected to play in the three fundamental decision areas and the constraints that government policies might impose on them.
Required:
Prepare a briefing note on the nature of the three fundamental decision areas. Specifically, the briefing notes should cover the objective of each class of decision; TWO (2) specific decisions the directors are expected to take in each class of financial decisions; and TWO (2) factors in the external environment they should consider when making financial decisions.
Answer
Investing decisions
Investing decisions relate to the acquisition and disposition of assets that would generate cash flows for the firm. The objective is to achieve optimal allocation of limited resources to investment opportunities. Directors are expected to make decisions such as:
- Deciding on growth strategy, whether to employ internal or external growth strategies.
- Deciding on the proportion of the components of assets needed to achieve the firm’s objectives.
Financing decisions
Financing decisions are related to the mix of the various types of finance the firm should use. The objective is to minimize the risk and cost of finance. Directors are expected to make decisions such as:
- Deciding on the blend of equity and debt in the financing structure.
- Deciding on the method of issuing new securities.
Dividend decisions
Dividend decisions are related to the payment of dividends and retention of earnings for reinvestment. The objective is to achieve a balance between meeting shareholders’ expectations of current dividends and reinvesting enough earnings to achieve targeted growth. Directors are expected to make decisions such as:
- Deciding on whether to recommend payment of dividends or reinvestment of earnings.
- Deciding on the amount of dividend to recommend.
Relevant factors in the external environment
Directors should consider the following external factors when making financial decisions:
- Laws and regulations
- Economic factors
- Tags: Dividend Policy, Financing decisions, Investment decisions
- Level: Level 2
- Topic: Introduction to Financial Management
- Series: MAY 2020
- Uploader: Theophilus