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CA Intermediate · Financial Management and Strategic Management · Scope and Objectives of Financial Management

In the context of the scope of financial management, which of the following best describes the 'investment decision' of a firm?

The investment decision is about allocating the firm's funds to long-term assets and projects expected to generate future returns. Deciding the debt-equity mix is the financing decision, and profit distribution is the dividend decision, so only the allocation of funds to long-term projects describes investment.

  1. AChoosing the mix of debt and equity used to finance assets
  2. BDeciding how much of the profit is to be paid to shareholders
  3. CDeciding how to allocate funds to long-term assets and projects expected to yield future returnsCorrect
  4. DArranging short-term bank credit to meet daily cash needs

Explanation

The investment decision (capital budgeting) concerns committing funds to long-term assets and projects based on expected returns and risk. Choosing the debt-equity mix is the financing decision, and paying profits to shareholders is the dividend decision. Short-term credit relates to working capital management.

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