How are the investment decision and financing decision related?

Question:

How are the investment decision and financing decision related?

Finance:

Finance refers to the study of the way an organization should efficiently invest its assets for the maximization of returns over a certain period. It determines the future value of an asset. It essentially shows how funds are managed and assets allocated over a certain period.

Answer and Explanation:

  • Investment decision shows the decisions that are made by the senior management and investors concerning the fund level that should be directed in an investment opportunity. It is generally the selection of an asset to which a firm would invest its funds, which would lead to the company experiencing the highest rates of return over a certain stated period.
  • Financing decision shows the process conducted by a finance department that includes the allocating funds that are needed for investment, payment of the needs of the company, and borrowing of the funds. It can be done by the use of the funds of the company or through seeking external funds.

The decisions are related since their main aim is the maximization of the value of shareholders. The investment decisions' focus is the allocation of funds for value maximization while for financing decisions; it is the payment of the company's expenses and investments. They are connected in the way funds are spent and borrowed.


Learn more about this topic:

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What Is Financing? - Definition & Types

from Corporate Finance: Help & Review

Chapter 8 / Lesson 7
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