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1
OVERVIEW OF FINANCIAL DECISIONS
UNIT 1
Nature of Long Term Financial Decisions 5
UNIT 2
Cost of Capital 25
UNIT 3
Capital Structure Decisions 47
1
Overview of Financial
Decisions Course Design Committee and Preparation Team
Prof. R.S. Dhankar Prof. R.M. Srivastava
University of Delhi Course Editor
New Delhi Banaras Hindu University,
Varanasi
Prof. K.V. Rao
Nagarjuna University, Prof. B.B. Khanna
Nagarjuna Nagar, Director
Guntur School of Management Studies
IGNOU, New Delhi
Prof. M.S. Narasimhan
Indian Institute of Management, Dr. K. Ravi Sankar
Bangalore School of Management Studies
IGNOU, New Delhi
Prof. M. Chandra Sekhar
Indian Institute of Ms. Anjali Ramteke
Advanced Management, School of Management Studies
Visakhapatnam IGNOU, New Delhi
Print Production
Mr. A S. Chhatwal Mr. Tilak Raj Ms. Sumathy Nair
Asstt. Registrar (Publication), Sr. Scale Section Officer (Publication) Proof Reader
SOMS, IGNOU SOMS, IGNOU SOMS, IGNOU
June, 2004
ISBN-81-266-1277-0
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or
any other means, without permission in writing from the Indira Gandhi National Open
University.
Further information about the Indira Gandhi National Open University courses may be obtained
from the University’s Office at Maidan Garhi, New Delhi-110 068.
Printed and published on behalf of the Indira Gandhi National Open University, New Delhi,
by Director, School of Management Studies.
Unit 1 deals with Nature of Long term Financing Decisions. In this unit we
discuss about Investment Decisions, Financing Decisions & Dividend Policy
Decisions and inter relationship among these decisions. While taking investment
& financing decisions one crucial factor which has to be taken into
consideration is the time value of money. Time value of money concept has
application in determining present value & terminal value, implied interest rates
and annuities.
Unit 2 deals with Cost of Capital. Cost of capital links the long term financial
decisions with shareholders value. Each of the individual component of capital
has different cost associated with it. The companies which are able to keep the
cost of capital low gains a competitive advantage and internally also the gain in
terms of liquidity, flexibility of capital structure and access to low cost sources
of funds.
Unit 3 deals with Capital Structure. Capital Structure is basically the amount of
long term debt and equity in the capital. Inter-relationship among components of
the capital structure determines the risk, return and value of the firm.
3
Overview of Financial
Decisions
4. Project Planning
5. Capital Budgeting Decisions
6. Economic Appraisal
7. Project Monitoring and Control
4. FINANCING DECISIONS
4
UNIT 1 NATURE OF LONG TERM
FINANCIAL DECISIONS
Objectives
The objectives of this unit are to :