The functions of financial manager can be grouped into three financial decisions; the investment grouped into three financial decisions; the investment decision. the financing decision and the dividend decision. the financing decision and the dividend decision is the allocation of capital to investment proposals whose benefits are to be realized in future. Because the future benefits are not known with certainly, investment proposals necessarily involve risk. Consequently, they should be evaluated in terms of both expected future return and the incremental risk they add to the firm as a whole. These are the factors that affect the firm’s valuations in the market place.
Besides a decision to commit funds on the investment proposal capital budgeting helps in deciding the recommitment of funds when an old asset become unprofitable.
The other major aspect of the capital budgeting theory relates to the selection of a cut of or hurdle rate against which the expected returns of new investment proposals can be compared. There is a broad agreement about how cost of capital should be computed. but large number of problems, crop up when we compute cost of capital from the available data.
In additions to selecting a new investment opportunity a firm must manage its existing asset efficiently. The financial manager is charged with varying degrees of operational responsibilities.
Investment in current assets effects firm’s liquidity, Profitability and risk. A conflict exists between liquidity and profitability. If firm has excess liquidty then a portion of it will be unutilized and will reduce the profitability and vice-versa. If inadequate liquidity now it may become illquid and may not meet its obligation in time reduced credit worthiness, good will etc. there are chances of technical insolvency. Thus a proper trade of must be achieved in liquidity and profitability. In other to ensure this, a financial manager should develop sound techniques of managing current assets such as cash receivable and inventory. He should estimate firms working capital needs and make sure that funds would be made available when needed.
We consider managers and acquisitions form the stand point of an investment decision. There external investment opportunities can be evaluated in the same general manner on investment proposal that is generated internally, Also, consolidation, failures are reorganization, which involved decision to liquidate a campaign or to rehabilitate, it, often by changing its capital structure.