5. Financial management decisions and their effect on firm value

Financial managers make a variety of decisions that can affect a firm's value. These include capital budgeting, capital structure, and dividend policy decisions. A financial manager's decisions and actions are evaluated against the criterion of their effect on the price of the firm's common stock. Good decisions result in increasing share prices and increasing shareholder wealth, while poor decisions achieve the opposite result.

Many of the financial decisions that affect shareholder value fall into one of three basic categories. Identify the types of managerial finance decisions described in the following table.

Type of DecisionWhat types of assets should be purchased to support new projects and generate future cash flows?Capital budgeting The stock market is approaching its year-to-date high value, so should Chicago Pork Producers Inc. consider selling new stock or new bonds to pay for its planned market expansion?Capital budgeting Should a company decrease its dividend from $0.75 per share to $0.60 per share?Dividend policy

Seattle Seafood Company is evaluating its use of debt and equity capital. Some members of the finance team think the company would be better served by issuing new debt and using the proceeds to buy back shares of its common stock. What type of managerial decision is this?

Capital budgeting

Capital structure

Dividend policy

It is useful to examine the company valuation process from both an internal and an external perspective. The value of a company is affected by three groups of factors: (1) the attributes of the firm itself, (2) the characteristics of the investors interested in the firm's securities, and (3) conditions in the financial markets in which the company and its investors participate.

In the following table, indicate whether the factors described fall into the firm, investor, or market factor category.

Preference for saving or spending -Firm Factor -Investor Factor- Market Factor

Capital structure decisions and dividend decisions-Firm Factor -Investor Factor- Market Factor

Economic and financial market conditions-Firm Factor -Investor Factor- Market Factor