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 Decision Should Yorkshire Pudding Inc. issue new bonds? How much of Detroit Diesel Services Inc.'s current earnings should be paid out as dividends, as opposed to being retained by the firm? Should International Imports Inc. purchase a new delivery truck, or should it simply repair the truck it currently owns? If the managers of International Imports Inc. decided to retain 75% of this year's after-tax earnings and use the funds to purchase additional assets, what type of managerial decision are they making? Capital structure Capital budgeting 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. Firm Factor Investor Factor Market Factor Preference for saving or spending Capital structure decisions and dividend decisions Economic and financial market conditions O