Financial management decisions and their effect on firm value

Financial managers make a variety of decisions that can affect a firms value. These include capital budgeting, capital structure, and dividend policy decisions. A financial managers decisions and actions are evaluated against the criterion of their effect on the price of the firms 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.

Descriptions	Type of Decision
Should American Sporting Goods Inc. issue new bonds?
How much of Fort Worth Cattle Companys current earnings should be paid out as dividends, as opposed to being retained by the firm?
Should Universal Computer Corporation purchase a new delivery truck, or should it simply repair the truck it currently owns?

Universal Computer Corporation 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 structure

Dividend policy

Capital budgeting

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 firms 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