Assessed Discussion Question
Define what we mean by the firm’s financing decision and the firm’s investment decision. What entities are on the “other side” of these decisions? Financing decision refers to those decisions related to the liabilities and the stockholders equality sides of the firm’s position statement especially concerning decision on to issue bond. Firms’ investment decision refers to those decisions concerned with the asset side of the firm’s balance sheet dealing with the strategic process of on determining long-term future cost and benefits in areas of decision of offering a new product, new investment and so on. It shows the relationship between present and future. Firms use financing decision for at least three main reasons. The financing decision helps firms in providing an important insight in to the ways of estimating the cost of capital. Second, it helps to avoid making mistakes in the firm’s operation process. Third, it can provide good foundation for understanding how and why the financing decision affect capital the value of the firm in certain an imperfect capital markets. 3. What are the two factors on which present value depends?
Present values is defined as the value on a given date of a future payment or serious of payments discounted to reflect the time value of money and other related factors such as investment risk. Present value depends on both the expected cash follows and the cost of capital. The increase and decrease of present value depends on both elements. For instance, if the cost of capital increases, the present value will decrease even though the expected cash flow does not change. In the similar manner, present value will increase when expected cash flow increases even when the cost of capital has not changed. There are also situations when present value remains constant when there are changes in the expected cash flows and cost of capital (required return). Therefore, when the changes exactly offset, it...
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