Finance Functions and Decisions — V = f(I, F, D)

## Finance Functions and Decisions

The value of a firm depends on three key finance functions:

> ### V = f(I, F, D)

> Value = function of (Investment decisions, Financing decisions, Dividend decisions)

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## Long-Term Functions / Decisions

### (i) Investment Decisions (I)

• Core question: Where to invest funds?
• Covers:
• Long-term assets — plant, machinery, projects (evaluated via capital budgeting)
• Current assets — inventory, receivables
• Must assess: project viability, expected returns, and risk

### (ii) Financing Decisions (F)

• Core question: Where to get money from?
• Involves choosing the right sources of finance and determining capital structure (debt-equity mix)
• Goal: Availability of funds at lowest cost with manageable risk
• Finance manager must understand:
• Difference between profit and cash flow
• Risks such as currency fluctuations or excessive debt burden

### (iii) Dividend Decisions (D)

• Core question: How much profit to distribute vs. retain?
• Balances:
• Rewarding investors (paying dividends)
• Reinvesting for growth (retained earnings)
• Directly affects market value of shares

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## Short-Term Functions / Decisions (Working Capital Management)

These relate to managing current assets and current liabilities:

• Cash, receivables, payables, inventory
• Goal: Maintain liquidity, ensure smooth operations, avoid cash shortages or idle funds

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## Summary Table