Finance Functions

According to James Van Horne, the functions of finance/accounting comprise

three deci- sions: the investment decision, the financing decision, and the
dividend decision.
Dividend decision refers to the policy that the management formulates in
regard to earnings for distribution as dividends among shareholders. Dividend
decision determines the division of earnings between payments to
shareholders and retained earnings . The dividend decision, in corporate
finance, is a decision made by the directors of a company about the amount
and timing of any cash payments made to the company's stockholders.
Dividend decisions concern issues such as the percentage of earnings paid to
stockholders, the stability of dividends paid over time, and the repurchase or
issuance of stock. Dividend decisions determine the amount of funds that are
retained in a firm compared to the amount paid out to stockholders. The firm
has to balance between the growth of the company and the distribution to
the shareholders. It has a critical influence on the value of the firm. It has to
also to strike a balance between the long term financing decision( company
distributing dividend in the absence of any investment opportunity) and the
wealth maximization. Retained earnings helps the firm to concentrate on the
growth, expansion and modernization of the firm.
The investment decision, also called capital budgeting, is the allocation and
reallocation of capital and resources to projects, products, assets, and
divisions of an organization. Once strategies are formulated, capital
budgeting decisions are required to successfully implement strategies.
Capital budgeting is also concerned with the analyzing and ranking of
possible investments in fixed assets such as land, buildings, and equipment
in terms of the additional outlays and additional receipts that will result from
each investment. A good finance department will be able to prepare such
capital budgets and to rank them on the basis of some accepted criteria or
hurdle rate (for example, years to pay back investment, rate of return, or
time to break-even point) for the purpose of strategic decision making. Most
firms have more than one hurdle rate and vary it as a function of the type of
project being considered. Projects with high strategic significance, such as
entering new markets or defending market share, will often have low hurdle
rates.
The financing decision determines the best capital structure for the firm and
includes examining various methods by which the firm can raise capital (for
example, by issuing stock, increasing debt, selling assets, or using a
combination of these approaches). The financing decision must consider both

short-term and long-term needs for working capital. The mix of externally
generated short-term and long-term funds in relation to the amount and
timing of internally generated funds should be appropriate to the corporate
objectives, strategies, and policies. The concept of financial leverage (the
ratio of total debt to total assets) is helpful in describing how debt is used to
increase the earnings available to common sharehold- ers. When the
company finances its activities by sales of bonds or notes instead of through
stock, the earnings per share are boosted: the interest paid on the debt
reduces taxable income, but fewer shareholders share the profits than if the
company had sold more stock to finance its activities.