Finance deals with the investment, financing and dividend decisions that businesses make as well as the tools

and analysis used to make these decisions. The primary goal of finance is to maximize business value while managing the firm's financial risks (Pike and Neale, 2003). Although it is in principle different from managerial finance which studies the nature of these three types of decisions of all firms, rather than business alone, the main concepts in the study of finance is applicable to investment, financing and dividend problems of all kinds of firms (Pike and Neale, 2003). Investment decision is the decision to commit the firm's financial and other resources to a particular course of action. Confusingly, the same term is often applied to both real investment, such as buildings and equipment, and financial investment, such as investment in shares and other securities (Ryan, 2007). While the principles underlying investment analysis are basically the same for both types of investment, it is helpful for the firm to concentrate here on the former category, usually referred to as capital investment. The firm particular (David and Richard, 1998). It means that the management must allocate limited resources between competing opportunities or projects in a process known as capital budgeting. The firms making this capital allocation decision requires estimating the value of each opportunity or project such as a function of the size, timing and predictability of future cash flows (David and Richard, 1998). In general, each project's value will be estimated using a discounted cash flow (DCF) valuation. Therefore, investment decisions basically are made based on net present value (NPV). The opportunity with the highest value as measured by the resultant NPV will be selected. This requires estimating the size and timing of all of the incremental cash flows resulting from the project (David and Richard, 1998). emphasis on strategic capital projects concentrates on the allocation of a firm's long-term capital resources

These future cash flows are then discounted to determine their present value. These present values are then summed, and this sum net of the initial investment outlay is the NPV. Otherwise, the investment will be rejected on the basis of the NPV rule when the project with the negative value (Ryan, 2007). For example, investment required for 5 projects are in total RM20 million but the availability capital of Setia Bhd is only RM12 million. Therefore, Setia Berhad needs to decide which projects are to be accepted (Pike and Neale, 2003). This decision will be affected by whether the projects are divisible or indivisible? Table 1.1 Net present value of calculation that projects are divisible Project A B C D E Capital (RM) 2 million 1 million 3 million 5 million 4 million 15 million Net Present Value (RM'000) 300 500 1500 1000 2000 Ranking 5 4 2 3 1

Table 1.2 Net present value of calculation that projects are indivisible Combination of Project BCD CDE ABCD ABDE Capital (RM) 9 million 12 million 11 million 12 million Net Present Value (RM'000) 3000 4500 3300 3800

For those projects that are divisible Setia Berhad will need to calculate the NPV and rank there projects based on the NPV. Based on that ranking, those projects which give the highest should be selected. But the firm may not have sufficient finance for all the projects. Therefore, it will choose combination of projects that it can finance with its available capital. It will choose that combination that gives the highest NPV (Pike and Neale, 2003).

From the Table 1.1, divisible projects of Setia Berhad are rank based on the NPV, Project E will be selected which gives the highest NPV (RM2,000,000). Followed by Project C and then Project D. The cost of financing there 3 projects is RM 12 million and equals the finance available (Pike and Neale, 2003). When the projects are indivisible that means Setia Berhad can do the whole projects or not do the projects at all as shown in Table 1.2. Decision making of Setia Berhad uses trial and error method to find the combination of projects which gives the firms highest possible return given that the capital is limited to RM 12million (Pike and Neale, 2003). Table 1.2 shows that the combination of Project C, D & E gives the best possible returns (a NPV of RM4,500,000) . In conjunction with NPV, there are several other measures used as selection criteria in business finance. These are visible from the DCF and include discounted payback period, internal rate of return (IRR), profit index (PI) and accounting rate of return (ARR). As a result, NPV is the most popular selection criteria for investment decisions (Alexander, 1991). The expected NPV, although useful but not show the whole picture. Firms are required to estimate the degree of the risk. Risk is an important element in virtually all investment decisions. The risks relevant in capital budgeting are project risk in isolation, the projects impact on business risk and its impact on market risk. The firms may also face the risk of losses in the business (Alexander, 1991). The standard deviation, semi-variance and coefficient of variation are each slightly different ways of measuring project risk. The identification, measurement and reduction of risk of a firm should be a central feature in the decision making process. This does not mean that the risk can be measured completely. Sometimes, the firms choose to handle project risk by using less objective methods such as experience, feel or intuition (Alexander, 1991).

Financing decision defines the problems of how much capital should be raised to fund the firms operations and the best mix of financing. The capital structure that results in maximizes the value of the investments should be chosen (Ryan, 2007). In the same way that firms can hold financial assets such as investing in shares of other companies or lending to banks, it can also sell claims on its own real assets, by issuing shares, raising loans, undertaking lease obligation. A financial security such as a share or bond, gives the holder a claim on the future profits or interest due (Ryan, 2007). The treasurer will need to look at the various sources of finance to choose he suitable types of finance needed. In making this decision, they will need to look at the cost of capital versus the risk (Ryan, 2007). The largest proportion of long-term finance is usually provided by shareholders and is termed equity capital. Ordinary share capital is the main source of new money from shareholders. Shareholders are entitled both to participate in the business through voting general meeting and to receive dividend out of profits. As owners of the business, the ordinary shareholders may have to face a financing risk but enjoy the main fruits of success in the form of dividends and share price growth (Mc Laney, 2006). The money lent to a business by third parties is termed debt finance. Most firms borrow money on a long-term basis by issuing debentures. The term of the loan will specify the amount of the loan, rate of interest and date of payment, redemption date and method of repayment. The borrower has a contract required payment regardless of whether it is making profit. There is no such thing as telling the lender the firm did not make profits and as such can not repay the loan. This is financing risk faced by borrowers (Mc Laney, 2006). In addition, if the borrowers default, then the lender would able to seize the based on the terms of loan contract and sell the assets to recover the amount owed. If the firm does not pay dividend, the shareholders can change the directors by holding an annual general

meeting (AGM) or extraordinary general meeting. The shareholders can recovered their money by selling their shares but can not close down the company (Mc Laney, 2006). The cost of capital is low because risk of lender is lower but the borrowers bear the greatest risk because they have to repay the loan even if the firms have makes losses or no cash in the company. There is less risk losing money by the lender. Where shareholders are concerned when the firm is not doing well, the shareholders can lose whatever investment in the firm. The shareholders may not recover much because the assets of the firm will be sold to pay creditors and employees and lastly shareholders (Ryan, 2007, p.152). When the firm has too much debt, the gearing is very high. When gearing is very high it is considered that the financial risk of the firm is very high, the possibilities of the firm being unable to made payments is likely. Therefore, the high financing risk will cause the people to not want to invest (Madura, 2006, p.607). Capital structure looks at mix of debts and equity. If the firm have few of debts but a lot of shares, the firm may want to borrow more money. When the firm increases their borrowing will increase the gearing, as far as the shareholders are concerned the control of the firm will still be the same (Madura, 2006, p.607). Dividend decision relates to whether to pay dividend and how much. It also concerns the amount a business should reinvest back into operations and how much should be returned to the owner of the business in the form of dividend as well as when to pay dividend and what form to pay dividend (Weston and Copeland, 1986). There have a few things that the firms have to decide whether to pay dividend. Firstly, the firms that have made the profits need to pay dividend to the shareholders. While the firms that have made losses then do not need to pay dividend (Weston and Copeland, 1986).

Actually, the firms may have earned profits but the firms do not need to pay dividend to the shareholders for a period of one to two years they are planning to expand or planning to make an investment in operations. This is because the firms will not have enough funds for investment in this situation. The shareholders will accept this as long as shareholders are able look at the possibility of very much higher returns in future (Berk and DeMarzo, 2003). Secondly, how much should be returned to owner of the business will depend on the number of shares. For example, the shareholders received dividend from the company of 5 cents per share in year 2006and then 6 cents per share in year 2007 but in year 2008 become 2 cents per share. It may means that the firm is not doing well because the returns are initially high but now have become less. This gives a signal to the public which will make the investors very wary (Berk and DeMarzo, 2003). Therefore, how much dividend the firm pays not only depends on the plans when the firm is doing investments. It also depends on previous year dividends and depend what kind of message that the firm is trying to give to the public (Berk and DeMarzo, 2003). Thirdly, when to pay dividend means some of them will decide to pay the dividend in installments. It means that the firm may declare half of the dividend to be paid in the middle of the year and the remaining half to be paid at the end of the year. The firm may also decide to pay the dividend to shareholders in one, three or four parts (Mc Laney, 2006). Finally, what form to pay the dividend means the firm has made profits which have not been distributed by way of dividend, so the firm can convert to scrip dividend to the existing shareholders. Scrip dividend known as a capitalisation or bonus issue, it means a free issue of shares to the firms existing shareholders. There is no cash involved in a bonus issue. It does not bring more funds into the business but simply divides the real capital of the firm into large number of shares (Mc Laney, 2006).

The interrelationship will happen in the investment decision, financing decision and dividend decision in the long-term finance. In case of the investment decision, the amount of capital the firm needs will affect the financing decision. Dividend decision will be affected by the financing decision. The more dividend of the firm to pay, the firm has less retained profit and that means the firm has to get more financing (Hodges, et al, 1991, p.163). Another way of looking at it as far as the firm is concerned that the firm may only be able to convince the people to give them the financing to buy shares and lend money if the firms are convince that the return from the company is going to be high. If the investment here going give higher returns then it will be affected the way of the finances look at the company (Hodges, et al, 1991, p.163). Some of the firms have a lot of project which are going give them a lot of returns or profits then the firms are more willing to supply capital for projects. The shareholders will be willing to buy shares if they are convinced that this investment will be generating enough returns to give them a high level of dividends (Alexander, 1991). The investment decision can be determined by net present value (NPV), discounted payback period, internal rate of return (IRR), accounting rate of return (ARR) or other methods. Whatever method is uses, it would have to calculate its cost of capital. The rate used for calculating the cost of capital will be the discount rate. That discount rate is decided by the firm financing. The type of financing the firm use decide cost of capital and that is going to decide what is the discount rate making investment. These are the way of financing decision affected investment decision (Eiteman and Stonebill, 2007). The amount of financing that a firm needs depends on the investment outlay. How many project of the firm is accepting, when the firm taking a lot of projects will involved a lot of money. Therefore, the firm needs more financing to investment. The financing decision will affected by that. The amount of investment is doing decide how much financing the firm need and based on that the firm need look further to see where their get

financing. The amount of the financing will decide by the investment (Pike and Neale, 2003). It sometimes happens that investment decision is decided by the amount of financing. Some of the firm go thought the capital rationing, they do not want to use debts capital to finance project because do not want too much of borrowings and want to limit the exposure so they will choose there project for which internal financing is available. They would not expose there to be other risk (Gitman, 2006). So, it is the interrelationship of these three types of decisions. Investment, financing and dividend decision decisions are influenced by the availability of finance and cost of borrowing (Gitman, 2006).

References
Alexander, D., 1991. Financial Reporting: The Theoretical and Regulatory Framework, 9th ed. London: Chapman & Hall. Berk, J. and DeMarzo, P., 2003. Corporate Finance. United Kingdom: Pearson Education Limited. David, F. and Richard, L., 1998. How to Pass: Management Accounting, Third Level. Malaysia: Systematic Education Group Berhad Eiteman, D.K. and Stonebill, A., 2007. Multinational Business Finance, 11th ed. United State: Pearson Education. Gitman, L.J., 2006. Principles of Managerial Finance. 11th ed. United State: Pearson Education Limited. Hodges, S.D., et al, 1991. Principles of Corporate Finance, 4th ed. Singapore: Mc GrawHill. Madura, J., 2006. International Corporate Finance, 8th ed. Thomson South-Western.

Mc Laney, E., 2006. Business Finance: Theory and Practice. 7 th ed. United Kingdom: Pearson Education Limited. Pike, R. and Neale, B., 2003. Corporate Finance and Investment. 4th ed. United

Kingdom: Pearson Education Limited. Ryan, B., 2007. Corporation Finance and Valuation. Thomson Learning. Weston, J.F. and Copeland, T.E., 1986. Managerial Finance. CBS College Publishing.