Explain the following terms / concepts.
1. Financing decision
(a) The business firm has access to the capital market to fulfill its financial needs. The firm has multiple choices of sources of financing.
(b) Different types of securities like shares, debentures, etc. can be issued to raise funds. Funds may also be borrowed from financial institutions and lenders. The finance manager must ensure that the firm is well capitalised.
2. Investment decision
(a) Investment decisions refer to the decisions regarding utilization of funds raised by the firm. It relates to the selection of assets in which funds are to be invested.
(b) The funds can be invested in two types of assets, namely:
• Long term assets or fixed assets
• Short term assets or current assets
3. Fixed capital
(a) Fixed capital refers to capital invested in fixed assets. Fixed Capital is invested in long term assets such as land, building, equipment, etc.
(b) Investor invests money in fixed capital to make a future profit. Fixed capital is usually required at the time of the establishment of the company
4. Working capital
(a) Working capital is the capital that is used to carry out the day to day business activities. The business firm has to arrange capital for making an investment in short term assets such as cash, account receivable, inventory, etc.
(b) The capital invested in these assets is referred to as Working Capital. Investor invests money in working capital for getting an immediate return.