1. What do you mean by investment decision?

Explain the nature

and significance.
The Investment Decision relates to the decision made by the investors or
the top-level management with respect to the amount of funds to be
deployed in the investment opportunities. Simply, selecting the type of
assets in which the funds will be invested by the firm is termed as the
investment decision. These assets fall into two categories:

1. Long Term Assets

2. Short-Term Assets

The decision of investing funds in the long term assets is known

as Capital Budgeting. Thus, Capital Budgeting is the process of selecting
the asset or an investment proposal that will yield returns over a long
period.
The investment made in the current assets or short term assets is termed
as Working Capital Management. The working capital management
deals with the management of current assets that are highly liquid in
nature.
Need and importance/Nature

(1) Large investment

- Involve large investment of funds
- Fund available is limited and the demand for funds exceeds the existing
resources
- Important for firm to plan and control capital expenditure

(2) Long term commitment of funds

- Involves not only large amount of fund but also long term on
permanent basis.
- It increases financial risk involved in investment decision.

- Greater the risk greater the need for planning capital expenditure.

(3) Irreversible Nature

- Capital expenditure decision are irreversible

- Once decision for acquiring permanent asset is taken, it become

very difficult to dispose of these assets without heavy losses.

(4) Long-term effect on profitability

- Capital expenditure decision are long-term and have effect on

profitability of a concern

- Not only present earning but also the future growth and profitability
of the firm depends on investment decision taken today

- Capital budgeting is needed to avoid over investment or under

investment in fixed assets.

(5) Difficulties of investment decision

- Long term investment decision are difficult to take because (i)
decision extends to a series of year beyond the current accounting
period

- (ii) uncertainties of future

- (iii) higher degree of risk

(6) National importance

- Investment decision taken by individual concern is of national

importance because it determines employment, economic activities and
economic growth.

2. Different types of values:

The types of value are:

 Book value
 Depreciated value
 Going concern value
 Liquidation or break up value
 Fire sale value
 Intrinsic value
 Fair value
 Fair market value
 Replacement value
 Special, investment or strategic value.
Book Value
Book value is the amount at which an asset or liability is recorded on the
entities books of accounts.
Depreciated Value
Depreciated value or written down value is the net amount after deducting
depreciation or amortisation.

Going Concern Value

Going concern value is the value of an asset to the enterprise as a going
concern or the value of an asset ‘in use’. Most business valuations will
be prepared on the basis of a going concern.

Liquidation Value
Upon winding up, the assets of a business are realised in a shorter
timeframe which results in the assets on achieving their full value. It
would generally equal the amount that could be achieved at public
auction.

Fire Sale Value

Fire sale value is the price at which an asset could be sold in the shortest
possible time regardless of how low a price is obtained.

Intrinsic Value
Intrinsic value is a concept based on the theoretical ‘true worth’ of an asset
and is determined by its past record and potential earning power. The
intrinsic value of an asset may be much higher than the market value as
the market may under value the asset due to doubts about the ability of
the entity to achieve its intrinsic value.

Fair Market Value and Market Value

The concepts of fair market value and market value have a common
thread in terms of their definition and in many situations used
interchangeably.
Fair Market Value is:

“The price that would be negotiated in an open and unrestricted market

between a knowledgeable, willing but not anxious buyer and a
knowledgeable, willing but not anxious seller acting at arm’s length”.
The definition assumes a hypothetical buyer and seller, it does not assume
an individual buyer or seller with their own specific interests or
motivations.

Knowledgeable assumes that they understand the business and its

particular issues and that they understand the economic rationale behind
the business valuation process being an investment reflective of risk and
return.

Anxious assumes that the buyer and seller are not subject to external
pressures and the transaction is based on the merits of the investment
itself.

An open and unrestricted market assumes that there is perfect competition

however in some cases there may be regulatory restrictions that overlay
the transaction that need to be taken into account such as foreign
investment guidelines, competition requirements and consumer
protection.

Fair Value
Fair value is defined as:

“The estimated price for the transfer of an asset between knowledgeable

and willing parties that reflects the interests of those parties”.
The important differences between fair value and fair market value are
that in fair value:

 The identity of seller and purchaser are relevant as opposed to

hypothetical
 The parties may not be at arm’s length
 Certain synergies may be included that are known for both parties.
A common application of fair value is in cases involving the oppression
of minority interests where the application of the definition of fair value
is to ignore any discount for minority interests in the valuation process.

Special Investment or Specific Value

 Specific value assumes that there are specific benefits that will accrue or
be expected to accrue to the investment.

Examples would include synergies that could arise following the merger
of customer’s products or administrative costs.

Special value would also apply for transactions where the special skills
and experience of the employees are obtained or to prevent their
competition obtaining the technology.

Value to the Owner

Value to the Owner is applied in Family Law and allows an extension to
fair market value particularly where there is no market for the investment,
a minority interest in a closely held family company or an ‘interest’ in a
discretionary trust.

3. Types of dividend.

A dividend is generally considered to be a cash payment issued to the

holders of company stock. However, there are several types of
dividends, some of which do not involve the payment of cash
to shareholders. These dividend types are:

 Cash dividend. The cash dividend is by far the most common of the
dividend types used. On the date of declaration, the board of
directors resolves to pay a certain dividend amount in cash to
those investors holding the company's stock on a specific date.
The date of record is the date on which dividends are assigned to the
holders of the company's stock. On the date of payment, the company
issues dividend payments.
 Stock dividend. A stock dividend is the issuance by a company of
its common stock to its common shareholders without any
consideration. If the company issues less than 25 percent of the total
number of previously outstanding shares, then treat the transaction as
a stock dividend. If the transaction is for a greater proportion of the
 previously outstanding shares, then treat the transaction as a stock
split. To record a stock dividend, transfer from retained earnings to
the capital stock and additional paid-in capital accounts an amount
equal to the fair value of the additional shares issued. The fair value of
the additional shares issued is based on their fair market value when
the dividend is declared.
 Property dividend. A company may issue a non-monetary dividend to
investors, rather than making a cash or stock payment. Record this
distribution at the fair market value of the assets distributed. Since the
fair market value is likely to vary somewhat from the book value of the
assets, the company will likely record the variance as a gain or loss.
This accounting rule can sometimes lead a business to deliberately
issue property dividends in order to alter their taxable and/or reported
income.
 Scrip dividend. A company may not have sufficient funds to issue
dividends in the near future, so instead it issues a scrip dividend, which
is essentially a promissory note (which may or may not include
interest) to pay shareholders at a later date. This dividend creates a note
payable.
 Liquidating dividend. When the board of directors wishes to return the
capital originally contributed by shareholders as a dividend, it is called
a liquidating dividend, and may be a precursor to shutting down the
business. The accounting for a liquidating dividend is similar to the
entries for a cash dividend, except that the funds are considered to come
from the additional paid-in capital account.

4. Corporate Restructuring:
Corporate restructuring is an action taken by the corporate entity to
modify its capital structure or its operations significantly. Generally,
corporate restructuring happens when a corporate entity is experiencing
significant problems and is in financial jeopardy
The process of corporate restructuring is considered very important to
eliminate all the financial crisis and enhance the company’s performance.
The management of concerned corporate entity facing the financial
crunches hires a financial and legal expert for advisory and assistance in
the negotiation and the transaction deals. Usually, the concerned entity
may look at debt financing, operations reduction, any portion of the
company to interested investors.
In addition to this, the need for a corporate restructuring arises due to the
change in the ownership structure of a company. Such change in the
ownership structure of the company might be due to the takeover, merger,
adverse economic conditions, adverse changes in business such as
buyouts, bankruptcy, lack of integration between the divisions, over
employed personnel, etc.

Types of Corporate Restructuring

1. Financial Restructuring: This type of restructuring may take place

due to a severe fall in the overall sales because of the adverse
economic conditions. Here, the corporate entity may alter its equity
pattern, debt-servicing schedule, the equity holdings, and cross-
holding pattern. All this is done to sustain the market and the
profitability of the company.
2. Organisational Restructuring: The Organisational Restructuring
implies a change in the organisational structure of a company, such
as reducing its level of the hierarchy, redesigning the job positions,
downsizing the employees, and changing the reporting
relationships. This type of restructuring is done to cut down the cost
and to pay off the outstanding debt to continue with the business
operations in some manner.

Characteristics of Corporate Restructuring

 To improve the Balance Sheet of the company (by disposing of the

unprofitable division from its core business)
 Staff reduction (by closing down or selling off the unprofitable
portion)
 Changes in corporate management
  Disposing of the underutilised assets, such as brands/patent rights.
 Outsourcing its operations such as technical support and payroll
management to a more efficient 3rd party.
 Shifting of operations such as moving of manufacturing operations
to lower-cost locations.
 Reorganising functions such as marketing, sales, and distribution.
 Renegotiating labour contracts to reduce overhead.
 Rescheduling or refinancing of debt to minimise the interest
payments.
 Conducting a public relations campaign at large to reposition the
company with its consumers.

Types of Corporate Restructuring Strategies

1. Merger:
This is the concept where two or more business entities are merged
together either by way of absorption or amalgamation or by forming
of a new company. The merger of two or more business entities is
generally done by exchange of securities between the acquiring and
the target company.
2. Demerger:
Under this corporate restructuring strategy, two or more companies
are combined into a single company to get the benefit of synergy
arising out of such a merger.
3. Reverse Merger:
In this strategy, the unlisted public companies have the opportunity
to convert into a listed public company, without opting for IPO
(Initial Public offer). In this strategy, the private company acquires
a majority shareholding in the public company with its own name.
4. Disinvestment:
When a corporate entity sells out or liquidates an asset or subsidiary,
it is known as “divestiture”.
5. Takeover/Acquisition:
Under this strategy, the acquiring company takes overall control of
the target company. It is also known as the Acquisition.
 6. Joint Venture (JV):
Under this strategy, an entity is formed by two or more companies
to undertake financial act together. The entity created is called the
Joint Venture. Both the parties agree to contribute in proportion as
agreed to form a new entity and also share the expenses, revenues
and control of the company.
7. Strategic Alliance:
Under this strategy, two or more entities enter into an agreement to
collaborate with each other, in order to achieve certain objectives
while still acting as independent organisations.
8. Slump Sale:
Under this strategy, an entity transfers its one or more undertaking
for lump sum consideration. Under Slump Sale, an undertaking is
sold for a consideration irrespective of the individual values of the
assets or liabilities of the undertaking.

5. Criteria of good Corporate Governance:

Clear Organizational Strategy
Good corporate governance starts with a clear strategy for the
organization. For example, a furniture company’s management team
might research the market to identify a profitable niche, create a product
line to meet the needs of that target market and then advertise its wares
with a marketing campaign that reaches those consumers directly. At each
stage, knowing the overall strategy helps the company’s workforce stay
focused on the organizational mission: meeting the needs of the
consumers in that target market.
Effective Risk Management
Even if your company implements smart policies, competitors might steal
your customers, unexpected disasters might cripple your operations and
economy fluctuations might erode the buying capabilities of your target
market. You can’t avoid risk, so it’s vital to implement effective strategic
risk management. For example, a company’s management might decide
to diversify operations so the business can count on revenue from several
different markets, rather than depend on just one.
Discipline and Commitment
Corporate policies are only as effective as their implementation. A
company’s management can spend years developing a strategy to push
into new markets, but if it can’t mobilize its workforce to implement the
strategy, the initiative will fail. Good corporate governance requires
having the discipline and commitment to implement policies, resolutions
and strategies.
Fairness to Employees and Customers
Fairness must always be a high priority for management. For example,
managers must push their employees to be their best, but they should also
recognize that a heavy workload can have negative long-term effects, such
as low morale and high turnover. Companies also must be fair to their
customers, both for ethical and public-relations reasons. Treating
customers unfairly, whatever the short-term benefits, always hurts a
company’s long-term prospects.
Transparency and Information Sharing
Managers sometimes keep their own counsel, limiting the information
that filters down to employees. But corporate transparency helps unify an
organization: When employees understand management’s strategies and
are allowed to monitor the company’s financial performance, they
understand their roles within the company. Transparency is also important
to the public, who tend not to trust secretive corporations.
Corporate Social Responsibility
Social responsibility at the corporate level is increasingly a topic of
concern. Consumers expect companies to be good community members,
for example, by initiating recycling efforts and reducing waste and
pollution. Good corporate governance identifies ways to improve
company practices and also promotes social good by reinvesting in the
local community.
Regular Self-Evaluation
Mistakes will be made, no matter how well you manage your company.
The key is to perform regular self-evaluations to identify and mitigate
brewing problems. Employee and customer surveys, for example, can
supply vital feedback about the effectiveness of your current policies.
Hiring outside consultants to analyze your operations also can help
identify ways to improve your company’s efficiency and performance.