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Development of financial strategy

The impact of investment, financing

and dividend decisions on ratios

It is important to consider the interrelationship between investment,

financing and dividend decisions when assessing the impact of the
decisions on the entity's ratios.

Examples of interrelationships

 An investment decision to undertake a profitable project, financed by raising
new debt or equity finance, may impact several important investor and lender
ratios such as earnings per share, earnings yield and interest cover.

 Financing requirements and cash available for payment of dividends are
determined based on the overall consideration of the forecast future cash flows
arising from investment decisions, business strategy and forecast business and
economic variables.

 A change in dividend policy can have an immediate impact on some investor
ratios such as dividend cover and dividend yield. However, there may also be
other, less obvious, impacts. For example, reducing the level of dividend paid
out one year could increase the amount of funds available for reinvestment, so
there might well be an increased level of growth in profit which could impact
ratios such as earnings per share.

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