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Financial Management — Business Studies STD 12 Commerce — Question

CBSE BoardEnglish MediumSTD 12 CommerceBusiness StudiesFinancial Management6 Marks
Question
What is meant by ‘Financing Decision’? State any four factors affecting the financing decision.
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Answer

Financing decision is the decision about the quantum of finance to be raised from various long term sources and how” much is to be raised from each source. Factors affecting financing decision are:
  1. Cost of different sources of finance as some sources may be cheaper than others.
  2. Risk associated with different sources of finance is different.
  3. Higher the floatation costs, less attractive the source.
  4. A stronger cash flow position may make debt financing more viable than funding through equity.
  5. With higher fixed operating costs, lower fixed financing costs should be opted for.
  6. Issue of more equity may lead to dilution of management’s control over the business.
  7. State of the capital market is considered while taking financing decision as in a depressed capital market, issue of equity shares may be difficult.

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