Gujarat BoardEnglish MediumSTD 12 CommerceOCMFINANCIAL MANAGEMENT5 Marks
Question
Write a note on decisions related to financing and factors affecting it.
✓
Answer
Decisions related to financing:
Investment decisions are connected with the assets of the company while financing decisions are related to the capital structure.Capital structure of the company consists of:
$(a)$ equity shares
$(b)$ equity shares and preference shares
$(c)$ equity shares and debentures
$(d)$ equity shares, preference shares and debentures
Capital structure is a mixture of owner’s capital and debt. Finance manager has to take decision regarding the portion to be maintained between equity and debt in capital structure. A fine balance between equity capital and debt is necessary so as to maximize the returns of the company.
Capital structure having a proper proportion of equity capital and debt is called optimum capital structure. Optimum capital structure is less risky and ensures maximum return.
Factors affecting financing:
The factors affecting financing can be classified as
Internal factors and
External factors.
$1.$ Internal factors:
Type or nature of business, size of business, growth of business, financial requirement, nature of assets and requirement, attitude of directors are internal factors that affect financing decisions.
$2.$ External factors:
Condition of capital market, expenses of issuing securities, attitude of investors, rate of interest prevailing in market, legal restrictions, institutional investors, etc. are external factors that affect financing decisions.
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