Financing Decisions

• This decision is about the amount of finance to be raised from various long-term sources
• Main sources of funds are shareholder's funds and borrowed funds
• A firm needs to have a careful mix of both debt and equity in making a capital structure

Factors Affecting Financing Decision:

1. Cash Flow Position of the Business: a company having a stronger cash flow position may choose debt financing
2. Higher Fixed Operating Costs:  Already higher fixed operating costs (e.g., building rent, Insurance premium, Salaries, etc.), discourages the  debt  over equity
3. Other Floatation Costs: Equity have a higher  flotation cost in comparison to debts like prospectus, underwriter commission
4. Issue of Cost: The costs of raising funds through different sources are different.  The financial manager should have a cheaper source of finance.
5. Control Considerations: Issues of more equity may lead to dilution of management’s control over the business. Debt does not let control dilution may be preferred
6. Extent of Risk: Debts have more risk in comparison to equity.
7. State of Capital Markets: During the boom period when the stock market is rising, more people invest in equity as a growing business will give more chances of higher-earning than investing in debts.