Which decision is concerned with rising of finance using shareholders’ funds or borrowed funds? Identify and describe the financial decision involved in this decision. Explain any four factors affecting that decision.

Financing decision: This decision is concerned with raising of finance using shareholders fund or borrowed fund. It involves identification of various sources of finance and the quantum of finance to be raised from long-term and short-term sources.

Four factors affecting the financing decision:

1. Cost:  Cost of raising fund influences the financing decisions. A prudent financial manager selects the cheapest source of finance.
2. Risk: Debt capital is most risky and from the point of view of risk it should not be used.
3. Flotation cost: From the point of view of floating costs, retained profit is the most appropriate source. Therefore, it should be made.
4. Cash Flow position: If the cash flow position of the company is good, the payment of interest on the debt and the refund of capital can be easily made. Therefore, in order to advantage of cheap finance, debt can be given priority.
5. Level of Fixed Operating Costs: If a business has a high level of fixed operating costs (e.g., building rent, Insurance premium, Salaries etc.), It must opt for lower fixed financing costs. Hence, lower debt financing is better. Similarly, if fixed operating cost is less, more of debt financing may be preferred.