Explain the following as factors affecting financial decision.
i. Cost
ii. Cash flow position of business
iii. Level of fixed operating cost
iv. Control consideration
i) Cost: Different sources of capital involve different cost. The cost of capital is the minimum rate of return a firm must earn on its investment, so that the market value of the companies’ equity capital does not fall.
ii) Cash flow position of business: A stronger cash flow position may make debt financing more viable than funding through equity.
iii) Level of fixed operating cost: If a business has high fixed operating costs it must reduce fixed financing costs. Hence, lower debt financing is better. Similarly, if fixed operating cost is less, more of debt financing may be preferred.
iv) Control Considerations: Issues of more equity may lead to dilution of management’s control over the business. Hence issue of more equity shares result in less control over business. For more control, issuance of debt fund is preferred.
