What do you mean by Financing Decision ? Explain with example.

Answer – A financing decision determines how much finance is obtained from owners' funds and borrowed funds. Owners' funds include equity and retained earnings; borrowed funds include loans and debentures.

Factors

• Cost: compare the cost of each source; interest is normally tax-deductible, subject to applicable rules.
• Risk: debt requires interest and repayment even when profits are low; excessive debt increases financial risk.
• Flotation costs: issue and arrangement expenses affect the net funds available.
• Cash-flow position: stable cash flows support regular debt payments.
• Fixed operating costs: high operating commitments leave less capacity for additional fixed financial charges.
• Control: issuing equity may dilute existing owners' control; debt generally does not confer ordinary voting rights.
• Capital-market conditions: investor confidence and market conditions influence the feasibility and cost of raising funds.

Example: a company with unstable receipts may prefer more equity even if debt appears cheaper.

Example: an enterprise needing ₹10 lakh may choose ₹6 lakh of equity and a ₹4 lakh bank loan after comparing cost, risk and control.