The correct answer is option (4)- A, B, C and D only.
Cost, Risk, Floatation Costs and Cash Flow Position of the Company are the factors affecting financing decision.
The financing decisions are affected by various factors. Important among them are as follows:
(a) Cost: The cost of raising funds through different sources are different. A prudent financial manager would normally opt for a source which is the cheapest.
(b) Risk: The risk associated with each of the sources is different.
(c) Floatation Costs: Higher the floatation cost, less attractive the source.
(d) Cash Flow Position of the Company: A stronger cash flow position may make debt financing more viable than funding through equity.
(e) Fixed Operating Costs: If a business has high fixed operating costs (e.g., building rent, Insurance premium, Salaries, etc.), 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.
(f) Control Considerations: Issues of more equity may lead to dilution of management’s control over the business. Debt financing has no such implication. Companies afraid of a takeover bid would prefer debt to equity.
(g) State of Capital Market: Health of the capital market may also affect the choice of source of fund. During the period when stock market is rising, more people invest in equity. However, depressed capital market may make issue of equity shares difficult for any company.
NOTE- Taxation Policy affects dividend decision.
Taxation Policy: The choice between the payment of dividend and retaining the earnings is, to some extent, affected by the difference in the tax treatment of dividends and capital gains. If tax on dividend is higher, it is better to pay less by way of dividends. As compared to this, higher dividends may be declared if tax rates are relatively lower. Though the dividends are free of tax in the hands of shareholders, a dividend distribution tax is levied on companies. Thus, under the present tax policy, shareholders are likely to prefer higher dividends. |
