The correct answer is option (1) - A-II, B-III, C-IV, D-I.
| List I |
List II |
| A. Mix between owners and borrowed funds |
II. Capital Structure |
| B. Financing Decision |
III. Control Consideration |
| C. Fixed Capital Requirement |
IV. Diversification |
| D. Working Capital Requirement |
I. Seasonal factors |
A. Mix between owners and borrowed funds - II. Capital Structure.
Capital structure refers to the mix between owners and borrowed funds. Debt and equity differ significantly in their cost and riskiness for the firm. The cost of debt is lower than the cost of equity for a firm because the lender’s risk is lower than the equity shareholder’s risk, since the lender earns an assured return and repayment of capital and, therefore, they should require a lower rate of return. Additionally, interest paid on debt is a deductible expense for computation of tax liability whereas dividends are paid out of after-tax profit. Increased use of debt, therefore, is likely to lower the over-all cost of capital of the firm provided that the cost of equity remains unaffected.
B. Financing Decision - III. Control Consideration.
The financing decisions are affected by various factors. Control Consideration is one of them. 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.
C. Fixed Capital Requirement -IV. Diversification.
Diversification is a factor that affects the fixed capital requirement. A firm may choose to diversify its operations for various reasons, With diversification, fixed capital requirements increase e.g., a textile company is diversifying and starting a cement manufacturing plant. Obviously, its investment in fixed capital will increase.
D. Working Capital Requirement - I. Seasonal factors.
Seasonal factor affects working capital requirement. Most business have some seasonality in their operations. In peak season, because of higher level of activity, larger amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season. | 
