Which of the following pairs of a financial decision and what it decides is correctly matched?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Financing decision - The proportion of long-term funds to be raised from debt and equity.
Option (1) Financing decision - The proportion of long-term funds to be raised from debt and equity. — Correct. The financing decision is about how much to raise from which long-term source. The two main sources are shareholders’ funds and borrowed funds. The firm decides the proportion of each.
Option (2) Investment decision - How much of the profit after tax is to be retained in the business. — Incorrect. Keeping back part of the profit after tax is the dividend decision. The investment decision is about how the firm’s funds are invested in different assets.
Option (3) Dividend decision - Where the firm’s scarce resources are to be put to earn the highest return. — Incorrect. Choosing where to put scarce resources for the highest return is the investment decision. The dividend decision is about how much profit is paid out and how much is kept.
Option (4) Capital budgeting decision - The levels of cash, inventory and receivables to be kept. — Incorrect. Levels of cash, inventory and receivables are working capital decisions, the short-term side of investment. Capital budgeting is the long-term side, such as a new machine.
NCERT (2026-27 Edition): “Financing Decision This decision is about the quantum of finance to be raised from various long-term sources. Short-term sources are studied under the ‘working capital management’. It involves identification of various available sources. The main sources of funds for a firm are shareholders’ funds and borrowed funds. The shareholders’ funds refer to the equity capital and the retained earnings. Borrowed funds refer to the finance raised through debentures or other forms of debt. A firm has to decide the proportion of funds to be raised from either sources, based on their basic characteristics. …” “Financing Decision … Financing decision is, thus, concerned with the decisions about how much to be raised from which source. This decision determines the overall cost of capital and the financial risk of the enterprise. …” |