‘The decision determines the overall cost of capital and the financial risk of the enterprises.’ Which decision is highlighted in the above statement?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Financing decision
Option (1) Dividend decision — Incorrect. It is about how much profit to pay to shareholders and how much to keep in the business. It does not fix the cost of capital.
Option (2) Capital budgeting decision — Incorrect. It is about which long-term assets or projects to invest in. It is an investment decision, not a decision about raising funds.
Option (3) Working capital decision — Incorrect. It is about the day-to-day funds needed for current assets and current liabilities.
Option (4) Financing decision — Correct. This decision is about how much money to raise and from which source, such as debt or equity. Each source has its own cost and risk, so this decision determines the overall cost of capital and the financial risk of the enterprise.
NCERT (2026-27 Edition): “Financing Decision … The cost of each type of finance has to be estimated. Some sources may be cheaper than others. For example, debt is considered to be the cheapest of all the sources, tax deductibility of interest makes it still cheaper. Associated risk is also different for each source, e.g., it is necessary to pay interest on debt and redeem the principal amount on maturity. There is no such compulsion to pay any dividend on equity shares. Thus, there is some amount of financial risk in debt financing. The overall financial risk depends upon the proportion of debt in the total capital. The fund raising exercise also costs something. This cost is called floatation cost. It also must be considered while evaluating different sources. 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.” |