The Financing Decision is:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → The decision about the quantum of finance to be raised from various sources
Option (1) Related to how the firm’s funds are invested in different assets — Incorrect. Putting funds into assets is the investment decision. It decides where the money goes, not where it comes from.
Option (2) The decision about the quantum of finance to be raised from various sources — Correct. The financing decision fixes how much money is to be raised and from which sources. The two main sources are owners’ funds (equity and retained earnings) and borrowed funds (debentures and loans). The manager also decides the proportion of each.
Option (3) Related to how and what portion of profit is distributed to shareholders — Incorrect. This is the dividend decision: how much of the profit is paid out and how much is kept in the business.
Option (4) Related to the selection of best financing alternative or best investment alternative — Incorrect. It mixes two decisions into one. Choosing an investment belongs to the investment decision, not to the financing decision.
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. …” |