Rakesh is working on the financial plan of his new business. He asked his friend, Roy to help him in identifying the source of finance to use. Roy calculated the cost of capital with financial risk and told, Rakesh that he could take more of borrowed funds, Identify the type of decision Roy helped Rakesh in taking.

Financing decision

The correct answer is option (3) - Financing decision.

Roy's advice on taking more borrowed funds and considering the cost of capital with financial risk relates to the financing decision. The financing decision involves determining the optimal mix of debt and equity to finance a business's operations and investments. It considers the capital structure and aims to minimize the cost of capital while meeting the financial needs of the business.

• Pro forma cash flow: This statement forecasts future cash inflows and outflows, not directly related to the choice of financing sources.
• Income statement: This statement summarizes revenues and expenses, providing no guidance on debt vs. equity financing.
• Financing decision: This decision concerns the optimal mix of debt and equity capital to raise funds for a business. Analyzing the cost of capital and financial risk plays a crucial role in determining this mix.
• Investment decision: This decision focuses on selecting individual projects or assets to invest in, not the source of financing for the overall business.