Business StudiesFinancial Management

The Financing Decisions are affected by:(A) Floatation Costs(B) Cash…

The Financing Decisions are affected by:

(A) Floatation Costs

(B) Cash Flow Position of the Company

(D) Taxation Policy

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → (A), (B) and (C) only

(A) Floatation Costs — Correct. The financing decision is about how much money is raised from each source, mainly debt and equity. The higher the cost of raising funds from a source, the less attractive that source.
(B) Cash Flow Position of the Company — Correct. A company with strong cash flows can pay interest easily, so it can use more debt.
(C) Fixed Operating Costs — Correct. A firm with high fixed costs like rent and salaries should keep its fixed interest charges low, so it uses less debt.
(D) Taxation Policy — Incorrect. Taxation policy is a factor affecting the dividend decision: the tax on dividends and on capital gains decides whether profits are better paid out or kept back.

NCERT (2026-27 Edition): “Factors Affecting Financing Decisions … (c) Floatation Costs: Higher the floatation cost, less attractive the source.
(d) Cash Flow Position of the Company: A stronger cash flow position may make debt financing more viable than funding through equity.
(e) Fixed Operating Costs: If a business has high fixed operating costs (e.g., building rent, Insurance premium, Salaries, etc.), It must reduce fixed financing costs. Hence, lower debt financing is better. Similarly, if fixed operating cost is less, more of debt financing may be preferred.”

“Factors Affecting Dividend Decision … (g) Taxation Policy: The choice between the payment of dividend and retaining the earnings is, to some extent, affected by the difference in the tax treatment of dividends and capital gains. …”