Select the factors to be considered while making financing decisions in a company:
(A) Fixed operating costs
(B) Cash Flow Position
(C) Stability of Earnings
(D) State of Capital Markets
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (B) and (D) only
(A) Fixed operating costs — Correct. A firm with high fixed costs, such as rent and salaries, must pay them even when sales fall. Such a firm should use less debt.
(B) Cash Flow Position — Correct. A strong cash flow means the firm can pay interest and repay loans on time, so it can take on more debt.
(C) Stability of Earnings — Incorrect. This is a factor in the dividend decision. A company with stable earnings can pay a higher dividend. It is not a factor of the financing decision.
(D) State of Capital Markets — Correct. When the share market is booming, equity is easy to raise. When it is dull, the firm may have to turn to debt.
NCERT (2026-27 Edition): “Factors Affecting Financing Decisions The financing decisions are affected by various factors. Important among them are as follows:” “(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. …” “(g) State of Capital Market: Health of the capital market may also affect the choice of source of fund. …” “Factors Affecting Dividend Decision … (b) Stability Earnings: Other things remaining the same, a company having stable earning is in a better position to declare higher dividends. …” |