Which factor affecting the financing decision was taken into consider…

Sehaj joined his father’s business of Organic masalas, near Baddi in Himachal after completing his MBA. In order to capture a major share of the market, he decided to sell the product in small attractive packages by using the latest packaging technology and machinery. He believed that this project has huge financial potential in terms of sales and cash flows. Father asked Sehaj to prepare a financial blueprint for the organization’s future operations. His father suggested that they hire financial consultants to help them with various sources of funds. The consultant enlisted various sources of finance and their associated costs of public issue to determine the optimal source(s) of finance. The consultant also referred to certain guidelines issued by SEBI.

Which factor affecting the financing decision was taken into consideration by the consultant?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Floatation costs

Option (1) Cost — Incorrect. This factor compares the cost of each source itself, such as the interest on debt or the return expected by shareholders. The consultant looked at the cost of raising the issue, which is a different factor.
Option (2) Control consideration — Incorrect. This factor asks whether new shareholders would dilute the owners’ control. Nothing in the passage speaks of control.
Option (3) Floatation costs — Correct. The consultant listed the sources of finance with their “associated costs of public issue”. These are floatation costs: brokerage, commission, printing of applications and advertising paid to raise funds from the public. The higher these costs, the less attractive the source.
Option (4) Cash flow position of business — Incorrect. A strong cash flow makes debt safer to use, but the passage does not speak of the firm’s cash position.

NCERT (2026-27 Edition): “Factors Affecting Financing Decisions The financing decisions are affected by various factors. Important among them are as follows:
(a) Cost: The cost of raising funds through different sources are different. A prudent financial manager would normally opt for a source which is the cheapest.”

“(c) Floatation Costs: Higher the floatation cost, less attractive the source.”

Which factor affecting the financing decision was taken into consideration by the consultant?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Floatation costs

Option (1) Cost — Incorrect. This factor compares the cost of each source itself, such as the interest on debt or the return expected by shareholders. The consultant looked at the cost of raising the issue, which is a different factor.
Option (2) Control consideration — Incorrect. This factor asks whether new shareholders would dilute the owners’ control. Nothing in the passage speaks of control.
Option (3) Floatation costs — Correct. The consultant listed the sources of finance with their “associated costs of public issue”. These are floatation costs: brokerage, commission, printing of applications and advertising paid to raise funds from the public. The higher these costs, the less attractive the source.
Option (4) Cash flow position of business — Incorrect. A strong cash flow makes debt safer to use, but the passage does not speak of the firm’s cash position.

“(c) Floatation Costs: Higher the floatation cost, less attractive the source.”