The financing decisions are affected by various factors. Some of them…

The financing decisions are affected by various factors. Some of them are as follows:

A. Risk associated with each source
B. Cash flow position of competing company
C. Floatation costs
D. Stability of earnings

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → A and C only

The financing decision is about how much money to raise from each long-term source, such as equity, debt and retained earnings. Its main factors are cost, risk, floatation costs, the firm’s own cash flow position, fixed operating costs, control considerations and the state of the capital market.

A. Risk associated with each source — Correct. Each source carries a different risk. Debt must be repaid with interest whatever the profit, so it is riskier for the firm than equity.
B. Cash flow position of competing company — Incorrect. The factor is the cash flow position of the company itself. A firm with strong cash flow can afford to borrow, because it can pay the interest. A rival’s cash flow does not decide this.
C. Floatation costs — Correct. Raising funds costs money: brokerage, underwriting and the expenses of an issue. The higher the floatation cost of a source, the less attractive it is.
D. Stability of earnings — Incorrect. This is a factor of the dividend decision. A company with stable earnings can declare higher dividends.

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.
(b) Risk: The risk associated with each of the sources is different.”

“(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.”

“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. …”