Financing Decision:
The financing objective asserts that the mix of debt and equity selected to finance investment should maximize the value of investment made. Financing Decision consists of raising finance, different financial instruments and obligations attached to it. The finance manager involve in the following financing decisions:
1. Determining the level of gearing.
2. Determining the financing pattern of long-term fund requirements.
3. Determining the financing pattern of medium and short-term fund requirements.
4. Raising of fund through financial instruments like equity shares, preference shares, debentures, bonds, etc.
5. Arrangement of fund from banks and financial institutions for long term, medium term and short-term needs.
6. Arrangement of finance for working capital requirements.
7. Consideration of interest burden of the firm.
8. Taking advantage of interest and depreciation in reducing the tax liability of the firm.
For financing decision, the capital structure is broadly divided into:
a) Equity:
The raising of fund through issue of shares is known as equity. The shareholders expect the return in the form of dividend. The dividend payments are made only if the distributable profits are available with the company after payment of interest charges and tax payment.
b) Debt:
The debt funds are raised in the forms of debentures, bonds, term loans etc. The expectation of the provider of debt is to obtain return in the form of interest payments. The interest/debt is repaid as per the agreement. The interest should be paid irrespective of profitability of the firm.
