Question

Name the decision a financial manager takes, keeping in view the overall objective of maximising shareholders' wealth.

Explain any two factors affecting this decision?

Answer 1

Financing decision is concerned with the decisions about how much funds are to be raised from which long-term source, i.e. by means of shareholders’ funds or borrowed funds.

Shareholders’ funds include share capital, reserves and surplus and retained earnings, whereas, borrowed funds include debentures, long-term loans and public deposits.

Factors affecting financing decision :

• Cost
  

The cost of raising funds from different sources are different. A wise finance manager opt for the cheapest source of finance.

• Risk
  

The risk associated to each of the source is different. The source which involves least risk should be preferred.