Question

Which of the following is NOT a factor affecting 'financing decision'?

Options

• Fixed operating costs

• Cash flow position

• Control considerations

• Diversification

Answer 1

Diversification

Explanation:

1. Debt financing is more viable than equity capital for businesses with significant cash flow.
2. To reduce fixed finance costs (interest), businesses with high fixed operating costs, such as rent and insurance premiums, should use less debt. Similarly, lower fixed operating costs allow for more debt financing.
3. Increased equity may reduce control over the business. Companies fearing a takeover may favor debt over equity.