Question

State any four factors affecting the decision that determines the overall cost of capital and the financial risk of the enterprise.

Accepted Answer

The four factors affecting the decision that determines the overall cost of capital and the financial risk of the enterprise (Financing decision) are: (i) Cost of different sources of finance as some sources may be cheaper than others. (ii) Risk associated with different sources of finance is different. (iii) Higher the floatation costs, less attractive the source. (iv) A stronger cash flow position may make debt financing more viable than funding through equity. (v) With higher fixed operating costs, lower fixed financing costs should be opted for. (vi) Issue of more equity may lead to dilution of management’s control over the business. (vii) State of the capital market is considered while taking financing decision as in a depressed capital market, issue of equity shares may be difficult.

State any four factors affecting the decision that determines the overall cost of capital and the financial risk of the enterprise.

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