Financing Decisions by a Firm
Financing decision relate to capital structure, Capital structure of a firm is determined by the proportions of ownership capital and creditorship capital in total capital employed. Financing decisions, thus, relate to proportion of debt. capital and proportion of equity capital in total capital and proportion of equity capital in total capital employed. It is possible to change the value of the firm by changing capital structure. So financing decision may have important impact upon attainment of financial objective.
While making financing decision, the financial manager aims at securing optimal financing mix. An optimal financing mix is that which contributes to the maximization of market price per share, in the long run.
Financing decisions are concerned with the choice of sources of funds selection of a particular source of funds is principally governed by (a) cost of financing and (b) the nature of commitment (fixed commitment or variable commitment) or the nature of cost. (c) period of raising funds.
(i) Determining financial risk (determining the volume of fixed charges).
(ii) raising funds from sources like development banks, public (shareholder and creditors) bankers etc.
(iii) Performing, Earning Before Interest and Taxes (EBIT) Earning Per Share (EPS) analysis and cash flow analysis ;
(iv) determination of cost of capital of different sources and weighted average cost of capital :
(v) analyzing lease financing and evaluating other borrowing alternatives;
(vi) evaluating the impact of income taxes on financial average;
(vii) determining the level of net working capital ;
(viii) determining the amounts and forms of different components of liquid assets;
(ix)determining the type of extent of security to be offered to creditors ;
(x) determining the period for which creditorship capital from different types of sources would be used by the firm.
(xi) administering retained earnings (including the decision of capitalizing retained earnings by issuing bonus shares).
(xii) making arrangement for insurance, underwriting and brokerage and other activities related to sale of equity shares activities related to sale of equity shares and debt instruments.
(xiii) estimating the rate on return on investment and administering credits and collection thereof.