question_answer

Name the decision, a financial manager takes keeping in view the overall objective of maximising shareholders' wealth. Also, explain any four factors affecting the decision.

Answer:

The above said decision is financing decision. It is concerned with the decisions about how much funds are to be raised from which long-term source, i.e. by means of share-holders funds or borrowed funds. The factors affecting financing decisions are: (any four) (i) Cost The cost of raising funds from different sources are different. A wise finance manager opts for the cheapest source of finance. (ii) Risk The risk associated with each of the source is different. The source which involves least risk should be preferred. (iii) Cash Flow Position of the Company A stronger cash flow position may make debt financing more viable than funding through equity. (iv) Control Considerations Issue of more equity may dilute shareholders' control over the business. Therefore, a company afraid of a takeover bid may prefer debt to equity. (v) State of Capital Market If the stock market is rising, then it is easy to sell equity shares. But in a depressed capital market, the company has to opt for debt financing.