Question

Explain the following as factors affecting 'Financing Decision':
(i) Fixed operating costs
(ii) Cash flow position of the company

Hint:

Financing decision factors always revolve around risk, cost, and control. Primary market is for raising funds; secondary market is for liquidity.

Answer 1

Fixed Operating Costs: Firms with higher fixed costs are cautious about taking on additional financial burden, as debt financing increases risk due to obligatory interest payments. Therefore, high fixed costs reduce the preference for debt in financing decisions.
Cash Flow Position: If a company has robust and reliable cash inflows, it is in a better position to service debt by paying interest and principal timely. Hence, such companies are more likely to go for debt financing.