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: Companies with substantial fixed costs tend to avoid further financial obligations. This aversion stems from the increased risk associated with debt due to mandatory interest payments. Consequently, high fixed costs diminish the inclination towards debt financing.
Cash Flow Position: Companies exhibiting strong and consistent cash inflows are better equipped to manage debt repayment, including both interest and principal. Therefore, these companies are more inclined to utilize debt financing.