Financing decision refers to the decision-making process that companies undertake regarding what proportion of equity and debt capital to have in their capital structure. It is a crucial decision that is to be made by the financial manager, and it is focused on the borrowing and allocation of funds required for the investment decisions of the firm. The financing decision seeks to optimize the weighted average cost of capital (WACC) by looking at a company’s capital structure, specifically the cost of equity and the cost of debt. The objective of the financial decision is to balance an optimum capital structure.

Factors affecting financing decision include the cost of raising funds from different sources, the risk associated with each of the sources, the floatation cost, the cash flow position of the company, flexibility, and regulatory framework. The cost of capital is an important ingredient in the valuation of a company by investors. Companies aim to minimize their cost of funding while maintaining a stable credit rating and the ability to finance new projects.

In summary, financing decision is a crucial decision that companies undertake regarding what proportion of equity and debt capital to have in their capital structure. It seeks to optimize the WACC by looking at a company’s capital structure, specifically the cost of equity and the cost of debt. Factors affecting financing decision include the cost of raising funds from different sources, the risk associated with each of the sources, the floatation cost, the cash flow position of the company, flexibility, and regulatory framework.