Question

Why is it important to understand and apply financing options for a decision-maker?

Answer 1

Financing option means all the options which are available for the managers to finance the company and different projects and it will be either debt capital or equity capital or preference capital or external financing or internal financing and it will be dependent after ascertainment of cost as well as return and nature of the project along with the uncertainty associated with returns and cash flows.

Decision maker should always be aware about various different financing options and the benefits as well as the disadvantages associated with those options like when the decision-maker will be opting for more of the debt financing then it can be leading for solvency problem of the company for the longer period of time and if he is looking for equity capital then it would be meaning that he will have to dissolve control over the organisation so this will be having advantages and disadvantages in its own perspective and decision makers should always be try to match the objective of the company with the appropriate type of financing so that it can help the decision maker in order to maximize the rate of return and maximize the value of the company.

In the financial world, there are large number of financing options which are available for a corporate and decision makers should be trying to incorporate various types of financing in optimum proportion in the overall capital of the company so that it will be helping him in order to generate a rate of return which will be higher than the cost of capital and maximize the value.