Author(s) :

1M. Abdul Basid, P. Mahalakshmi.

Volume/Issue :

Abstract :

The financing decisions occupy a pivotal role in the overall finance function in a corporate firm which mainly concerns itself with an efficient utilization of the funds provided by the owners or obtained from external sources together with those retained or ploughed back out of surplus or undistributed profits. These decisions are mainly in the nature of planning capital structure, working capital and mechanism through which funds can be raised from the capital market whenever required. The financing decisions explains how to plan an appropriate mix with least count, how to raise long term funds, and how to mobilize the funds for working capital within a short span of time. Such a financing policy provides an appropriate backdrop for formulating effective policies for investment of funds as well as management of earnings. It contributes to magnifying the earnings on equity as profitability (expressed as return on equity), to a large extent, is dependent on the degree of leverage in the capital structure. Besides, the valuation of the structure of physical assets depends fundamentally on the financing mix. This makes it necessary for the management of a firm to pursue a well thought out of financing policy, which ought to be framed initially, incorporating, among other things, the proportion of the debt and equity, types of debts and own funds to be used and volume of the funds to be raised from each source or combination of sources, to enable the firm to have a proper capitalization. In the absence of this, the firm may face the problem of either over capitalization or under capitalization impeding its smooth financial functioning.

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