What are the Characteristics of the financing decision
There are two characteristics of the financing decision.
First, theory of capital structure which illustrates theoretical relationship between the employment of debt and return of the shareholders. Use of debt implies a higher return to shareholders as also the financial risk. A proper balance between debt and equity to ensure a trade-off between risk and return to shareholders is essential. A capital structure with a reasonable proportion of debt and equity capital is known as the optimum capital structure. Hence, one dimension of financing decision whether there is an optimum capital structure? And in what proportion must funds be raised to maximise return to the shareholders?
Second aspect of the financing decision is determination of an appropriate capital structure, given the facts of a specific case.