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CA Intermediate · Financial Management and Strategic Management · Scope and Objectives of Financial Management

In the context of the finance function of a firm, which of the following is a decision that falls under the 'financing decision' rather than the 'investment decision'?

Choosing between a debt-heavy and an equity-heavy mix of long-term funds is a financing decision, because it concerns the sources and composition of capital. Replacing machinery, selecting projects and deciding cash holdings relate to how funds are deployed in assets, which is the investment decision.

  1. AChoosing between a debt-heavy and an equity-heavy mix of long-term fundsCorrect
  2. BDeciding whether to replace an old machine with a new one
  3. CSelecting which of two mutually exclusive projects to undertake
  4. DDeciding how much to hold in cash and marketable securities

Explanation

The financing decision deals with the sources of funds and the capital structure, i.e. the mix of debt and equity. Machine replacement and project selection are capital budgeting (investment) decisions. Deciding cash holdings is a current asset (working capital) matter, which is part of investment in current assets, not the financing mix.

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