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CS Executive · Corporate Accounting and Financial Management · Introduction to Financial Management

Which of the following is classified as a financing decision rather than an investment decision in corporate financial management?

Deciding the proportion of long-term debt and equity is a financing decision because it determines the capital structure, that is, how funds are sourced. Selecting machines, acquiring a unit or setting inventory levels all concern how funds are deployed in assets, so they are investment decisions.

  1. AChoosing between two machines of different capacity for a new plant
  2. BDeciding the proportion of long-term debt and equity to raise for funding expansionCorrect
  3. CDeciding whether to acquire a competitor's business unit
  4. DDeciding the level of inventory to be held for production

Explanation

A financing decision concerns the sources of funds and the mix of debt and equity, i.e. the capital structure. Choosing machines and acquiring a business are capital budgeting (investment) decisions, and inventory level is a working capital (short-term investment) decision.

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