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The main decisions a corporation must make fall under these four categories: Investment, Financing, Working capital,...

The main decisions a corporation must make fall under these four categories: Investment, Financing, Working capital, and Payout. What is the financing decision? How can you tie in your knowledge of bonds and stocks with the financing decision? In other words, what do bonds and stocks have to do with the financing decision?

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Answer #1

Bond and stocks are securities of the company

They play a pivotal role in financing decision

Financing mean to arrange funds for our planned projects

Debt has some cost component and we call it as cost of debt

Cost component of equity is called cost of equity

We choose a mix of debt and equity so that the weighted average cost of capital is less than the projects expected return or our return on equity

So debt and equity play a key role in financing decision

Cost of equity is higher than cost if debt so we add debt to reduce weighted average cost up to a limit and cost of equity depends and investors risk perception on the company

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