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THE FINANCING DECISION
Financing decision
3. Capital structure / risk profile:
• Consider the present D:E ratio in relation to the
optimum or target D:E equity ratio.
• It is assumed that a company will attempt to move
towards the optimum debt : equity ratio when new
funds are raised.
• Consider the impact on overall risk profile. Risk is
inevitable, however, it is the responsibility of
management to manage risk.
• Equity may be more expensive but it is lower risk from
the perspective of the entity as dividends only need to
be paid when profits are available.
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