What Is Financial Mix Decision?


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Luke Wilcox Profile
Luke Wilcox answered
Financial mix is a term used in the corporate world to define a mix of equity to debt in a firm. In other words, this term is used to describe the formula that defines how much capital is being raised by debt and how much is being raised by equity. There are many that believe this particular mix can have an impact on increasing or decreasing the value of the firm.
The goal of any firm is to continuously increase the value. Any plans that are made, financial or otherwise, will be done with this goal in mind. Those in charge of the finances want to bring more wealth to the shareholders to keep them happy with the way the business is going.
For most firms, debt is considered a cheaper source of finance. This is because when a firm raises capital through debt the interest that they are charged is tax deductible. The same is not true for debt that is raised from capital.
Because of this, a financial mix can actually help increase the value of the firm. It does this by altering the amount of debt that the firm has. This process will change the interest that the firm must pay out. If the interest that is paid out is decreased due to the new debt, then the income of the firm is increased. This leads to an increase in the value of the firm.
This is why many in finance believe that financial mix plays a pivotal role in how successful a business is. However, there are risks. By increasing the debt of a firm, there is also the increased risk of bankruptcy. Those in charge of the finances must be certain that they know what they are doing if they are going to adjust the financial mix.
d ds Profile
d ds answered
Determining the financial mix can be considered the same as the firm’s capital structure. Every firm needs money to operate and start up which is called capital. The main decision to be taken is to determine how this capital will be generated.the resultant capital structure of the firm is called the financial mix. In simple word, it is the amount of capital generated from debt and equity. This represents the money the company generated by issuing bonds and issuing stocks. Keeping in mind the objective of the firm, the firm decides how the financial mix is to be designed. It is also the maximum amount of capital that can be generated at the lowest cost.

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