Q.The decision that concerns HOW a company should raise the funds it needs — the mix of share capital, debentures, and deposits — is known as the:
(A) Investment Decision
(B) Financing Decision
(C) Dividend Decision
(D) Production Decision

The one-word answer is Capital Structure — the composition or proportion of the different long-term sources of finance in a company's total capitalisation.

Every company raises funds from several sources — equity share capital, preference share capital, retained earnings, debentures and long-term loans. Capital structure refers to the relative proportion in which these owned and borrowed funds are combined to make up the total capital.

A sound capital structure balances risk and return: too much borrowed capital increases fixed interest burden and financial risk, while too little may reduce the benefit of trading on equity. Deciding the right capital structure is a key function of corporate finance.

A company pays taxes to the government. Dividend is paid to shareholders out of profit and interest is paid to creditors/debenture-holders, but only tax is the compulsory payment a company makes to the government.

Every company that earns income is a separate taxable entity and must pay income tax (and other statutory dues such as GST) to the government. This is a legal obligation, not a voluntary distribution.

The other options are payments to different stakeholders and not to the government:

• Dividend is a share of profit distributed to the company's shareholders.

• Interest is the fixed return paid to lenders and debenture-holders on borrowed capital.