financing mix

Management must also attempt to match the financing mix to the asset being financed as closely as possible, in terms of both timing and cash flows.

This should reflect the riskiness of the investment, typically measured by the volatility of cash flows, and must take into account the financing mix.

As above, since both hurdle rate and cash flows (and hence the riskiness of the firm) will be affected, the financing mix will impact the valuation of the firm (as well as the other long-term financial management decisions).

Managers use models such as the CAPM or the APT to estimate a discount rate appropriate for a particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected.

The issue of equities, although it may improve the creditworthiness of the company, will also reduce the gearing (leverage) in its financing mix and also reduce the tax-shield effect of interest payments due to debt holders, thus lowering the potential rate of return to the owners.