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प्रश्न
Explain how 'cost of debt' affects the choice of capital structure of a company
How does ‘Cost of Debt’ affect the capital structure of a company? State.
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उत्तर १
Cost of debt affects the choice of capital structure of a company. If the firm can borrow funds at a lower rate (i.e. low cost of debt), then more debt can be raised. On the contrary, if the firm can borrow funds at a higher rate (i.e. high cost of debt), then a lesser amount of a debt will be raised
Low cost of debt ⇒ Higher Proportion of Debt in Capital Structure
High Cost of Debt ⇒ Lower Proportion of Debt in Capital Structure
उत्तर २
Debt is risky where payment of regular interest on the debt is a legal obligation of the business. If the firm can manage a borrowed fund at a lower rate of interest, then it will prefer to have more of debt as compared to equity.
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संबंधित प्रश्न
Sakshi Ltd. is a company manufacturing electronic goods. It has a share capital ofRs 120 lakhs. The earning per share in the previous year wasRs 0.5. For diversification, the company requires additional capital ofRs 80 lakhs. The company raised funds by issuing 10% debentures for the same. During the current year the company earned profit ofRs 16 lakhs on capital employed. It paid tax @ 40%.
a. State whether the shareholders gained or lost in respect of earning per share on diversification. Show your calculations clearly.
b. Also state any three factors that favour the issue of debentures by the company as part of its capital structure.
Explain briefly any four factors which affect the choice of capital structure of a company.
What is meant by Capital Structure?
What is meant by Trading on Equity?
How does cost of equity affect the choice of capital structure of a company? Explain
How do ‘Floatation costs’ affect the choice of capital structure of a company? State
Explain the following as factor affecting the choice of capital structure:
Cash flow position
Explain the following as factors affecting the choice of capital structure:
Cost of equity
Explain the following as factors affecting the choice of capital structure:
Return on Investment
Explain any four factors that affect the choice of capital structure of a company.
What is meant by capital structure?
Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional Rs. 80,00,000 for replacing machines with modern machinery of higher production capacity. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was Rs. 8,00,000 and total capital investment was Rs. 1,00,00,000. Suggest whether issue of debenture would be considered a rational decision by the company. Give reason to justify your answer. (Ans. No, Cost of Debt (10%) is more than ROI which is 8%).
“Capital structure decision is essentially optimisation of risk-return relationship.” Comment.
Write the internal factors influencing Capital Structure.
Answer the following question.
'Determining the relative proportion of various types of funds depends upon various factors.' Explain any six such factors.
______ refers to a situation when a company is not able to meet its fixed financial charges.
ICR = ______
Tapan, after leaving his job, wanted to start a Private Limited Company with his son. His son was keen that the company may start manufacturing of Mobile-phones with some unique features. However, Tapan felt that the mobile phones are prone to quick obsolescence and a heavy fixed capital investment would be required regularly in this business. Therefore, he convinced his son to start a furniture business. ______ factor affecting fixed capital requirements is making Tapan choose furniture business over mobile phone.
Which of the following is not a factor affecting capital structure of a company?
