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प्रश्न
Explain the following as factor affecting the choice of capital structure:
Cash flow position
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उत्तर
Capital structure is the proportion of debt and equity used for financing business operations.
Cash flow position: The cash flow position should match with the obligation of making payments because if the company fails to make payment will face insolvency. So, a company employs more debt securities in its capital structure if a company is sure of generating enough cash inflow. On the other hand, if there is less cash, then a company should employ more of equity in its capital structure.
Strong cash flow position ⇒ More debt
Weak cash flow position ⇒ More equity
संबंधित प्रश्न
Explain how 'cost of debt' affects the choice of capital structure of a company
How does cost of equity affect the choice of capital structure of a company? Explain
Explain the following as factor affecting the choice of capital structure:
Floatation costs
Explain the following as factors affecting the choice of capital structure:
Risk Consideration
Explain any four factors that affect the choice of capital structure of a company.
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.
Explain the term ‘Trading on Equity’? Why, when and how it can be used by company.
Owned Capital Borrowed Capital
Answer the following question.
'Determining the overall cost of capital and the financial risk of the enterprise depends upon various factors.' Explain any six such factors.
ICR = ______
Which component of capital structure determines the overall financial risk?
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.
Assertion (1): Higher the flotation cost, less attractive the source.
Reason (R): The choice between the payment of dividend and retaining the earnings is, to some extent, affected by the difference in the tax treatment of dividends and capital gains.
State any four factors affecting the decision that determines the overall capital and the financial risk of the enterprise.
Krish limited is in the business of manufacturing and exporting carpets and other home decor products. It has a share capital of ₹ 70 lacs at the face value of ₹ 100 each. Company is considering a major expansion of its production facilities and wants to raise ₹ 50 lacs. The finance manager of the company Mr. Prabhakar has recommended that the company can raise funds of the same amount by issuing 7% debentures. Given that earning per share of the company after expansion is ₹ 35 and tax rate is 30%, did Mr. Prabhakar give a justified recommendation?
Show the working.
