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प्रश्न
Explain the following as factors affecting the choice of capital structure:
Cost of equity
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उत्तर
Cost of equity: In terms of dividend payments, higher the cost of equity, lower is its proportion in total capital.
Use of debt increases ⇒ Financial risk increases ⇒ Expectation of rate of return increases ⇒ Difficult to opt for ⇒ Equity cost increases
संबंधित प्रश्न
What is meant by Capital Structure?
What is meant by Trading on Equity?
Veronica Ltd., a reputed truck manufacturing company, needs rupees twenty crores as additional capital to expand its business. Mr Alind Jindal, the CEO of the company, wants to raise funds through equity. The Finance Manager, Mr Nikhil Sachdeva, suggests that the existing shareholders be offered the privilege to subscribe to the new issue of shares as per the terms and conditions of the company which was agreed by Mr Alind Jindal.
Name the method through which the company decided to raise additional capital.
Explain how 'cost of debt' affects the choice of capital structure of a company
Explain the following as factor affecting the choice of capital structure:
Floatation costs
Write the external factors influencing capital structure.
Write notes on Capital structure and its components.
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%).
Owned Capital Borrowed Capital
Answer the following question.
'Determining the relative proportion of various types of funds depends upon various factors.' Explain any six such factors.
Read the following text and answer the following questions on the basis of the same:
Mr. A. Bose is running a successful business. Mr. Bose is the owner of R. K. Cement Ltd. Mr. Bose decided to expand his business by acquiring a Steel Factory. This required an investment of Rs. 60 crores. To seek advice in this matter, he called his financial advisor Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%). Employ more of cheaper debt may enhance the EPS. Mr. Ghosh also suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest on loan is a tax deductible expense for computation of tax liability. After due deliberations with Mr. Ghosh, Mr. Bose decided to raise funds from a financial institution.
Identify the concept of Financial Management as advised by Mr. Ghosh in the above situation.
Read the following text and answer the following questions on the basis of the same:
Mr. A. Bose is running a successful business. Mr. Bose is the owner of R. K. Cement Ltd. Mr. Bose decided to expand his business by acquiring a Steel Factory. This required an investment of Rs. 60 crores. To seek advice in this matter, he called his financial advisor Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%). Employ more of cheaper debt may enhance the EPS. Mr. Ghosh also suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest on loan is a tax deductible expense for computation of tax liability. After due deliberations with Mr. Ghosh, Mr. Bose decided to raise funds from a financial institution.
“Mr. T. Ghosh who advised him about the judicious mix of equity (40%) and Debt (60%)”
The proportion of debt in the overall capital is called _______.
______ refers to a situation when a company is not able to meet its fixed financial charges.
ICR = ______
Which component of capital structure determines the overall financial risk?
State any four factors affecting the decision that determines the overall capital and the financial risk of the enterprise.
When the proportion of debt and equity is such that it results in an increase in the value of equity share the ______ is/are said to be optimal.
State any three factors determining the choice of an appropriate capital structure of a company.
______ refers to the increase in profit earned by the equity shareholders due to the presence of fixed financial charges like interest.
The Board of directors of Medex Pharma Ltd. decided to issue debentures worth ₹ 40 lakhs in order to finance a major Research and Development project. This would increase the Debt Equity ratio from 1:1 to 2:1.However, at the same time it would increase the Earnings per share.
The reason that will justify the above situation is ______.
