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प्रश्न
Explain the following as factor affecting the choice of capital structure:
Floatation costs
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उत्तर
- When a business generates money by issuing securities, it faces flotation charges, which include underwriting, legal, and registration fees.
- These expenses have a big impact on the capital structure decision.
- The business may decide to use a smaller percentage of a certain funding source in its capital structure in order to save costs if the flotation costs of that funding type, such as issuing shares, are high.
- On the other hand, sources that have lower flotation costs might be more appealing.
संबंधित प्रश्न
Explain briefly any four factors which affect the choice of capital structure of a company.
What is meant by Trading on Equity?
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:
Risk Consideration
Explain the following as factors affecting the choice of capital structure:
Control
Write the external factors influencing capital structure.
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.
Explain the term ‘Trading on Equity’? Why, when and how it can be used by company.
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.
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.
State any four factors affecting the decision that determines the overall capital and the financial risk of the enterprise.
______ refers to the increase in profit earned by the equity shareholders due to the presence of fixed financial charges like interest.
Which of the following is not a factor affecting capital structure of a company?
