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प्रश्न
State any three factors determining the choice of an appropriate capital structure of a company.
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उत्तर
Factors Affecting the Choice of Capital Structure:
- Cash flow position: Before choosing the capital structure of the company, it is important to take into account the magnitude of the anticipated cash flows. Debt can be used if there is enough cash flow, but it must fulfill set payment obligations. The business must make specific cash payments for things like (i) routine business operations, (ii) investments in fixed assets, (iii) debt servicing obligations, and (iv) maintaining a suitable buffer.
- Interest coverage ratio:
- The interest coverage ratio, computed as EBIT/Interest, measures how often a company's earnings before interest and taxes (EBIT) cover its interest commitment.
- The greater the interest coverage ratio, the lesser the danger that the company would fail to satisfy its interest payment commitments.
- Debt Service Coverage Ratio: The cash earnings created by activities are compared to the amount of money required to pay off the debt and the capital for the preference shares. The following is the formula:
Debt. Service coverage ratio = (Profit after tax + Depreciation + Interest + Non Cash)/(Expenses Preference Dividend + Interest + Repayment Obligation) - Return On Investment: If the company's return on investment is better, it can opt to enhance its EPS through trading on equity, implying that its flexibility to employ debt is stronger.
- Cost Of Equity:
- When a corporation employs more debt, the financial risk that equity holders face increases, as does their desired rate of return.
- If debt is employed beyond a certain threshold, the cost of equity may rise quickly, and the share price may fall despite rising EPS.
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संबंधित प्रश्न
Viyo Ltd.' is a company manufacturing textiles. It has a share capital of Rs 60 lakhs. The earnings per share in the previous year was Rs 0.50. For diversification, the company requires additional capital of Rs 40 lakhs. The company raised funds by issuing 10% debentures for the same. During the current year the company earned profit of Rs 8 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 you calculations clearly.
b. Also, state any three factors that favour the issue of debentures by the company as part of its capital structure.
What is meant by Trading on Equity?
Explain the following as factor affecting the choice of capital structure:
Floatation costs
Explain the following as factors affecting the choice of capital structure:
Stock-Market conditions
Explain the following as factors affecting the choice of capital structure:
Risk Consideration
Write notes on Capital structure and its components.
State, with reasons, whether the following statements are True or False (Any THREE) :
It is not possible to go ahead without financial plan.
What is meant by capital structure?
Owned Capital Borrowed Capital
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 _______.
Financial leverage is called favourable if :
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.
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.
______ 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 ______.
