Advertisements
Advertisements
प्रश्न
State any three factors determining the choice of an appropriate capital structure of a company.
Advertisements
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.
APPEARS IN
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 Capital Structure?
Explain the following as factor affecting the choice of capital structure:
Cash flow position
Explain the following as factor affecting the choice of capital structure:
Floatation costs
Explain the following as factors affecting the choice of capital structure:
Return on Investment
Explain the following as factors affecting the choice of capital structure:
Flexibility
Write the external factors influencing capital structure.
Write notes on Capital structure and its components.
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%).
Explain the term ‘Trading on Equity’? Why, when and how it can be used by company.
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.
ICR = ______
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.
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.
______ 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?
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 ______.
