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प्रश्न
Write the external factors influencing capital structure.
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उत्तर
- Market Condition: -The pattern of capital is also influenced by prevailing market conditions. Readiness of investors to purchase shares, interest rate, stages of business cycle, tax, risk of investment, etc together form market conditions.
- Attitude of Investor: -Attitude of investor also plays an important role in determination of capital structure. The investor s who is ready to take risk and expect higher returns prefer equity shares for investment. On the contrary, cautions investors, who are interested in safe and assured income, invest in debentures.
- Cost of Capital: -Cost of capital is one of the important factors while designing capital structure. The cost of capital is the minimum return expected by its supplier. The expected return depends upon the degree of risk. The high degree of risk is assumed by shareholders than debt holder. In case of debt holder, the rate of interest is fixed, while rate of dividend given to shareholder is not fixed.
- Government rules and regulation: -Statutory obligations play important role in capital structure decision. The SEBI has prescribed Debt: equity ratio norm of 2:1. A higher debt-equity ratio of 3:1 has been permitted for large capital intensive project. The small industrial projects are given concession and aid by government to avail more debt capital as compared to equity capital.
- Attitude of financial institution: -If financial institution prescribes high terms of lending, then management has to move to other source of financing. If financial institutions prescribe easy terms of lending, it would be advantageous to obtain funds at cheaper rate.
- Rate of Interest: -The prevailing rate of interest plays vital role in determining capital structure. If prevailing interest rates are higher, firms will delay debt financing. On the other hand, if prevailing interest rates are lower, firm will opt debt financing.
- Taxation: -Interest paid against debt is tax deductable expenditure. Dividend is not considered as tax deductable expenditure for the company. As such, issue of debt is more advantageous than issue of share capital.
- Competition:- The firm which are facing cut-throat competition prefer to issue equity shares because their earnings are not certain and adequate. But the companies which have monopolies may issue debt capital because of certainty of earnings.
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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.
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
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:
Flexibility
Explain any four factors that affect the choice of capital structure of a company.
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%).
“Capital structure decision is essentially optimisation of risk-return relationship.” Comment.
Write the internal factors influencing Capital Structure.
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.
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.
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.
