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Question
Explain the following as factors affecting the choice of capital structure:
Cost of equity
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Solution
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
RELATED QUESTIONS
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.
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Name the method through which the company decided to raise additional capital.
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Explain the following as factor affecting the choice of capital structure:
Floatation costs
Explain the following as factors affecting the choice of capital structure:
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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?
Explain the term ‘Trading on Equity’? Why, when and how it can be used by company.
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Owned Capital Borrowed Capital
ICR = ______
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