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Questions
What is meant by capital structure?
What is capital structure?
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Solution
Capital structure is the proportion of debt and equity used for financing business operations. It represents the proportion of debt capital and equity capital in the capital structure. It is not easy to define the best capital structure for a firm. It should increase the value of the equity share or maximize the wealth of the equity shareholders.
`"Capital Structure" = "Dept"/"Equity"`
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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
Explain the following as factors affecting the choice of capital structure:
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Explain the term ‘Trading on Equity’? Why, when and how it can be used by company.
Owned Capital Borrowed Capital
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Financial leverage is called favourable if :
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.
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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.
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.
