What are the factors which will affect the capital structure of this company?
Capital structure refers to the proportion in which debt and equity funds are used for financing the operations of a business. A capital structure is said to be optimum when the proportion of debt and equity is such that it results in an increase in the value of shares. The factors that will affect the capital structure of this company are
(i) Equity Funds The composition of equity funds in the capital structure will be governed by the following factors
(a) The requirement of funds of ‘S' Limited is for long term. Hence, equity funds will be more appropriate.
(b) There are no financial risks attached to this form of funding.
(c) If the stock market is bullish, the company can easily raise funds through issue of equity shares.
(d) If the company already has raised reasonable amount of debt funds, each subsequent borrowing will come at a higher interest rate and will increase the fixed charges.
(ii) Debt Funds The usage and the ratio of debt funds in the capital structure will be governed by factors like
(a) The availability of cash flow with the company to meet its fixed financial charges. The purpose is to reduce the financial risk associated with such payments which can further be checked by using ‘debt' service coverage ratio.
(b) It will provide the benefit of trading on equity and hence will increase the earning per share of equity shareholders. However, ‘return on investment’ ratio will be the guiding principle behind it. The company should opt for trading on equity only when return on investment is more than the fixed charges.
(c) Interest on debt funds is a deductible expense and therefore, will reduce the tax liability.
(d) It does not result in dilution of management control.
Explain the importance of having a financial plan for this company. Give an imaginary plan to support your answer.
Discuss about working capital affecting both the liquidity as well as profitability of a business.
‘S’ Limited is manqufacturing steel at its plant in India. It is enjoying a buoyant demand for its products as economic growth is about 7%-8% and the demand for steel is growing. It is planning to set up a new steel plant to cash on the increased demand it is facing. It is estimated that it will require about ? 5,000 crores to set up and about t 500 crores of working capital to start the new plant.
What is the role and objectives of financial management for this company?
Capital structure decision is essentially optimisation of risk-return relationship. Comment.
Keeping in mind that it is a highly capital intensive sector what factors will affect the fixed and working capital. Give reasons with regard to both in support of your answer.
What is meant by working capital? How is it calculated?
Discuss five important determinants of working capital requirements.
A capital budgeting decision is capable of changing the financial fortune of a business. Do you agree? Why or why not?
Explain the term ‘trading on equity’. Why, when and how it can used by a business organisation?