Business Studies

Business Finance

Easy

Aval Ltd. is engaged in the business of the export of canvas goods and bags. In the past, the performance of the company was above expectations. In line with the latest demand in the market, the company decided to venture into leather goods for which it required specialized machinery. For this, the Finance Manager Prabhu prepared a financial blueprint for the organization's future operations to estimate the amount of funds required and the timings with the objective to ensure that enough funds are available at the right time. He also collected the relevant data about the profit estimates for the coming years. By doing this, he wanted to be sure about the availability of funds from the internal sources of the business. For the remaining funds, he is trying to find alternative sources from outside. The company is willing to go for a public issue of shares and debentures to be made under SEBI guidelines. Public issue of shares and debentures requires considerable outlay of funds too. Due to extensive operations, the manager is of the viewpoint that a company may have to ensure that earnings before interest and taxes of a company should cover the interest obligation. The manager also felt that the cash profits generated by the operations need to be compared with the total cash required for the service of the debentures and the preference share capital.

"The company is willing to go for a public issue of shares and debentures to be made under SEBI guidelines". Identify the factor affecting capital structure highlighted in the aforesaid statement.

Risk Consideration

Regulatory Framework

Stock Market Conditions

Capital Structure of other Companies

✅ Correct Option: 2

Option 1 -> Risk Consideration: This factor involves assessing financial and business risks while deciding the debt-equity mix, which is not the primary focus of the statement.

Option 2 -> Regulatory Framework: The statement specifically mentions "SEBI guidelines" which are regulatory requirements that govern public issues of securities, directly indicating compliance with legal and regulatory framework.

Option 3 -> Stock Market Conditions: This factor relates to market trends, investor sentiment, and timing of issues based on market conditions, not regulatory compliance mentioned in the statement.

Option 4 -> Capital Structure of other Companies: This involves benchmarking with peer companies' capital structures, which is not referenced in the given statement.

Hence, Option 2: Regulatory Framework -> The statement explicitly mentions that the public issue of shares and debentures will be made "under SEBI guidelines," which are mandatory regulatory provisions that companies must comply with when raising capital from the public. This clearly highlights the Regulatory Framework as the factor affecting capital structure decisions -> correct

Question 47

"Finance Manager Prabhu prepared a financial blueprint for the organization's future operations to estimate the amount of funds required and the timings with the objective to ensure that enough funds are available at the right time". Identify the concept of financial management highlighted in the aforesaid statement.

Question 48

"Public issue of shares and debentures requires considerable outlay of funds at the time of issue too". Identify the factor affecting capital structure highlighted in the aforesaid statement.

Question 49

"Due to extensive operations, the manager is of the viewpoint that a company may have to ensure that earnings before interest and taxes of a company should cover the interest obligation". Identify the factor affecting capital structure highlighted in the aforesaid statement.

Question 50

Which financial ratio will establish the relation between the cash profits generated by the operations and the total cash required for the service of the debentures and the preference share capital?

"The company is willing to go for a public issue of shares and debentures to be made under SEBI guidelines". Identify the factor affecting capital structure highlighted in the aforesaid statement.

Solution

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