Business Studies

Business Finance

Medium

Hind Beverages

Hind Beverages Inc., the leading soft drink and drinking water company in the private sector, has acquired Himalayan Water Co., in a deal worth $8.6 billion in 2007 to further expand its market share. A financial decision of this magnitude has significant implicitness for both Hind Beverages Inc and Himalayan Water as well as their employees and shareholders.

Hind Beverages Inc. raised a debt of over $8 billion to finance the transaction. This financing decision affected the capital structure of the acquirer.

Why might a company prefer debt over equity for financing?

Debt financing does not affect earnings per share.

Debt financing is safe

No obligation of payment in case of liquidation

Retain Control over business

✅ Correct Option: 4

Issuing fresh equity dilutes ownership and voting power, whereas lenders and debenture holders have no voting rights. So raising funds through debt lets existing owners retain control over the business. Debt is riskier, must be repaid even in liquidation, and does affect EPS through trading on equity, so the other options are wrong.

Question 41

What will be the net effect on the acquirer company's capital structure after the acquisition?

Question 42

What may be the reason behind the acquisition of Himalayan Water Co. by Hind Beverages Inc.?

Question 43

Identify the source of debt that a company might have used to raise $8 billion to finance the transaction.

Question 45

Which of the following statements is NOT correct about capital structure?

Why might a company prefer debt over equity for financing?

Solution

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