Business Studies

Business Finance

Easy

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.

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

Capital structure can be measured by debt-equity ratio.

Capital structure reflects the mix of debt and equity

A higher proportion of debt is always desired

The capital structure of a company affects both profitability and financial risk.

✅ Correct Option: 3

Capital structure is the mix of debt and equity, measured by the debt-equity ratio, and it influences both profitability (through trading on equity) and financial risk. However, higher debt is desirable only when return on investment exceeds the cost of debt; it is not always desired because it also raises financial risk. Hence option 3 is incorrect.

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 44

Why might a company prefer debt over equity for financing?

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

Solution

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