Business Studies

Business Finance

Easy

Altros Ltd. dealing in ready made garments, is planning to expand its business operations in order to cater to international market. For this purpose, the company needs additional ₹80,00,000 for replacing machines with modern machinery of higher production capacity. It involves committing the finance on a long-term basis. These decisions are very crucial for any business since they affect its earning capacity in the long run. The company wishes to raise the required funds by issuing Debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was ₹8,00,000 and total capital investment was ₹1,00,00,000. Instead of issuing 10% Debenture the company can issue Equity shares for raising the funds. The financial manager of the company would normally opt for a source which is the cheapest.

A decision to raise funds for ₹ 80,00,000 either from 10% Debenture or Equity shares is a:

Investment decision

Financing decision

Shareholders' decision

Dividend decision

✅ Correct Option: 2

A financing decision concerns the quantum of finance to be raised and the choice of sources, i.e., how much to raise through debt versus equity. Deciding whether to raise ₹80,00,000 through 10% debentures or equity shares is therefore a financing decision.

Question 41

A decision for replacing machines with modern machinery of higher production capacity is a:

Question 42

What is the other name of long-term investment decision?

Question 43

The financial decisions are affected by various factors. Which one of the following factors is discussed in the above case?

Question 45

The decision involving the choice between the right mix of equity financing and debt financing is:

A decision to raise funds for ₹ 80,00,000 either from 10% Debenture or Equity shares is a:

Solution

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