Question

ABC Ltd is a auto spare parts manufacturing company. The company has issued equity and preference share to meet it's requirements. Other source of finance have not been considered at all. This has resulted in payment of large amount of taxes to government as dividend on shares is not deducted from income of the company for the purpose of tax calculation.
A) state the source of finance which can give benefit of tax saving.
B) state other six factors which are kept in mind for selecting source of finance.

Answer 1

Sources of finance

Explanation:

Answer b) ABC ltd. should focus on the factors

• What is the size of the business. It is able to borrow if its planning on going for a loan or not. Because the gearing and liquidity ratios must be checked.
• What is the total cost of the source of finance. Then calculate whether its a good deal or not. They must see whether its worth it or not.
• What is the type of source, if its a loan, is it long term or short term. Will the business be able to make such installments on time or not.

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Answer 2

The source of finance and the other six factors:

The source of finance:

Debentures as a Source of  Finance can give benefit of tax-saving. The interest on debentures is a tax-deductible expense and hence the effective cost of debentures is lower as compared to equity and preference share where dividend is not a tax-deductible expense.

The other six factors which are kept in mind for selecting source of finance:

• Purpose for which the capital is required whether short term or long term sources of fund.
• The cost of the source of finance. It is important to consider two costs-cost - procurement and cost utilization of funds
• The amount required for the finance and the length of time for which money is required.
• Control is another factor which plays an important role when choosing a source of finance.
• Risk is an important element to consider.
• The stability and financial strength of the business.

To know more:

Write a short note on international source of finance.

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