"Ojas Auto Ltd. " is a very well known auto company in the
industry having more of equity share capital than long term deb
in its capital structure. It is willing to expand and establish new
unit in the backward region and want to train the tribal women in
skill Development to empower them. It has a huge amount of
cash reserve of Rs. 1000 crores.
(a) what is the status of capital structure of the above company.
(b) According to you, which source of finance should be used
by the company in establishing new units ? Give any two
reasons in support of your answer.
Answers
Answer:
the company has more equity shares instead of preference share and debentures
Status of capital structure and Source of finance:
(A)
There is Optimal Capital structure for the company because the industry is having more of equity share capital than long term debt in its capital structure. The optimal structure is the structure or combination of debt and equity that leads to the maximum value of the firm. Optimal structure maximises the value of the company and hence the wealth of its owners minimises the company’s cost of capital.
(B)
Bank loans is the source of finance used by the company in establishing new units. Bank can provide a wide variety of lending options for business owners, including short-term or long-term financing for establishing new units. The only thing that determines whether or not to approve the business loan is the whether the company has enough cash flow to repay the principal plus interest and in this there is no problem because the company has huge amount of cash reserves. The bank also encourages company to expand and establish new unit in the backward region.
To know more:
A distinguish netween capitalization and capital structure
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