you are the head of finance department of Indian motors Ltd.;a car manufacturing company.You have to decide to raise funds for your company.Explain any six factors you would consider for your choice of funds.
Answers
Answer:
Cost. Cheapest source of finance should be preferred. (Debt is generally cheaper than Equity)
Risk. Source involving less risk should be preferred. (Equity is less risky than Debt)
Floatation cost. If a source has high floatation cost it should be avoided (Equity has high floatation costs associated with it).
Cash flow position. The source of funds should also depend on the Cash flow position of
the firm. A company with healthy Cash flow can go for Debt as it can bear the fixed financial cost of interest on Debt.
Fixed operating cost. A company which has high fixed operating costs (like rent, salary, etc.) already runs high business risk. If such firm goes for Debt as source, it will add on financial risk (as Debt is risky).
Control considerations. A company having control considerations should go for Debt as a source of finance.
State of Capital market. When the Capital market is bullish or active (investors believe that the stock prices will increase), it is a good time for issuing Equity in order to have a good response from the investors. On the other hand, if the Capital market is bearish or sluggish (investors believe that stock prices will decrease) it is better not to issue Equity.
The company can opt for Debt as a source of funds.