A company is currently debt-free and is considering raising 10 crore. As a finance manager, what practical factors would you evaluate before…
CA Intermediate · Financial Management and Strategic Management · MTP · September 2025
A company is currently debt-free and is considering raising 10 crore. As a finance manager, what practical factors would you evaluate before deciding whether to raise funds through debt, equity, or a mix of both? JUSTIFY your approach briefly.
Suggested Answer and Working Notes:
(c) Before deciding the capital structure, one should evaluate: Cost of capital – Debt is cheaper due to tax shield, but excessive debt increases financial risk. Control considerations – Equity dilutes ownership; debt doesn't. Current interest rate and market conditions – Favorable debt terms or bullish equity market can guide the choice. Cash flow stability - If the company has stable cash flows, it can safely take on debt. If the company has stable earnings and wants to retain control, a mix with a reasonable portion of debt to optimize cost is favourable.
Topics: Part-A: Financial Management
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