The three factors that favour the issue of debentures by the company as part of its capital structure are:
(i) Tax deductibility: Interest paid by the company to its debenture holders is tax deductible. In the above scenario the company is paying tax (a) 40% . Thus, it is beneficial for the company to issue debentures.
(ii) Say in management: In the given scenario, the company already has a share capital of ₹ 60,00,000 . Issuing more shares will dilute the control of management. Thus, companies that are apprehensive of the dilution of control opt for more of debt and less of equity.
(iii) Relatively low cost: For a company, cost of raising capital of debentures is relatively lower than that through equity. This is due to guaranteed repayment that debenture holders require lower rate of returns. Besides this, interest amount repayable to debenture holders is deductible expense. So the interest amount is deducted from the company's earning and then the net amount is used for calculations of tax liabilities. Hence companies prefer to opt for debentures, as higher use of debt, lowers the overall cost of capital with cost of equity remaining unaffected.