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Ananta Ltd. is a company dealing in ready-made garments from last many years. Recently the profit of the company have started increasing. The finance manager decided to retain the profit instead of distributing it among shareholders.
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Question : 19
Total: 19
State any three factors effecting the decision identified in (i) above.
Solution:
Three factors affecting financing decisions are:
1. Cost of raising funds: Those sources of funds are preferred that involve minimal cost.
2. Risk involved: Sources of funds that involve moderate risk are preferred over those that involve high risk. For instance, debt or debentures involve the risk of default payment which must be carefully analysed before taking the debt.
3. Floatation cost: These are the costs involved in the process of raising funds. They can be in the form of broker's commission, fees of underwriters, etc. Those sources of funds are preferred that involve minimum floatation cost.
1. Cost of raising funds: Those sources of funds are preferred that involve minimal cost.
2. Risk involved: Sources of funds that involve moderate risk are preferred over those that involve high risk. For instance, debt or debentures involve the risk of default payment which must be carefully analysed before taking the debt.
3. Floatation cost: These are the costs involved in the process of raising funds. They can be in the form of broker's commission, fees of underwriters, etc. Those sources of funds are preferred that involve minimum floatation cost.
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