Question

Kaysons Ltd. was a reputed company manufacturing automotive parts for electric vehicles. With growing demand for electric vehicles, Kaysons Ltd. required more capital to meet the increased demand for automotive parts. Atul, the Finance Manager, suggested raising funds through a public issue of shares as the stock market was bullish. Although this process would reduce the management’s holding and involve significant expenditure, the Chief Executive Officer agreed. The public issue of shares was made in compliance with Securities and Exchange Board of India (SEBI) guidelines. Identify and state four factors affecting the choice of capital structure being discussed above.

Hint:

Factors like stock market conditions, control, cost, and regulatory compliance are critical when deciding on a capital structure.

Answer 1

1. Stock Market Conditions: If the stock market is bullish, companies prefer raising equity capital as shares can be sold more easily, often at a higher price.

2. Control: Issuing additional equity reduces the existing management’s holding in the company, potentially diluting control over business decisions.

3. Floatation Costs: Raising funds through equity involves significant costs such as underwriting fees, advertising, and compliance expenses.

4. Regulatory Framework: The company had to ensure compliance with SEBI guidelines while issuing shares.