Question

Kaysons Ltd. was a reputed company manufacturing automotive parts for electric vehicles. As the demand for electric vehicles grew, Kaysons Ltd. needed more capital to keep up with the demand for automotive parts. Atul, the Finance Manager of Kaysons Ltd., suggested that the company should raise funds through a public issue of shares as the stock market was bullish. The Chief Executive Officer fully understood that this process of raising funds would not only reduce the management’s holding in the company but would also require considerable expenditure. Even then he agreed with the Finance Manager and the public issue of shares was made complying with the guidelines of Securities and Exchange Board of India.
Identify and state any four factors affecting choice of capital structure being discussed above.

Hint:

While planning capital structure, always weigh the cost, control, risk, and compliance aspects.

Answer 1

1. Trading on Equity: The decision to issue more equity shares shows that the company is considering how additional equity can affect the existing shareholder earnings. Less financial leverage means less risk.
2. Cost of Raising Funds: Public issue involves floatation costs like underwriting, brokerage, and legal expenses. The CEO acknowledges this significant cost, which is a key factor in determining capital structure.
3. Stock Market Conditions: Atul advised issuing shares since the stock market was bullish. A favorable market improves investor confidence, increasing the likelihood of successful capital raising.
4. Regulatory Framework: The company ensured compliance with SEBI guidelines, which influences the choice and execution of capital raising mechanisms.
Final Answer: Trading on equity, Cost of raising funds, Stock market conditions, Regulatory framework