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Shalini, after acquiring a degree in Hotel Management and Business Administration took over her family food processing company of manufacturing pickles, jams and squashes. The business was established by her great grandmother and was doing reasonably well. However the fixed operating costs of the business were high and the cash flow position was weak. She wanted to undertake modernisation of the existing business to introduce the latest manufacturing processes and diversify into the market of chocolates and candies. She was very enthusiastic and approached a finance consultant, who told her that approximately ₹50 lakh would be required for undertaking the modernisation and expansion programme. He also informed her that the stock market was going through a bullish phase. 

1. Keeping the above considerations in mind, name the source of finance Shalini should not choose for financing the modernisation and expansion of her food processing business. Give one reason in support of your answer. 

2. Explain any two other factors, apart from those stated in the above situation, which Shalini should keep in mind while taking this decision.

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1. Shalini should not choose ‘debt’ as a source of finance for financing the modernisation and expansion of her business. The main reason for our suggestion is that the cash flow position of the firm is weak and as a result, the firm may not be able to honour fixed cash payment obligations. 

2. Following are the other factors which Shalini should keep in mind while taking the decision relating to source of finance : 

1. Conditions of capital market – The time of issue and the composition of the buyers should be kept in mind. If capital market is depressed i.e., investors are not willing to subscribe to shares, a company should rely on debt as a source of finance. 

2. Desire to control – Desire of the promoters to have control over the company is an important factor. If the promoters want to retain control, they will issue more debentures and preference shares and less equity shares. 

3. Regulatory framework – The management of a company should consider regulatory framework provided by Companies Act, SEBI Guidelines, etc. Raising funds from banks and financial institutions require fulfilment of some norms.

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