Question

The Capital of India has been declared as the most polluted city in the world. Bengaluru, Mumbai, Patna, Ahmedabad, Lucknow, Kanpur and Ludhiana are also the highly polluted Indian cities. This has resulted into a dramatic increase in the sale of home air purifiers. The prices of these devices range from Rs.2,000 to Rs.25,000 depending upon the type of pollutant these purifiers remove. Looking at the increasing demand of these air purifiers 'Pure Air Technology India Ltd.' has developed a low cost home air purifie in its R & D Lab. The company has estimated that a commercial production of 1,00,000 units per year may cost the company Rs.500 per unit. For this capital of Rs.100 crores will be required. The company decided to have both equity and debt in its capital structure. Explain any four factors that the company should consider while deciding its capital structure.

Answer 1

Following are the factors affecting the choice of Capital structure of a company:

1. Cash flow position

2. Interest coverage ratio

3. Debt service coverage Ratio

4. Return on Investment

5. Cost of debt

6. Tax rate

7. Cost of equity

8. Floatation costs

9. Fixed operating costs

10. Risk consideration

11. Flexibility

12. Control

13. Regulatory/ framework

14. Stock market conditions

15. Capital structure of other companies.