Question

Alka Motors is one of the leading automobile companies in India. Due to growing demand for electric vehicles, Alka Motors planned to expand its business and for this, it wanted to raise funds. The finance manager suggested that it should raise funds through equity as the market was bullish. As per the suggestion of finance manager, the company decided to raise \( \text{₹ } 3,500 \) crore from equity for its expansion plan for electric vehicles.
The factor that the finance manager took into consideration to raise funds through equity was :

• A. Cash flow position
• B. Flexibility
• C. Cost of debt
• D. Stock-market conditions

Hint:

Issue Equity when the market is Bullish to capitalize on high investor sentiment. Use Debt when the market is Bearish, as equity might not attract enough buyers. Bullish markets usually lead to lower flotation costs for equity.

Answer 1

The Correct Option is D

Step 1: Pick out the exact reason given in the case.
The finance manager suggested raising funds through equity because the market was bullish.
Step 2: Recall the factors that affect a financing decision.
These include cost of the source, risk involved, cash flow position of the company, and the state of the capital market, that is, whether it is bullish or bearish.
Step 3: Connect the bullish market to the choice of equity.
In a bullish market investors are optimistic and share prices are generally high, so it becomes a good time for a company to sell new shares at a favourable price with less effort.
Step 4: Rule out the other options.
Cash flow position is about the ability to service fixed payments, flexibility is about ease of changing the capital structure later, and cost of debt has nothing to do with equity at all, so none of these match the reasoning in the case.
Final answer: Option 4, Stock market conditions.