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: Issuing additional equity shares indicates the company's evaluation of the impact on existing shareholder earnings. Reduced financial leverage lowers risk.
2. Cost of Raising Funds: Public offerings incur flotation expenses such as underwriting, brokerage, and legal fees. The CEO recognizes these substantial costs as critical to capital structure decisions.
3. Stock Market Conditions: Atul recommended share issuance due to a bullish stock market. Favorable market conditions boost investor confidence, enhancing the probability of successful capital acquisition.
4. Regulatory Framework: The company adhered to SEBI guidelines, which guide the selection and implementation of capital raising methods.
Final Answer: Trading on equity, Cost of raising funds, Stock market conditions, Regulatory framework