Hind Beverages
Hind Beverages Inc., the leading soft drink and drinking water company in the private sector, has acquired Himalayan Water Co., in a deal worth $8.6 billion in 2007 to further expand its market share. A financial decision of this magnitude has significant implicitness for both Hind Beverages Inc and Himalayan Water as well as their employees and shareholders.
Hind Beverages Inc. raised a debt of over $8 billion to finance the transaction. This financing decision affected the capital structure of the acquirer.
Why might a company prefer debt over equity for financing?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Retain Control over business
Option (1) Debt financing does not affect earnings per share. — Incorrect. Debt does affect earnings per share. When the business earns more on its investment than the interest it pays, debt raises the EPS; this is trading on equity. When it earns less, debt lowers the EPS.
Option (2) Debt financing is safe — Incorrect. Debt is riskier for the business, because interest and repayment are compulsory. A default can force the business into liquidation.
Option (3) No obligation of payment in case of liquidation — Incorrect. The opposite is true. Lenders must be paid back, and they are paid before the shareholders.
Option (4) Retain Control over business — Correct. Issuing more equity brings in new owners with voting rights, which dilutes the management’s control. Lenders get interest but no vote, so debt keeps control with the existing owners. This is the control consideration in the choice between debt and equity.
Note 1: The passage is the NCERT case study ‘When Tata Steel Acquired Corus’, which has been reproduced by NTA in the exam with the names of the companies changed. Note 2: It seems that there is a mistake in the original NTA paper, which prints “significant implicitness” in the passage when it should read “significant implications”. The slip is NCERT’s own: the NCERT case study prints the same word, and NTA copies lines from NCERT word for word, even where the book is wrong. Read the word as “implications”, meaning effects.
NCERT (2026-27 Edition): “(f) Control Considerations: Issues of more equity may lead to dilution of management’s control over the business. Debt financing has no such implication. Companies afraid of a takeover bid would prefer debt to equity.” |