Match List-I (situations faced by finance managers) with List-II (factors affecting the choice of capital structure):
| List-I | List-II | ||
|---|---|---|---|
| (A) | A finance manager studies the debt-equity ratios common in her industry before deciding how much to borrow. | (I) | Regulatory framework |
| (B) | A firm has to make its public issue of debentures under the guidelines laid down by SEBI. | (II) | Capital structure of other companies |
| (C) | A firm issues equity because share prices are rising and investors are keen to buy. | (III) | Flexibility |
| (D) | A firm keeps part of its borrowing power unused to take care of unforeseen circumstances. | (IV) | Stock market conditions |
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A)-(II), (B)-(I), (C)-(IV), (D)-(III)
| List-I | List-II | Reason |
|---|---|---|
| (A) A finance manager studies the debt-equity ratios common in her industry before deciding how much to borrow. | (II) Capital structure of other companies | The debt-equity ratios of other firms in the same industry are a useful guide. They should not be followed blindly. |
| (B) A firm has to make its public issue of debentures under the guidelines laid down by SEBI. | (I) Regulatory framework | Every company works within rules made by law. Public issues must follow SEBI guidelines. |
| (C) A firm issues equity because share prices are rising and investors are keen to buy. | (IV) Stock market conditions | In a bullish market equity shares sell easily, even at a higher price. So firms prefer equity then. |
| (D) A firm keeps part of its borrowing power unused to take care of unforeseen circumstances. | (III) Flexibility | A firm that borrows to the full cannot raise more debt later. So it keeps some borrowing power in hand. |
NCERT (2026-27 Edition): “10. Flexibility: If a firm uses its debt potential to the full, it loses flexibility to issue further debt. To maintain flexibility, it must maintain some borrowing power to take care of unforeseen circumstances.” “12. Regulatory Framework: Every company operates within a regulatory framework provided by the law e.g., public issue of shares and debentures have to be made under SEBI guidelines. Raising funds from banks and other financial institutions require fulfillment of other norms. The relative ease with which these norms can, be met or the procedures completed may also have a bearing upon the choice of the source of finance.” “13. Stock Market Conditions: If the stock markets are bullish, equity shares are more easily sold even at a higher price. Use of equity is often preferred by companies in such a situation. However, during a bearish phase, a company, may find raising of equity capital more difficult and it may opt for debt. Thus, stock market conditions often affect the choice between the two.” “14. Capital Structure of other Companies: A useful guideline in the capital structure planning is the debt-equity ratios of other companies in the same industry. There are usually some industry norms which may help. Care however must be taken that the company does not follow the industry norms blindly. For example, if the business risk of a firm is higher, it can not afford the same financial risk. It should go in for low debt. Thus, the management must know what the industry norms are, whether they are following them or deviating from them and adequate justification must be there in both cases.” |