Before choosing between a public issue of debentures and a bank loan, the finance manager of Kiran Ltd. checks how easily the company can meet SEBI guidelines and the norms of the banks.
Which factor affecting the choice of capital structure is he considering?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Regulatory framework
Option (1) Regulatory framework — Correct. Every company works within rules made by law. A public issue must follow SEBI guidelines, and a bank loan has its own norms. How easily these norms can be met affects the choice of the source of finance.
Option (2) Stock market conditions — Incorrect. This factor looks at whether the market is bullish or bearish. In a bullish market equity shares sell easily; in a bearish phase a firm may opt for debt. Kiran Ltd.’s manager is checking rules and norms.
Option (3) Floatation costs — Incorrect. Floatation cost is the cost of raising funds. A public issue needs considerable expenditure, while a loan from a financial institution may not cost so much. He is checking how easily norms can be met.
Option (4) Control — Incorrect. A public issue of equity may reduce the management’s holding and make the company open to takeover. Debentures and a bank loan are both debt, and debt does not dilute control.
NCERT (2026-27 Edition): “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.” “8. Floatation Costs: Process of raising resources also involves some cost. Public issue of shares and debentures requires considerable expenditure. Getting a loan from a financial institution may not cost so much. These considerations may also affect the choice between debt and equity and hence the capital structure.” |