Read the following text and answer the question.

Mr. Yash Mittal is running a successful business. Mr. Mittal is the owner of Y. K. Cement Ltd. Mr. Mittal decided to expand his business by acquiring a Steel Factory. This required an investment of ₹60 crores. To seek advice in this matter, he called his financial advisor Mr. Amit Pathak who advised him about the judicious mix of equity (40%) and Debt (60%). He suggested that employing more of cheaper debt may enhance the EPS. Mr. Pathak also suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is low. Though this will increase the financial risk but will also raise the return to equity shareholders. He also apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest on loan is a tax deductible expense for computation of tax liability. After due deliberations with Mr. Pathak, Mr. Mittal decided to raise funds from a financial institution.

According to Mr. Amit Pathak’s advice in the case of Mr. Yash Mittal’s business expansion, what is one potential advantage of raising funds through debt financing?

Tax-deductible interest on the loan

The correct answer is option 3- Tax-deductible interest on the loan.

Tax-deductible interest on the loan is an advantage of raising funds through debt financing.

One key benefit of debt financing is that the interest payments on the debt are typically tax-deductible. This means that the cost of borrowing is reduced by the amount of the tax savings due to the interest expense deduction. This can effectively lower the overall cost of debt and make it a more attractive option for financing compared to equity.


OTHER OPTIONS

• Dilution of control of equity shareholders: Debt financing does not dilute the ownership or control of equity shareholders. This is a characteristic of equity financing, where issuing new shares can reduce existing shareholders' control.

• Higher cost of raising funds compared to equity: Generally, debt financing can be cheaper than equity financing because debt typically has a lower cost compared to the expected return on equity. Moreover, equity financing might require giving up a share of ownership and potential future profits.

• Increased financial risk leading to lower EPS: While it's true that higher debt increases financial risk, the question is about the potential advantages of debt financing, not its risks. The increased risk might affect EPS (Earnings Per Share) negatively, but it is not the advantage.