Read the Paragraph given below carefully and answer the following question. (Q No 2) Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional Rs.80,00,000 for replacing machines with modern machinery of higher production capacity. It involves committing the finance on a long term basis. These decisions are very crucial for any business since they affect its earning capacity in the long run. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was Rs. 8,00,000 and total capital investment was Rs. 1,00,00,000. Instead of issuing 10% Debenture the Company can issue Equity Shares for raising the fund. The financial manager of the company would normally opt for a source which is the cheapest.

The financing decisions are affected by various factors. Which one of the following factor is discussed in the above case?

Cash Flow Position of the Company Cost Amount of Earnings Taxation Policy

Cost

The cost of raising funds through different sources are different. A prudent financial manager would normally opt for a source which is the cheapest.