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.

Identify the concept of Financial Management as advised by Mr. Pathak in the above situation.

Capital Structure

The correct answer is option 2- Capital Structure.

In the situation described, Mr. Pathak advised Mr. Mittal on the mix of equity and debt to fund the expansion and the implications of each financing option. This advice pertains to the concept of Capital Structure.

Capital Structure: One of the important decisions under financial management relates to the financing pattern or the proportion of the use of different sources in raising funds. On the basis of ownership, the sources of business finance can be broadly classified into two categories viz., ‘owners’ funds’ and ‘borrowed funds’. Owners’ funds consist of equity share capital, preference share capital and reserves and surpluses or retained earnings. Borrowed funds can be in the form of loans, debentures, public deposits etc. These may be borrowed from banks, other financial institutions, debentureholders and public. Capital structure refers to the mix between owners and borrowed funds. It can be calculated as debt-equity ratio i.e., Debt / Equity or as the proportion of debt out of the total capital i.e., Debt / (Debt+Equity).