Read the following text and answer the following question on the basis of the same (Q.5) 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 Rs. 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 Budgeting Capital Structure Capital Decision Cash Flow Decision

Capital Structure

Investment decision can be longterm or short-term. A long-term investment decision is also called a Capital Budgeting decision. It involves committing the finance on a long-term basis. Capital structure refers to the mix between owners and borrowed funds. These shall be referred as equity and debt in the subsequent text. It can be calculated as debt-equity ratio. In this para, there is emphasis on Capital Structure in the advise of Mr Pathak.