The financial decisions are affected by various factors. Which one of…

Altros Ltd. dealing in ready made 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 funds. The financial manager of the company would normally opt for a source which is the cheapest.

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

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Cost

Option (1) Cash flow position of the company — Incorrect. This factor asks whether the company will have enough cash to pay interest and repay debt. The passage does not discuss the company’s cash flow.
Option (2) Cost — Correct. Cost is a factor in the financing decision: each source of funds, debt or equity, has a cost of raising it, and a prudent finance manager chooses the cheapest source. The passage gives the cost of debt (10%) and says the finance manager would normally opt for the cheapest source.
Option (3) Amount of earnings — Incorrect. Earnings are a factor in the dividend decision, which fixes how much profit is paid out. The passage mentions EBIT, but not to decide a dividend.
Option (4) Taxation policy — Incorrect. Tax on dividends or the tax saving on interest can affect financing, but the passage says nothing about taxes.

Note: The passage is built on the NCERT exercise case study of Sunrises Ltd. in the chapter ‘Financial Management’, which has been reproduced in the exam.

NCERT (2026-27 Edition): “Factors Affecting Financing Decisions The financing decisions are affected by various factors. Important among them are as follows:
(a) 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.”

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

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Cost

Option (1) Cash flow position of the company — Incorrect. This factor asks whether the company will have enough cash to pay interest and repay debt. The passage does not discuss the company’s cash flow.
Option (2) Cost — Correct. Cost is a factor in the financing decision: each source of funds, debt or equity, has a cost of raising it, and a prudent finance manager chooses the cheapest source. The passage gives the cost of debt (10%) and says the finance manager would normally opt for the cheapest source.
Option (3) Amount of earnings — Incorrect. Earnings are a factor in the dividend decision, which fixes how much profit is paid out. The passage mentions EBIT, but not to decide a dividend.
Option (4) Taxation policy — Incorrect. Tax on dividends or the tax saving on interest can affect financing, but the passage says nothing about taxes.

Note: The passage is built on the NCERT exercise case study of Sunrises Ltd. in the chapter ‘Financial Management’, which has been reproduced in the exam.