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.
A decision to raise funds for Rs. 80,00,000 either from 10% Debenture or Equity shares is a:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Financing decision
Option (1) Investment decision — Incorrect. The investment decision was to buy the new machinery. This question is about where the money for it will come from.
Option (2) Financing decision — Correct. A financing decision is about the amount of funds to be raised and the sources they come from: borrowed funds, such as debentures, or owners’ funds, such as equity shares. Altros must choose between 10% debentures and equity shares to raise Rs. 80 lakh, so this is a financing decision.
Option (3) Shareholders’ decision — Incorrect. There is no such financial decision. The three are investment, financing and dividend.
Option (4) Dividend decision — Incorrect. The dividend decision is about sharing profit with shareholders, not about raising funds.
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): “Financing Decision This decision is about the quantum of finance to be raised from various long-term sources. Short-term sources are studied under the ‘working capital management’. It involves identification of various available sources. The main sources of funds for a firm are shareholders’ funds and borrowed funds. The shareholders’ funds refer to the equity capital and the retained earnings. Borrowed funds refer to the finance raised through debentures or other forms of debt. …” |