Page 130 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes shares and the tota1 wealth of company. This objective has to be kept in view while
making a decision on a new source of finance its impact on the earnings per share has to be
carefully analyzed. This helps in deciding whether funds should be raised by internal
equity or by borrowings.

5. Corporate Taxation: Under the Income Tax laws, dividend on shares is not deductible,
while interest paid on borrowed capital is allowed as deduction for computing taxable
income. The cost of raising finance through borrowing is deductible in the year in which
it is incurred. If it is incurred during the pre-commencement period, it is to be capitalized.
Cost of issue of shares is allowed as deduction. Owing to these provisions corporate
taxation plays an important role in determining the choice between different sources of
financing.
6. Government Policies: Government policies are a major factor in determining capital
structure.

Example: a change in the lending policies of financial institutions may mean a complete
change in the financial pattern to be followed in the companies.

Similarly, the Rules and Regulations framed by SEBI considerably affect the capital issue
policy of various companies. Monetary and fiscal policies of the government also affect
the capital structure decisions.
7. Legal Requirements: The finance manager has to keep in view the legal requirements
while deciding about the capital structure of the company.
8. Marketability: To obtain a balanced capital structure it is necessary to consider the ability
of the company to market corporate securities.
9. Maneuverability: Maneuverability is required to have as many alternatives as possible at
the time of expanding or contracting the requirement of funds. It enables use of proper
type of funds available at a given time and also enhances the bargaining power when
dealing with the prospective suppliers of funds.
10. Flexibility: Flexibility refers to the capacity of the business and its management to adjust
to expect and unexpected changes in circumstances. In other words, management would
like to have a capital structure, which provides maximum freedom to changes at all times.
11. Timing: Closely related to flexibility is the timing for issue of securities. Proper timing of
a security issue often brings substantial savings because of the dynamic nature of the
capital market. An Intelligent management tries to anticipate the climate in capital market
with a view to minimize the cost of raising funds and also to minimize the dilution
resulting from an issue of new ordinary shares.
12. Size of the Company: Small companies rely heavily on owners’ funds while large companies
are generally considered to be less risky by the investors and therefore, they can issue
different types of securities.
13. Purpose of Financing: The purpose of financing also to some extent affects the capital
structure of the company. In case funds are required for productive purposes like
manufacturing etc.; the company may raise funds through long-term sources. On other
hand, if funds are required for non-productive purposes, like welfare facilities to employees
such as schools, hospitals etc., the company may rely only on internal resources.
14. Period of Finance: The period for which finance is required also effects the determination
of capital structure. In case such funds are required for long-term requirements, say 8-10

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