'A business that doesn't grow dies', says Mr. Shah, owner of Shah Marble Ltd. with glorious 36 months of tis grand success having a capital base of Rs. 80 crores. Within a short span of time, the company could generate cash flow which not only covered fixed cash payment obligations but also create sufficient buffer. The company is on the growth path and a new breed of consumers is eager to buy the Italian marbe sold by Shah Marble Ltd. To meet the increasing demand. Mr. Shah decided to expand his business by acquiring a mine. This required an investment of Rs. 120 crores. To seek adivice in this matter, he called his financial advisor Mr. Seth who advised him about the judicious mix of equity (40%) and Debt(60%). Mr.Seth 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 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 tad deductible expense for computation of tax liability
After due deleberations with Mr. Seth, Mr. Shah decided to raise funds from a financial institution
(a) Identify and explain the concept of Financial Management as advised by Mr. Seth in the above situation
(b) State the four factors affecting the concept as identified in part (a) above which have been discussed between Mr. Shah and Mr. Seth.

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Solution

(a) Debt
Reason:
1. Due to weak cash flow position, the firm may not be able to honour fixed cash payment obligations.
2. Increased fixed operating cost will increase the business risk, therefore debt should not be issued as it further increases the financial risk
3. The stock market condition beingbullish, the investors will prefer to buy equity shares
(b) Other factors
Return on Investment
Tax rate
Cost of Equity
Floatation Costs
Flexibility
Control Consideration
Regulatory Framework
Capital Structure of other companies
Debt Service Coverage Ratio
Cost of Debt

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