Chapter 15: Banks sample question

You are a manager of an indian firm. You want to open new branches. Discuss what factors you would take into consideration in deciding how to finance the expansion.

I would either borrow from the bank, issue new shares, obtain government grants and using retained profits.
To borrow from the bank, I would look at the rate of interst. If I would feel that the rate of interest paid by the company would be less than the profit gained from investment. However, the money to be repaid may accumulate and I may not be able to pay it back. This may lead to my company making a loss. If my firm also starts making continuous losses this would make it difficult to pay back the loan.

Issuing new shares would not do any harm to the company, but if I increase the supply of shares, then the share price may decrease. This would make the shareholders unhappy as they would make a loss by selling their shares. This would also make it easier for another company to take over mine.

Govt. Grant- I would not mind taking the offer of taking a grant if the conditions are reasonable. However, if they are unreasonable this would mean that it will be difficult for the firm to do this.

I want to use retained profits to establish new firms. Using retained profits would mean, that I will not have to pay profits. I would however see opportunity cost- I may put this money in the bank instead