Welcome to the NCERT Solutions for Class 12 Business Studies - Chapter Financial Management. This page offers a step-by-step solution to the specific question from Exercise 2, Question 5:
Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional ₹ 80,00,000 for replacing machines with modern machinery of higher production capacity. 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 ₹ 8,00,000 and total capital investment was ₹ 1,00,00,000. Suggest whether issue of debenture would be considered a rational decision by the company. Give reason to justify your answer. (Ans. No, Cost of Debt (10%) is more than ROI which is 8%).
. With detailed answers and explanations for each chapter, students can strengthen their understanding and prepare confidently for exams. Ideal for CBSE and other board students, this resource will simplify your study experience.Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional ₹ 80,00,000 for replacing machines with modern machinery of higher production capacity. 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 ₹ 8,00,000 and total capital investment was ₹ 1,00,00,000. Suggest whether issue of debenture would be considered a rational decision by the company. Give reason to justify your answer. (Ans. No, Cost of Debt (10%) is more than ROI which is 8%).
If the cost of the debt is less than the cost of capital then a company can issue debenture for raising fund.
In the above case, the cost of capital is 10%, for the total capital of ₹ 80,00,000, the cost of capital is ₹ 8,00,000. The EBIT for the previous year of the company was ₹ 8,00,000 and total capital investment was ₹ 1,00,00,000. So the total ROI is
ROI = RETURN ÷ INVESTMENT × 100
ROI= 800000 ÷ 10000000 × 100 = 8 %
It will assume that the company will operates with the same efficiency, the additional investment of ₹ 80,00,000 will have net ROI of 8% which will be ₹ 6,40,000 against the cost of debt ₹ 8,00,000.
In the above case the cost of debt is 10% which is generating ROI of 8%, so it will not be advisable for the company to issue debenture when the cost of debt is higher than the cost of capital.
NCERT questions are designed to test your understanding of the concepts and theories discussed in the chapter. Here are some tips to help you answer NCERT questions effectively:
Stay updated with our latest educational content and study tips
It’s not about starting over if you took a break to care for children, take care of yourself, be healthy or for any other reason. This is a realistic strategy for the recovery of skills, selection of the right job, and overcoming the resume problem. One year, three years or 10 years of a career … Read more
Read MoreThere’s no need to score 95% or achieve a JEE/NEET rank. You don’t need to score 95% or rank in JEE/NEET to build a solid career. A candid and pragmatic guide to the routes that actually work for students who have an average mark and what to do when faced with the options. If … Read more
Read MoreAI tools, online platforms that are much cheaper than coaching centres and the changing idea of what “structure” even means have upended this argument more in the past two years than in the decade preceding it. Here’s what is really the case for 2026 – and what has actually stayed the same. If you look … Read more
Read MoreStarting to make a new career after 30 isn’t a start from scratch. Marketing, teaching, financial, retail, healthcare, sales and other professionals can pursue careers in technology by applying the existing knowledge and skills they have acquired to new technology skills. There are various ways to enter the technology industry, such as in IT support, … Read more
Read MoreCalculate percentage from obtained marks and total marks.
Welcome to the NCERT Solutions for Class 12 Business Studies - Chapter . This page offers a step-by-step solution to the specific question from Excercise 2 , Question 5: Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order ....
Fresh educational articles and updates.
Most-read articles from SaralStudy.
Fast access to frequently used study resources.
Recently viewed articles based on SaralStudy activity.
Add Comment