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2




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‡ It is concerned with quality of finance basically the crux of
capital structure decision is the optimum mix between Debts &
Equity.
‡ Focus is attaining the optimum capital structure .
‡ An optimum capital structure is one which maximize
shareholder¶s wealth.
‡ Capital structure decision is a matrix of 3 consideration:
a} Risk
b} Cost of capital
c} Tax planning
‡ The tax planner should properly make a balance between
risk, cost of capital and tax saving consideration in such a
manner, which ensure maximum shareholder¶s return with
optimum risk.

cope of tax planning as per Income
Tax Act 1961
As per the provisions given in Income tax Act
1961:
È Dividend on shares is not deductible;
È Distributed profit is subject to dividend tax;
È Interest paid on borrowed capital is allowed as deduction
u/s 36(1)(iii);
È Cost of raising fund through borrowing is deductible in
the year in which it is incurred;
È Cost of issue of shares is allowed as deduction in 5 years
under section 35 D.
 




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hare Capital 5 00 00 000 2 00 00 000 1 00 00 000

Debentures (14%) --------- 2 00 00 000 1 50 00 000
Loan From Fis/ Banks (18%) -------- 1 00 00 000 2 50 00 000



 
 
 

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 CA
E 2

The directors of a company propose to expand and modernize

its business for which an additional investment of Rs. 50
crore would be needed. They feel confident about raising the
entire fund of Rs. 50 crore either by making a further issue of
equity shares or borrowing from financial institutions at 18%
per annum. They decide in favour of raising the additional
capital by issue of equity shares. The company¶s present
paid up equity share capital is Rs. 50 crore, and its declaring
dividend at 20% (ignoring dividend tax) on
eptember 30,
every year for the last 5 years though, considering the
proposed expansion, there is desire to raise it to 25%.
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