"He also suggested her to take loan from Financial Institution as the cost of raising funds from Financial Institutions is low". Identify the factor reflected in the statement.
Show Hint
The cost of raising funds is the floatation cost factor.
Step 1: Understanding the Question:
The statement says loans from financial institutions are chosen because the cost of raising such funds is low. We must name the factor of capital structure shown here.
Step 2: Key Concept:
Floatation costs are the costs of raising funds, such as underwriting fees, brokerage and expenses of issuing securities. Raising funds from shares or debentures carries these costs, while a loan from an institution usually has a lower such cost. Lower floatation cost makes a source more attractive.
Step 3: Check option (A).
The consultant speaks of the cost of raising funds, which is the meaning of floatation costs. So (A) is right.
Step 4: Check option (B).
Control considerations deal with whether new equity would dilute the owners' control. The statement does not mention control. So (B) is wrong.
Step 5: Check option (C).
Risk considerations deal with financial risk from fixed charges on debt. The statement is about cost, not risk. So (C) is wrong.
Step 6: Check option (D).
Fixed operating costs are costs such as rent and salaries that remain the same at any output level. They are not the cost of raising funds. So (D) is wrong.
Final Answer:
The low cost of raising funds is the floatation cost factor, option 1.
\[ \boxed{\text{Option 1}} \]
