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CS Professional · Strategic Management and Corporate Finance · Business Policy and Formulation of Functional Strategy

Kaveri Foods Ltd's finance head proposes a functional financial strategy: fund a Rs 40 crore expansion with a debt-equity mix of 1:1 and keep the target debt-equity ratio at 1:1 after funding. The existing equity is Rs 60 crore and existing debt is Rs 60 crore. How much of the Rs 40 crore must be raised by equity to maintain the 1:1 ratio?

Rs 20 crore must come from equity. Existing debt and equity are both Rs 60 crore, so keeping a 1:1 ratio requires splitting the Rs 40 crore equally, giving debt and equity of Rs 80 crore each after funding.

  1. ARs 40 crore
  2. BRs 30 crore
  3. CRs 20 croreCorrect
  4. DRs 10 crore

Explanation

Existing debt and equity are equal at Rs 60 crore each. To keep 1:1, new funds must be split equally: Rs 20 crore debt and Rs 20 crore equity. Check: debt 80 and equity 80 gives 1:1. Rs 40 crore equity would make the ratio 60:100, below 1:1.

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