A change in capital structure of BBCL agricom for project expansion

BBCL introduction: Bharat building construction limited is a real estate company which provides innovative and high quality homes for the customers and maintains a high quality relationship with their customers and the community. The company is started in 1986 by vummidi ramiah and with his knowledge he has diversified in various sectors like construction, exports and trading and got its own brand name as vummidi enterprise. The company has diversified further into FMCG sector through barath agricom private limited where they export rice, wheat, sugar, groundnuts and many other products to parts of Asian countries, Middle East and part of African countries. Abstract: The company is now planning to raise the capital to increase the export quantity of the products to other countries. They prefer raising the capital through debt financing by borrowing additional 40 crores from the bank. So the comapy has the following advantage of financing through debt:

Maintain ownership: When you borrow from the bank or another lender, you are obligated to make the agreed-upon payments on time. But that is the end of your obligation to the lender. You can choose to run your business however you choose without outside interference.

Tax deductions:

This is a huge attraction for debt financing. In most cases, the principal and interest payments on a business loan are classified as business expenses, and thus can be deducted from your business income taxes. It helps to think of the government as a partner in your business, with a 30 percent ownership stake (or whatever your business tax rate is). If you can cut the government out of the equation, then its beneficial to your business.

Lower interest rate:

Furthermore, you should analyze the impact of tax deductions on the bank interest rate. If the bank is charging you 10 percent for your loan, and the government taxes you at 30 percent, then there is an advantage to taking a loan you can deduct

A company that is well established prefers debt financing. This company is launched in 1986 and has got a very good market share and demand among the customers. Further they are raising the capital to meet the increasing demand of the customers in the foreign nation. So the company goes in for debt financing rather than equity for maintaining ownership, to get lower interest rate and to get tax deduction. When the company goes in for debt, it increases the leverage of the company both financially and in operating part too. Capital intensive companies with tangible assets like airline, chemical, real estate, spices export rely more on debt rather than equity. So this company also prefers debt financing.