Ans.1 :- In FY 2000, Garuda Udyog's profit before tax was observed to fall to Rs 385 crores & finally, faced a huge loss of Rs 269 crores in FY 2001. And to add-on to the financial crunch, the total debt of the company increased from Rs 546 crores in FY 2000 to Rs 1112 crores in FY 2001. That is when Garuda resorted to increase its equity capital. From Rs 2642.5 crores in FY 2001 to Rs 4378.8 in FY 2005. The increased shareholder funds helped Garuda to pay-off a major chunk of its debts and adopt the policy of localization of manufacturing components. Ans.2 :- Garuda Udyog had started incurring losses by FY 2001 & its total debts had increased to a net amount of Rs 1112 crores. It was not advisable for Garuda to resort to external debts to fill-up the losses and revolutionarize its manufacturing process. Resorting to shareholders funds was, thus, a rational policy as it could reinvest its profits and then later distribute higher returns to its shareholders. Ans.3 :- In FY 2005, a net profit before tax of Rs 1304.9 crores was recorded by Garuda Udyog. And it debt status stands at Rs 307.6 crores. Thus, Garyda Udyog can afford to resort to debt financing for 20% of its planned investment of Rs 6000 crores. That would increase its debt by Rs 1200 crores. But for the rest of the investment, it would be rational & profitable for Garuda to resort to equity capital.
