The correct answer is: A. OL will increase.
When a company issues new share capital to redeem debentures, it is essentially exchanging debt for equity. This means that the company’s liabilities (debt) will decrease, while its equity (share capital) will increase. As a result, the company’s overall liabilities-to-equity ratio (or leverage) will decrease. This is because the company will now have more equity to support its debt.
A lower leverage ratio is generally considered to be a positive sign for a company, as it indicates that the company is less risky. This is because a lower leverage ratio means that the company has more equity to cover its debt payments in the event of a financial downturn.
However, it is important to note that issuing new share capital can also have some negative consequences. For example, it can dilute the ownership of existing shareholders, as the new shares will be issued to new investors. Additionally, it can increase the company’s costs, as it will need to pay fees to the investment banks that help it to issue the new shares.
Overall, whether or not issuing new share capital to redeem debentures is a good idea depends on the specific circumstances of the company. However, in general, it is a move that can help to improve the company’s financial health.
Here is a brief explanation of each option:
- Option A: OL will increase. This is the correct answer, as explained above.
- Option B: FL will increase. This is incorrect, as the company’s financial leverage will decrease.
- Option C: OL will decrease. This is incorrect, as the company’s liabilities will decrease.
- Option D: FL will decrease. This is incorrect, as the company’s financial leverage will decrease.