Possible response:

Expansion Plan and Financing Need
The Manufacturing company's directors are considering a significant investment in their production capacity to increase their sales and profits. To implement this expansion plan, the company needs additional funds that it plans to raise through the issuance of debentures worth Rs 20 lacs. Debentures are long-term debt instruments that offer fixed interest payments to their holders and carry no ownership rights or voting power.

Advantages of Issuing Debentures
The company may choose to issue debentures instead of equity shares or bank loans due to several advantages:

- Debentures have a lower cost of capital than equity shares as they do not dilute the ownership or control of the existing shareholders and do not require any sharing of profits beyond the fixed interest payments.
- Debentures offer a fixed interest rate that is tax-deductible, reducing the company's net cost of borrowing.
- Debentures are a more flexible source of financing than bank loans as they do not involve any collateral or restrictive covenants, and the repayment schedule can be tailored to the company's cash flows and maturity preferences.

Risks and Mitigation Measures
However, issuing debentures also involves some risks that the company needs to manage to ensure the financial viability and creditworthiness of the company:

- The company needs to ensure that it can generate sufficient cash flows to pay the interest and principal of the debentures on time, as any default may lead to legal action and damage the company's reputation and credit rating.
- The company needs to assess the market demand and competition for its products and services, as any downturn or disruption in the industry may affect its sales and profitability, impairing its ability to service the debentures.
- The company needs to maintain adequate liquidity and solvency ratios to reassure the debenture holders and other stakeholders about its financial health and risk management practices.

Conclusion
In conclusion, the Manufacturing company's decision to issue debentures worth Rs 20 lacs for expanding its production capacity reflects its strategic vision and financial prudence. By balancing the advantages and risks of debentures and ensuring proper risk management measures, the company can achieve its growth objectives while maintaining its financial stability and reputation.

By issuing debentures company can increase its earning per share and market value of share.
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