Chapter 3

Question 1

What are the three interrelated decisions?

Answer 1

Financing
Investing
Dividend

Question 2

Main influences from external economic factors

Answer 2

Need to maintain good investor relations
Limited access to sources of finance
Gearing level
Debt covenants
Government influence
Regulatory bodies
Major economic influences
Tax consideration
Accounting concepts

Question 3

Domestic tax implications

Answer 3

Profits generated by new investment project will be taxable
Debt interest is tax deductible
Higher tax rates will make debt more attractive
Dividends to shareholders will be taxed under income tax rules

Question 4

International tax implications

Answer 4

Multinational companies often attracted to set up their operations in a low tax economy
Double tax treaties will help elimate issues with paying tax in multiple countries on the same profits

Question 5

Information presented by borrower to lender

Answer 5

Business plan

Purpose, amounts and duration
Detailed cash flow forecasts
Explanation of how the borrower is proposing to repay the borrowing

Question 6

Assessment of creditworthiness of the lender

Answer 6

Detailed review of the potential borrower

Analysis of business plan
Security available
Credit ratings
Other borrowings/covenants