Methods of financing

Question 1

Suspending dividend

Answer 1

Will decrease gearing but send a message to The market financial difficulties.

This could lead to a fallen share price

Question 2

Right issue

Answer 2

Takes longer and comes with added costs

Question 3

Preferences shares

Answer 3

Basically dead – set coupon rate, may upset shareholders (due to decrease dividends), more expensive than debt to organise

Question 4

Convertible bonds

Answer 4

Lower interest rate payments that will dilute existing shareholders power in the business

Question 5

Debentures

Answer 5

Long-term debt that have longer maturities, don’t need to be secured with assets

Could be used to buy a business in exchange for their shares. Will keep them engaged and allow us time to realise any economic benefits in synergies. *Would have to pay interest.

Question 6

Short term loans

Answer 6

To pay a fast repaying investment – advantages is better rate and does not impact gearing

Question 7

Buying a supplier

Answer 7

Reduce the supplier power and risk of supply issues.

DD should be conducted on the governance of a target company to ensure good processes and controls in place.

Following an acquisition the business has moved quickly to secure its assets.

Consider keeping chief executive to give the market confidence, retain expertise and keep the workforce engaged

Complete a resource audit to assess the business assets and consider their value

if shareholders are unwilling to sell above market value it indicates more confidence in current board.

If a target works with our competitors, will our competitors continue to buy from them after an acquisition?

Our accounts being audited if not a level of professional scepticism is required.

Diversifies business which decrease risk longer-term whilst eliminating third-party costs from our cost base

Question 8

Cheapest way to fund expansion

Answer 8

Through borrowing.

Debt is always cheaper than equity and his tax deductible

Consider gearing, what borrowing could be secured against assets?

Do not breach debt covenants without permission.

Get permission from current lenders if taking out further lending.

Question 9

Share for share exchange

Answer 9

Simplest and most flexible way to finance an acquisition.

Allows flexibility if the price changes and doesn’t tie the business in with lots of exit fees (Like a loan)

Question 10

Stretching the working cycle and suspending the dividend

Answer 10

would have to consult with high power high interest stakeholders first