Options A+B advantages and disadvantages

Question 1

What are the pros of option A?

Answer 1

• No Debt Obligation: It allows the company to raise capital without creating debt or incurring interest payments, preserving cash flow.
• Shareholder Participation: Existing shareholders can maintain their ownership percentages, fostering loyalty and support for the company.

Question 2

What are the cons for option A?

Answer 2

• Dilution of Shares: Non-participating shareholders face a reduction in their ownership, which may lead to dissatisfaction and decreased share value.
• Market Perception Risks: The market may view the rights issue negatively, potentially resulting in a decline in share price if perceived as a sign of financial distress.

Question 3

What are the pros of option b?

Answer 3

• Immediate Capital Access: Provides instant access to the needed funds for acquisition and conversion, enabling swift action without delays.
• No Ownership Dilution: Maintains current ownership structures by preventing dilution for existing shareholders.

Question 4

What are the cons of option b?

Answer 4

• Repayment Obligations: Introduces regular interest and principal repayment requirements, which could strain cash flow, especially in the early years.
• Increased Financial Risk: Elevates the company’s financial leverage and vulnerability to economic fluctuations, along with potential restrictive covenants imposed by the bank