sources of finance

Question 1

adv rights issue

Answer 1

• Cheaper than issue of shares to general public
• Does not dilute ownership and control if rights are fully subscribed.
• It has not to be repaid as it is equity finance.
• Shareholders can make Capital Gain.

Question 2

dis rights isse

Answer 2

• It reduces Earnings Per Share(EPS) less MSP
• It is taken as a sign of struggle as liquidity shortage.
• It may not raise targeted finance for company as all shares might not be subscribed by shareholders.

Question 3

Advantages Of Bank Loan:

Answer 3

• It offers a tax advantage as higher interest lead to lower profit before tax which in turn reduces tax expense.
• It raises funds quicker than rights issue or general public issue of shares.
• It will not lead to divorce between ownership and control.

Question 4

Disadvantages Of Bank Loan:

Answer 4

• collateral will have to be given
• It will increase gearing of business which increases risk of business.
• Interest on loan increases expenses for business thus profits decline.

Question 5

Advantages Of Issuing Shares(on stock exchange):

Answer 5

 It has not to be repaid as it is equity finance.
 if company is short of cash or profits have declined then it can
delay dividends.
 If share price goes up due to good company performance, then investors will end up making a capital
gain.

Question 6

Disadvantages Of Issuing Shares(on Stock Exchange):

Answer 6

 Offering shares on Stock Exchange presents risk of takeover target might lose ownership.
 If share price declines due to company’s bad performance making a Capital Loss.
 More shareholder also vote for board of directors and will also influence decision-making within company divorce between ownership and control.
 It reduces Earnings Per Share(EPS) less MSP

Question 7

Delaying Trade Payables and Other Expenses:

Answer 7

 This can result in additional finance as money saved is money earned.( advantage)
 This may resent suppliers and in future they might refuse to provide or supply on credit, make credit
terms more strict, insist for cash only transactions or refuse to supply at all(disadvantage)

Question 8

Bank Overdraft:

Answer 8

 It results in additional cash flow and quickly.(pros)
 Interest is only calculated on the amount withdrawn as overdraft.(pros)
 Interest rate is higher than bank loan(cons).
 Overdraft has to be repaid within one year.