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A2b. Sources of Finance
A2b. Sources of Finance
Recommend the optimum capital mix and structure within a specified business context
and capital asset structure.
Sources of Finance
Operating Leases
The lessor will replace the leased asset with a more up-to-date model in
exchange for continuing leasing business.
Debt v Equity
These are the things you need to think about when asked about raising
finance - so just put all these in your answer and link them to the scenario.
Job done.
Gearing and financial risk
Equity finance will decrease gearing and financial risk, while debt finance will
increase them
Target capital structure
The aim is to minimise weighted average cost of capital (WACC).
The current shareholders are being offered 1 share for $4, for every 2 they
already own.
(The market value of those they already own are currently $6)
To calculate the exact effect simply multiply the current EPS by the TERP /
Market value before the rights issue
Eg Using the above illustration
EPS x 5.33 / 6
Effect on shareholders wealth
There is no effect on shareholders wealth after a rights issue.
This is because, although the share price has fallen, they have proportionately
more shares
Equity issues such as a rights issue do not require security and involve no
loss of control for the shareholders who take up the right
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The factors considered when reducing the amount of debt by issuing equity :
Companies with high levels of financial distress would find it more costly to
contract with their stakeholders.
For example, they may have to pay higher wages to attract the right calibre of
employees, give customers longer credit periods or larger discounts, and may
have to accept supplies on more onerous terms.