MGT201 Financial Management GDB 2 Solution Spring 2014

Scenario:

Mr. Zee – finance manager at Star (Pvt.) Limited, since its induction, has always been involved in the company’s important financial decisions. The company’s CEO – Mr. Bee believes in aggressive business moves and tries to chase every market opportunity for earning good profits for the company. Currently, he is considering investment in solar panel manufacturing business as a potential opportunity for the company’s growth.

In a recent board meeting on this matter, Zee shows his agreement on targeting this opportunity; however, he revealed insufficiency of funds with the company to pursue this opportunity.  Bee gave his opinion to arrange equity financing by the company’s sponsors for this project. But, Zee opposed the opinion and went in favor of debt financing.

Requirement:

Describe the most appropriate reasons for which Mr. Zee favored debt financing in the board meeting. (Give four reasons – each not more than two lines)

Solution: minutes ago

According to my point of view, Mr Zee the finance manager of the company is prefer to Debit financing because of the following reasons:
1:In debit financing at maturity date debit is ended while in equity company has to pay dividen forever.
2:In debit financing the ownership of the company is always with owner but in equity financing ownership is shifted to share holders.

3:Potential growth opportunities are existing in future, so through these opportunities company’s profit and market share value will increase. Debt financing also increase share’s value instead of equity financing.
4:Debt financing is most likely to be “risk free” or “low risk” and at some points its so-called risk-free interest rate.

 

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