- 15 Marks
FM – May 2016 – L3 – Q5 – Financing Decisions and Capital Markets
Preparation of a report identifying factors in choosing the appropriate debt finance mix and restrictions on debt raising for a company.
Question
BADEJO Limited, a small company, is currently considering a major capital investment project for which additional finance will be required. It is not currently feasible to raise additional equity finance, consequently debt finance is being considered. The decision has not yet been finalized whether this debt finance will be short or long term and whether it will be at fixed or variable rates. The financial controller has asked you, as the company’s Accountant, to prepare a report for the forthcoming meeting of the board of directors.
You are required to:
a.
Prepare a draft report to the board of directors which identifies and briefly explains:
The main factors to be considered when deciding on the appropriate mix of short, medium, or long-term finance for BADEJO Limited. (8 Marks)
b.
The practical considerations which could be factors in restricting the amount of debt BADEJO Limited could raise. (7 Marks)
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