Self-test Drumfet plc is a manufacturing company. The directors feel that the time is right to expand the business. To fund this expansion, they must raise a substantial amount of finance. They are considering the following options:

either 1. by issuing 8% debentures repayable in the year 2049; the debentures will be secured on the company’s land and buildings;

Or 2. selling the land and buildings and leasing them back from the new owners.

Required:

Advise the directors, giving reasons, which of the two methods of raising finance they should use.

(AQA Financial Accounting Unit 5 Jan 2009)