Question 1

A company operating over 15years has shares in issue rights and all outstanding shares were duly paid for. At the end of financial year in December 2017, the Company recorded significant improvement in sales and returns. The unprecedented performance was ascribed to the recent government policy which allowed flexibility in both local and export sales. At the just concluded Board Meeting, the chairman expressed great optimism and hope that the policy would continue and be sustained. All the Heads of relevant units were asked to advise and make suggestions on the possible strategies to drive the operation of the company towards meeting the expected increase in demand during the following accounting years. Among the suggestions made and strategies highlighted were; increasing the capacity from the present level of production, expanding the scope of sales and developing new product line etc.

The chairman of the board seemed to have preferred among others, capacity enhancement and development of new product as he demanded for a rough estimate of financial implications. Increasing the capacity would require additional investment of N100m for the purchases of a new version of the current machine and it is expected that production would increase by 25% with estimated 10% cash inflow in the first year. The cost estimation and evaluation suggested that development of a new product line would require N50m in the first year rising to N60m in the second year.

For the business to meet its future investment, a capital requirement of N160m is estimated. The chairman who is very optimistic and enthusiastic about the promising nature of the project however, expressed great concern on financing capacity of the company which he describes as being critical. At the board meeting, suggestions and various ideas were raised on how best to finance the project. Options include looking inwards, taking external loan, raising additional capital and sales of asset. The finance director who was also at the meeting was asked to, base on the suggestions and the available sources of finance, advise on how best to finance the project.

Required:

1. As a student of finance, you are to discuss likely factors that will inform finance decision as to whether the project should be financed using;

(i). Internal source of finance

(ii). Debt or equity source of finance