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QUESTION 1 ABC Company Ltd . , which is effectively controlled by the Aloha family although they own only a minority of shares, is to
QUESTION
ABC Company Ltd which is effectively controlled by the Aloha family although they own only a minority of shares, is to undertake a substantial new project which requires external finance of about K million, leading to a increase in gross assets. The project is to develop and market a new product and is fairly risky. A'bout of the funds required will be spent on land and buildings. The resale value of the land and buildings is expected to remain equal to or greater than, the initial purchase price. Expenditure during the development period of the first to years will be financed from other revenue of ABC Company Ltd This will have a consequent strain on the company's overall liquidity.
If after the development stage, the project proves unsuccessful, then the project will be terminated and its assets sold. If as is likely, the development is successful, the project's assets will be utilised in production and the company's profits will rise considerably. However, if the project proves to be very successful, then additional finance may be required to further expand the production facilities.
At present, ABC Company Ltd Is all equity financed.
The financial manager is uncertain whether he should seek funds from public in the form of common stock, preferred stock or bonds.
Required:
a Describe the major factors to be considered by ABC Company Ltd in deciding on the method of financing the proposed expansion project.
marks
b Briefly discuss the suitability of equity, loans and convertible debentures for the purpose of financing the project from the point of view of:
i ABC Company Ltd
marks
ii The provider of finance.
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Clearly state and justify the type of finance recommended for ABC Ltd marksTotal: marks
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