Question 3

The banking sector is a major source of debt finance for most companies in Ghana. The Bank of Ghana in 2017 embarked on a major financial sector clean-up in an attempt to build a more robust financial system in Ghana. The President his State of the Nations Address in January 2021, indicated that GH21billion was used in funding the cleaning up exercise. However, some believe that the financial sector clean-up is needless especially considering the amount of money involved in the clean-up. In a recent Board meeting of your company, the directors were divided as to whether to continue to rely on bank financing (debt) as a major source of financing. Some believe it is time to focus on equity financing as a major source of finance. This is because the license of Wele Bank Ghana Ltd, your bankers had been withdrawn during the financial sector clean-up. As the Finance Director of your company, you have been tasked to present a proposal to the Board of Directors for consideration. Your proposal must address the following;

1. Discuss three (3) positive and two (2) negative implications of the financial sector clean to the operations of your company. Your discussion must be situated within the industry in which your company operates.
2. With your understanding of lessons on capital structure, explain four (4) factors that your company must consider before settling on the source of financing?
3. Discuss two (2) benefits each of debt and equity as a source of financing to your company.
4. Explain how continuous reliance on debt financing will affect the return to the equity holders or shareholders of your company following the arguments of M&M proposition 2.
5. Following the agency theory of capital structure, discuss how debt financing can be used as a mechanism to deal with the agency problem.