The Role of Investment into Financial Inclusion Post COVID 19

In times of crisis, access to finance is more important than ever, making investments into inclusive finance funds is even more impactful than under normal circumstances. These funds alone won't be able to solve the problem, though. Microfinance institutions and SME banks will continue to need liquidity and their financial stability is of uttermost importance when it comes to reboot economies post COVID-19. The immediate need for liquidity for millions of small companies cannot and will not be provided by the banking sector alone, neither in developed nor in developing countries. Intelligently designed special emergency liquidity measures will be needed to support the real economy and maintain the financial sector infrastructure that has been built over the last decades.

Required:

a) Explicitly explain the next best alternative that would be available to firms to continue operations when the banking sector would not be able to provide the much needed funds to all businesses post COVID 19 pandemic. (3 marks)

b) Suppose that after the COVID 19 pandemic is greatly contained and that 'life gets back to normal' as before, OKR Ltd is deciding to use two different capital structures to expand the business. While comparing both the capital structures: In Plan I an all-equity capital structure, OKR Ltd will have 0.6 million shares outstanding while 300,000 shares would be outstanding in Plan II. Plan II is a levered plan and this would have $10,000,000.00 worth of outstanding debt. The tax rate would be 30.00% while interest rate on debt will be 10.00%. (i) What would be the break-even EBIT for OKR Ltd? (3 marks)

(ii) Assuming yourself as a business director/finance manager for OKR Ltd, provide a disadvantage of using Plan II post COVID 19. (2 marks)

(iii) State and explain any two scenarios whereby a firm can take tax benefits by issuing debt securities. (2 marks)