Question
Tony Co. Ltd. Is considering how to finance the procurement of a machinery costing GH750,000.00 with an estimated useful life of 5 years. There are
Tony Co. Ltd. Is considering how to finance the procurement of a machinery costing GH750,000.00 with an estimated useful life of 5 years. There are two finance options. Option One The machinery could be hired for an annual lease rental of GH155,000.00 which is payable at the beginning of each financial year. Option Two Tony Co. can purchase a machinery with a Bank loan of GH750,000.00 at 7% interest per annum. The machine will have a scrap value of GH75,000.00 at the end of its useful life. Tony Co. would have to incur maintenance cost of GH20, 000.00 each year if the machinery is purchased. Required: a) Evaluate whether Tony. Co. Ltd. Should borrow or use leasing as a source of finance, explaining the evaluation technique used(10 Marks) b) Franca Co. is a medium size Ghanaian company whose ordinary shareholders are all family members. The company has recently won a contract to supply to an European company and the prospect of increasing export means that Franca Co. needs to expand its current operations to be able to meet future demand. All the shareholders are in support of the intended expansion but not a single shareholder is in the position to providing additional capital. In view of that, Franca Co is seeking to raise debt finance of One Million Ghana Cedis (GH1,000,000.00). Required: Explain the factors that Franca Co. have to consider when choosing a source of debt finance and the factors that needs to be considered by the finance providers in deciding how much to lend to Franca Co (10 Marks).
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