Question 1: Answer all parts A. You are the CFO of a company that requires addit

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Question 1: Answer all parts A. You are the CFO of a company that requires additional 200 million finance for expansion. What are the considerations in deciding whether to raise debt or equity? Discuss how current market conditions might impact your decision.(15 marks) B. "From the perspective of a company raising capital, convertibles are great because they offer a lower return than straight debt and we just dish out shares rather than (15 marks) having to find cash to redeem the bonds". Discuss. debt position lender's perspective. C. Outline some of the restrictive covenants a bank might impose to protect their senior (10 marks) D. Explain why a higher Debt Service Coverage Ratio (DSCR) is preferable from the (10 marks)

Explanation / Answer

A. A well established company can use debt as a means of finance , because due to their proven track record debt can be easily obtained. The rate of interest for debt can be significantly low, for companies that are well estanlished.

the considerations are the collateral that will act as a security for secring the loan. The market conditions, what are the current interest rates, if the interest rates currently are high in the market then the person securing the loan might avoid taking the loan altogether. The industry conditions are also an important factor, if the industry is cyclical then the business may have probems securing the loan at times of market downturn. Debt is a cheap source of finance is comparison to equity.

equity :equity can come in the form of angel investors, venture capitalists , from crowd funding, private equity investors or strategic financing.venture capitalist demand a higher rate of return than the banks in return for a share of equity in the business.

B.Convertible debt is a financial product juts like debt but it can be converted into equity based on some trigger event, the debt usually accrues interets, but the interest is not paid until the trigger event occurs.The debt of the company vanishes as the trigger event occurs , although the company do not have to pay cash but they have to issue shares to the convertible bond holders which results in equity dilution. covertible bonds provide lower yields than the straight bonds but a higher yiled than stock.

C. the neagtive covenanta are :

that the borrower cannot issue debt that is senior to the current level of debt.

the ratio of total debt to eanings must not exceed a certain specified level, to ensur ethat the company does not burden itslef with more debt.another is the interest coverage ratio, which ensures that the EBIT/INTEREST is above a prescribed level to endure that the borrower does it's default on its payment obligations.they also prohibit the business to indulde ina ctivities which is outside it's core operations.

D. High debt service coverage ratio : means that the company ahs a high cash level avaialble to pay off interest, principal and lease payments. it is the ratio of the operating income to the debt obligations. the higher the ratio, the better is the ability of the company to fulfill it's dbt obligations which is better for the lender.

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