ABC Ltd.is planning to modernise its plant with latest technology .The company is not having sufficient money. The finance manager plans to arrange money for 3 years as after three years ,the company is expected a good return from their previous investment .The finance manager do not want to spend flotation cost and do not want to approach stock exchange. (6)
a)Suggest the suitable source of finance in above case. b)How can company approach public without spending on flotation cost ? c)State any four benefits of this source of finance .
Answers
Explanation:
ABC Ltd.is planning to modernise its plant with latest technology .The company is not having sufficient money. The finance manager plans to arrange money for 3 years as after three years ,the company is expected a good return from their previous investment .The finance manager do not want to spend flotation cost and do not want to approach stock exchange. (6)
a)Suggest the suitable source of finance in above case. b)How can company approach publ
ic without spending on flotation cost ? c)State any four benefits of this source of finance .
Debentures
Explanation:
a. A suitable source of finance would be debt/borrowings/debentures.
b. The company can approach the public with debentures. Debentures are a debt instrument used by companies and government to issue the loan. The loan is issued to corporates based on their reputation at a fixed rate of interest. Debentures are also known as a bond which serves as an IOU between issuers and purchaser.
c. Benefits of Debentures are:
- Do not dilute the control of equity shareholders on management
- Less costly as interest payment on debentures is tax deductible.
- The interest on debentures is a charge against profits.
- Investors who want fixed income at lesser risk prefer them.