Question 6.SE.1: Answer all parts below.Required:Provide reasons why a busine...
Answer all parts below.
Required:
Provide reasons why a business may decide to:
(a) Lease rather than buy an asset which is to be held for long-term use.
(b) Use retained profit to finance growth rather than issue new shares.
(c) Repay long-term loan capital earlier than the specified repayment date.
Financing issues
(a) This topic is dealt with in the chapter. The main benefits of leasing include ease of borrowing, reasonable cost, flexibility, and avoidance of large cash out flows (which normally occur where an asset is purchased).
(b) This topic is also dealt with in the chapter. The main benefits of using retained profits include no dilution of control, no share issue costs, no delay in receiving funds and the tax benefits of capital appreciation over dividends.
(c) A business may decide to repay a loan earlier than required for various reasons includ-ing the following:
● A fall in interest rates may make the existing loan interest rates higher than current loan interest rates. Thus, the business may decide to repay the existing loan using finance from a cheaper loan.
● A rise in interest rates or changes in taxation policy may make loan financing more expensive than other forms of financing. This may make the business decide to repay the loan using another form of finance.
● The business may have surplus cash and may have no other profitable uses for the cash.
● The business may wish to reduce the level of financial risk by reducing the level of gearing.