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ACCA FM知识点：Recommendation of a suitable financing method

文章来源：ACCA全球官网

发布时间：2021-11-18 14:46

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多年来，财务管理领域普遍要求为公司分析合适的融资方案。这是财务管理教学大纲中的一个关键领域，该要求可能占较大的分值。上一篇我们介绍了Evaluating the current financial position，本文我们继续讲解Recommendation of a suitable financing method。

Recommendation of a suitable financing method

When recommending a financing method,consideration should be given to a number of factors.These factors are key to justifying your choice of method and the examiner has in the past asked students to discuss these factors in an exam question.The factors include:

●Cost–Debt finance is cheaper than equity finance and so if the company has the capacity to take on more debt,it could have a cost advantage.

●Cash flows–While debt finance is cheaper than equity finance,it places on the company the obligation to pay out cash in the form of interest.Failure to pay this interest can result in action being taken to wind up the company.Hence,consideration should be given to the ability of the company to generate cash.If the company is currently cash-generating,then it should be able to pay its interest and debt finance could be a good choice.If the company is currently using cash because it is investing heavily in research and development for example,then the cash may not be available to service interest payments and the company would be better to use equity finance.The equity providers may be willing to accept little or no cash return in the short term,but will instead hope to benefit from capital growth or enhanced dividends once the investment currently taking place bears fruit.Also,equity providers cannot take action to wind up a company if it fails to pay the dividend expected.

●Risk–The directors of the company must control the total risk of the company and keep it at a level where the shareholders and other key stakeholders are content.Total risk is made up of the financial risk and the business risk.Hence,if it is clear that the business risk is going to rise–for example,because the company is diversifying into riskier areas or because the operating gearing is increasing–then the company may seek to reduce its financial risk.The reverse is also true–if business risk is expected to fall,then the company may be happy to accept more financial risk.

●Security and covenants–If debt is to be raised,security may be required.From the data given it should be possible to establish whether suitable security may be available.Covenants,such as those that impose an obligation on the company to maintain a certain liquidity level,may be required by debt providers and directors must consider if they will be willing to live with such covenants prior to taking on the debt.

●Availability–The likely availability of finance must also be considered when recommending a suitable finance source.For instance,a small or medium-sized unlisted company will always find raising equity difficult and,if you consider that the company requires more equity,you must be able to suggest potential sources,such as venture capitalists or business angels,and be aware of the drawbacks of such sources.Furthermore,if the recent or forecast financial performance is poor,all providers are likely to be wary of investing.

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●Maturity–The basic rule is that the term of the finance should match the term of the need(the matching principle).Hence,a short-term project should be financed with short-term finance.However,this basic rule can be flexed.For instance,if the project is short term–but other short-term opportunities are expected to arise in the future–the use of longer-term finance could be justified.

Students should always consider the maturity dates of debt finance in questions of this nature as it is an area the Financial Management examining team like to explore.For instance,in a past question the company was considering raising more finance but at the same time the existing long-term borrowings were scheduled to mature in just two years and,hence,consideration needed to be given to this issue.Equally,in previous questions,a company had been considering raising finance for a period of perhaps eight years and an examination of the company’s statement of financial position shows that the existing debt of the company would also mature in eight years.Obviously it is unwise for a company to have all its debt maturing at once as repayment would put a considerable cash strain on the company.If the debt could not be repaid,but was to be refinanced,this could be problematic if the economic conditions prevailing made refinancing difficult.

●Control–If debt is raised then there will be no change in control.However,if equity is raised control may change.Students should also recognise that a rights issue will only cause a change in control if shareholders sell their rights to other investors.

●Costs and ease of issue–Debt finance is generally both cheaper and easier to raise than equity and,hence,a company will often raise debt rather than equity.Raising equity is often difficult,time-consuming and costly.

●The yield curve–Consideration should be given to the term structure of interest rates.For instance,if the curve is becoming steeper this shows an expectation that interest rates will rise in the future.In these circumstances,a company may become more wary of borrowing additional debt or may prefer to raise fixed rate debt,or may look to hedge the interest rate risk in some way.

While this list is not meant to be exhaustive,it hopefully provides much for students to think about.Students should not necessarily expect to use all the factors in an answer.

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