Question

You have recently been appointed the Chief Financial Officer of Big Dreams Limited, a company in the fast moving consumer goods industry. The shareholders of the company at their Annual General Meeting approved an ambitious major expansion project that will enable the company to gain market share. You as the CFO has been tasked with preparing a report for the company’s board of directors clearly evaluating the available financing options

Answer 1

When I will be tasked with preparation of the report for the board of directors of the company in respect to evaluation of the available financing option, I will be trying to ascertain the overall rate of return which will be required out of these investments and the nature of past financing options which are associated with the company and I will be trying to synchronise the financing options with the past financing options and the need of the project because I will have to undermine the financing options under certain specific conditions-

A. I will be taking a higher proportion of debt capital in the overall financing option if the overall expected rate of return on the project is higher than the cost of debt capital.

B. I will be taking a lower portion of the capital in the overall financing options if the overall expected rate of return on the project is a lower the cost of debt capital.

Hence, Debt capital will be playing an important role in overall financing of this project because the debt capital have interest tax shield associated with it and I will be trying to ascertain the advantages and disadvantages of interest tax shield with cost of financial distress associated with the debt capital in advance. I will be trying to focus upon raising the financing options which will generate maximum benefit to the company and maximize the value of the company in long run .