Question

A company was planning to issue shares in IPO. Considering the corona situation in the country and 9%-6% interest rate scenario in the banking sector of Bangladesh, what is your opinion regarding equity issue at this situation or should they borrow from banking sector at lower interest rate scenario {maximum 9%)? Answer for each scenario below:
i.Its debt equity ratio is less than industry average debt-equity ratio
ii.Its debt-equity ratio is more than industry average debt-equity ratio

(min 2 page) clue answer using theories of capital structure taught or internet search]

Answer 1

I. The company is having a debt equity ratio of lower than the industry average debt equity ratio, it will mean that the company does not have a pressure on redemption of the debt on a fixed interval because the company is having a better condition when we are analysing the solvency status of the company from the leverage perspective, because the company is having lower debt equity ratio in respect to the industry average and it will mean that the company should be trying to go for raising more of the debt capital in order to manage its debt, and take the advantage of interest tax shield rather than dissolve the control on its existing stake because the company is having an advantageous stage of having a lower debt-equity ratio than that of the industry.

Hence, I will be advising the company to get the required portion of capital from ISSUANCE OF DEBT capital rather than equity capital.

2. When the company is having debt equity ratio, which is more than the industry average debt equity ratio. it will mean that, the company does not have adequate liquidity when we will be analysing the leverage status as it is a debt ridden company and hence the most probable option is to ISSUE EQUITY SHARES and raise the desired capital because issuance of equity shares will mean that the company will be lowering the overall debt equity ratio and it will also having a flexibility in terms of the operation because equity share does not have any kind of fixed obligation and it will also mean that the company will have a better debt equity ratio which will be in synchronisation to that of the industry and hence I will be advocating for issuance of more of the equity share and issuance of initial public offering in the market.