Question

As the Financial Controller of your company, you have been tasked to present a proposal to the Board of Directors of your company for consideration.   Your proposal must address the following;

a.      The negative impact of the COVID 19 pandemic on the operations of hospitality firms, justifying why your firm needs a stimulus package from the government?   Your arguments should be situated within the hospitality industry in Ghana. And again with your understanding of lessons on capital structure, which other four factors should your firm consider before choosing debt as a source of finance?

Answer 1

COVID -19 has affected each and every sector of the country on a very large scale negatively.The operations of the hospitality firms has been affected the most and these firms needs a stimulus package from the government.The following are the negative impact are:

• There operations have been stopped because of the nation wide lockdown in the country therefore no revenues during this period
• Also if the lockdown lifts up their opeartions will be not same as before because people are more aware now and they will not take any risk to their life,they will avoid going to these places.
• also the reduced traffic to the hotel will also have an obvious cascading effect on revenue from F&B,MICE,and other areas.
• they have also removed there staff because they can't bear the employee cost which led to unemployment in the country
• Even the travel agencies and online travel portals are affected.
• there is huge loss to hospitality industry and now it will take too much time to gets the things normal.

The Other factors that firm will consider before choosing debt as source of finance are:

1. Control- It is one of the factors firms issue debt as issuing debt to raise money will not dilute the existing right of the shareholders and they have same power as before.
2. Tax benefit-Another reason to issue debt is that we get tax benefit on the interest amount paid which reduce our tax liability,as this is not in case of issue of equity
3. Form of organisation and legal status- Sole proprietorship and partnership can't raise funds through issue of equity therefore they will raise finance from debt sources.
4. Risk- Firm should consider this,If the risk is too high then they should issue equity as debt is required tobe paid in case of failure as well.