Cary’s Caravans Ltd builds luxury caravans. The entity needs funds for expansion and has a choice...

Cary’s Caravans Ltd builds luxury caravans. The entity needs funds for expansion and has a choice of debt finance over approximately 20 years or equity finance by issuing additional shares to investors.

Explain the issues relating to these two different forms of finance.

Ensure in your answer to discuss interest rates, fixed and variable loans as well as the potential costs of offering shares via a public float.

Finally, given consideration to any other factors the Cary’s Caravans Ltd need to take into account in order to determine the most appropriate decision for their company.

Expert Solution

Debt Finance refers to raising finance through issue of fixed interest paying instrument.

Issues relating to debt and equity finance

In the current scenario, debt finance will be for long term i.e 20 years.Before raising finance through debt issue company has to ensure that they will generate enough cash for regular payment of interest.
In case of raising finance through issue of additional equity share, company should take into account the cost of issuing shares via public float.Further, raising additional shares means reducing the power and asset of existing shareholder which might make them unhappy and lead to heavy selling in the market.
The opportunity cost of choosing equity over debt finance will be largely determined by how much you will actually need to pay to borrow money.
Raising debt will allow company to reduce their tax payment as it will interest will be deducted from net income of the company on which tax is to be paid.

Finally Crvan shall take into consideration its long term strategy,vision, mission in order to determine the most appropriate mode of raising finance.

ekkarill92 answered 1 year ago

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