Question

Provide a real-life example of a long-term external source of finance (debt or equity issue) used by a blue-chip company in Hong Kong. A blue-chip company is defined as one of the listed corporations that constitute the leading stock index. In this case, the leading stock index in Hong Kong is the Hang Seng Index (HSI). In your essay, describe the nature of the financial arrangement (e.g. purpose, duration, risk assessment, etc.). In your opinion, explain whether this financial arrangement was a right move and suggest alternatives to this arrangement with reference to what you learned in this course and provide justifications.

More than 400 words

*I need your own answer Thank you very much!

Answer 1

Companies have two sources of raising funds which it can utilize for further investment and for smooth running of the business . these are either issue equity share(owner's capital) or to raise debt funds( loan) from outside. both have their own advantage and disadvantage.

If we talk about the company it is a blue chip company case it means it has very high reputation and tradings in the market which also means that it could get loan very easily . In our case leading stock index is hang keng index (HSI).

so , while taking the decision for the efficient capital structure the company needs to answer the following questions like the purpose , need, duration etc for raising the funds .

We discuss this questions 1 by 1 and work to find the optimum capital structure which makes maximum benefits with minimum cost.

1. PURPOSE: it means the aim/need  of raing capital . we suppose here that the company wants to expand its capital base by investing in capital intensive technology. so , in this case high debt equity ratio is required (more of debt and less of equity) because oh high as well as steady earnings.

2. DURATION: it means the time period for which we need the money. it may be for long period or for short period of time. if the company needs it for long period we advise to issue equity shares otherwise in case of short period one can use debt funds. our company wants to invest in higher projects it means it needs money for long term and that's why prefered to issue equity shares.

3.RISK ASSESMENT : the assesment of risk is different for different person as they see it from different perspective . someone thinks to issue equity shares means they have to share their ownership rights with others and in case of raising funds through debts they have to pay fixed interest even in case of low profits or negative earnings. as the above company wants to invest in new projects it is unsure about its success so it is considered to be quite risky to raise funds through debts . it is advisable to issue equity shares to diversify the risk .

suppose in setting up the new projects and on the whole infrastructure the cost would be say $2 million, so, the optimum capital structure in this case would be debt( 60 to 65 %) 1.2 million and rest by issuing equity shares . it would help the company to have an aggressive capital strucure which means higher risk and leads to higher returns . this will balance out the risk perspective and purpose of raising funds.