Question

Question 2 The Government of Ghana in an attempt to stimulate the Ghanaian economy after the COVID 19 pandemic has set aside GH¢600 million as a stimulus package for businesses. These stimulus packages are to be in the form of soft loans for businesses. However, some believe that these loans must be extended to firms in industries that are worst hit by the pandemic. As the Finance Director 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;

i. The negative impact of the COVID 19 pandemic on the operations of your firm, justifying why your firm needs such a stimulus package? Your arguments should be situated within the industry within which you operate.

ii. With your understanding of lessons on capital structure, which other four (4) factors should your firm consider before choosing this source of debt finance?

iii. Discuss four (4) risks that your company is likely to be exposed to if it goes ahead with this source of debt finance.

iv. Explain how this decision will affect the return to the equity holders or shareholders of your company following the arguments of M&M proposition k

Answer 1

President Nana Addo Dankwa Akufo-Addo will today launch a GH¢600 million Coronavirus Alleviation Programme (CAP) business support scheme intended to support small and medium-scale enterprises (SMEs) impacted by the novel coronavirus (COVID-19).

The fund is intended to provide relief to SMEs across the country that has been negatively affected by the disease.

In his fifth televised address to the nation, the President announced that government has partnered with the private sector to introduce a scheme in support of SMEs which were facing challenges owing to COVID-19.

"Government, in collaboration with the National Board for Small Scale Industries (NBSSI), Business & Trade Associations and selected Commercial and Rural Banks, will roll out a soft loan scheme up to a total of GH¢600 million, which will have a one-year moratorium and two-year repayment period for micro, small and medium scale businesses," he stated.

Executive Director of NBSSI, Esi Kosi Antwiwaa Yankey, earlier stated that the Board has developed an online portal to enable SMEs across the country access the GH¢600 million stimulus packages for businesses.

WHY THE FIRM WANTS THE STIMULUS PACKAGE

As the amount which is set aside by the govt, (taking the example of the SME) that why we require the stimuls package for the following reasons

1. TO INCREASE THE WORKING CAPITAL

2. TO COPE UP WITH THE DEFAULT IN THE CREDIT LINE

3. TO COPE WITH THE CREDIT TO SUPPLIERS

4. IN CASE THERE IS ANY BAD DEBT

5. THE FIRM AFFECTED BY THE LOSS IN THE SUPPLY CHAIN MANAGEMENT

FACTORS CONSIDERED WHILE CHOOSING THE SOURCE OF DEBT FINANCE

• Long-Term Goals. ...
• Available Interest Rates. ...
• The Need for Control. ...
• Borrowing Requirements. ...
• Current Business Structure. ...
• Future Repayment Terms. ...
• Access to Equity Markets.

RISK OF DEBT FINANCING

1. OVER LEVERAGING Debt capital is often referred to as leverage, because you borrow against future earnings of the business

2.FUTUTRE FINANCING LIMITATIONS f you elect to take on significant debt financing at the start of business, you may limit your future borrowing potential.

3. SLUMPS AND COLLATERAL A key risk of borrowing now and leveraging future cash flow is that sales could slump at some point, making it difficult to make payment

4. LACK OF REINVESTMENT If debt financing challenges your ability to keep up with current expenses and commitments, it really impedes reinvesting earnings into business expansion.

IMPACT ON SHAREHOLDERSS

1. better trust on the company

2. Increase in the amount of control by the company

3. shareholders as a whole will be satisfied related to the going concern principle

4. enables a holistic approach